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Operator
Good day, ladies and gentlemen, and welcome to the RioCAN Real Estate Investment Trust Second Quarter 2022 Conference Call and Webcast. As a reminder, this conference call is being recorded. I would like to turn the conference over to Ms. Jennifer Seuss, Senior Vice President, General Counsel, and Corporate Secretary. Ms. Seuss, you may begin.
Jennifer Seuss
Thank you, and good morning, everyone. I am Jennifer Seuss, 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 REOCAN'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 with respect to management's, excuse me, 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 REOCAN's performance, liquidity, cash flows, and profitability. REOCAN'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 June 30, 2022, and management's discussion and analysis related thereto as applicable, together with RIOCAN's most recent annual information forms that are all available on our website and at www.cdar.com. I'll now turn the call over to our CEO, Jonathan Gitlin.
Jennifer Seuss
Thanks so much, Jennifer, and thanks as always to everyone for taking the time to join us today. I hope you are enjoying this summer. As usual, I'm surrounded by the exceptional senior management team here at RioCAN. Through the second quarter, we and the 600 others who make up this great organization demonstrated RioCAN's ability to succeed in any environment. The team is united in concentrating on the critical pillars that support the five-year plan we shared earlier this year at our investor day. Our second quarter results reflect this continued and acute focus on reimagining retail, customer centrism, intelligent diversification, and responsible growth. Based on the quality and positioning of our portfolio and the strength of our balance sheet, my confidence in our performance remains unwavering despite the obvious unpredictability in the economic background. The underlying macro level factors obviously necessitate language such as cautiously optimistic. And I'll address these factors in a moment. But before doing so, I want to highlight the portfolio's performance in this last quarter. The best way to summarize our operating results is to say it was a tremendously successful quarter and we're achieving results that are in line with where we stood before COVID. Occupancy is at 97.2%, bolstered by our retail occupancy, which is now at 97.6%. SFO per unit is 7% higher than it was in this quarter in 2021. Leasing results, which are, I would say, the purest indicator of the overall health of a commercial portfolio, they're very strong. Blended leasing spreads were 10.5% for the quarter. Same property NOI grew by 6.2%. Tenant retention was over 93%. Now this number tends to bounce around a little, while it tends to bounce around a little, the prevailing trends confirm that tenants value the space and the service that RioCam provides, and they really don't like to give it up. The 11.2% spread achieved on renewal rents in the quarter highlights how aggressively tenants are pushing to maintain existing space. As most view the time leading up to March of 2020 as a stabilized environment, there's much emphasis on comparing current results with those achieved pre-COVID. We're proud to deliver results in line with our pre-pandemic metrics, but there's underlying context that further enhances my confidence in our growth trajectory. You're well aware that RioCAN's commitment to enhance the quality of our offerings started long before the pandemic and, in fact, accelerated during the pandemic environment. We continue to sell low growth assets and advance our major market presence. Over 92% of our income is now generated in the Vectom market. On average, the people shopping at RioCans properties have a household income of $129,000 and come from a population base of over 206,000 people within a five kilometer radius of our centers. We also invested in our physical property, technology, ESG, and the dynamic team here at RioCAN. Those improvements and investments are now paying significant dividends. Since 2020, we've delivered a combined total of 1.1 million square feet of successful developments, mainly in Toronto. That number is expected to increase to 2.5 million square feet of new development completions by the end of 2023, including our iconic Toronto development, The Well. We now have 2,005 residential rental units in the portfolio, with another 1,134 under construction. Demand for these units has continued to demonstrate the desirability of the RioCam Living offering. The resilience and diversity of our tenant mix is markedly enhanced, with over 95% of our tenants classified as strong, stable, or compelling traffic drivers. Our standing as an ESG leader in the commercial real estate sector has only improved. Simply put, our efforts over the years are yielding results now and will continue to bolster our success despite market volatility. The scarcity of quality retail space further enhances our competitive advantages. It's safe to say that in major Canadian markets, very little new retail supply has been created in the past decade. Replacement costs for well-located retail are now well above market values. Now I'm going to illustrate that with some numbers. The implied value of our income-producing properties in our current unit price is about $330 per square foot. Now if you compare that to the cost of constructing new retail, It's quite illuminating. In the GTA, with the high construction costs and market value of land included, the cost to construct new retail is in the range of the mid-$600 per square foot. This tells us a couple of things. First, there's a clear gap between valuations and replacement costs. Second, it's virtually impossible to buy land and construct new retail without a substantial increase in market rent. It's only feasible to build new retail on land that's already owned or as part of a high density misuse development. This means the quality retail space, the kind that we at RioCan offer, is and will continue to be in short supply. Meanwhile, particularly in the GTA, the population continues to grow, driving demand further upward. These conditions are entrenched and reinforce our confidence in the sustainability solid operational performance well into the future. Yet, as I mentioned a moment ago, there are numerous unknowns that linger in the environment. Our stakeholders have voiced their concerns about how these factors impact RioCan, and I'd like to address these questions. First, I'll talk about the recessionary environment, specifically the viability of retail during a prolonged economic slowdown, if in fact that arises. 86% of RioCAN's tenants are categorized as strong and stable. These businesses have stable rent-paying ability, strong covenants, and reliable foot traffic. They provide the day-to-day essentials consumers require in any economic climate. I'll pause here for a moment to reflect on our performance in Alberta over the last 10 years. Now, I use our performance in Alberta as a logical barometer as our portfolio composition in that province mirrors that of our national portfolio. It comprises largely open air, necessity-based retail, and has exceptional demographic profiles. The Alberta market has been in the throes of a resource-based economic slowdown for the better part of a decade. And within those 10 years, the operational metrics for our assets in Alberta were equal to or better than our national portfolio. In as much as anyone can draw any conclusions in this uncertain environment, we feel that our consistent performance in Alberta in the face of an economic downturn is indicative of our portfolio's resilience and viability in any market conditions. Our leasing results support that conclusion as demand for our space continues to be high, driven by national grocers, discount retailers, beauty, medical, and pharmacy uses. Next, I'll address concerns about rising interest rates. Now we're fortunate to have a debt ladder, as we always have, that helps us to shield the impact of violent spikes in interest rates. We have $411 million of debt due for the remainder of 2022. Now as Dennis is going to tell you, we will benefit from our $250 million hedge of the underlying GOC bonds, which will drive down the actual cost of the remaining financings for this year. In 2023, we won't have the benefit of those hedges on new financing, and there will be an impact on our FFO results. But due to the timing of 2023 debt maturities, the FFO impact will be weighted more to the second half of the year. It's also important to note that the overall impact, even if rates continue to increase, will be offset by numerous positive FFO factors, including gains from the scheduled sale of condo units, and increasing NOI from development deliveries and organic growth from our existing income-producing portfolio. Finally, there's inflation. This impacts us in several ways, including an impact on consumer spending and increases in construction costs. As I already mentioned, much of our tenant base provides necessity-based goods that consumers need in any economic cycle. Many of our tenants have the ability to pass through inflation to their customers. That said, Some of our prominent retailers, including Walmart, have indicated that inflation drives shoppers to avoid high-margin discretionary items in favor of lower-margin necessity items. This is a concern but will not, in our view, impact the long-term viability of our largest tenants, as they have a long and strong track record and sizable balance sheet. With respect to construction costs, well, they've been impacted by sustained year-over-year inflation for many years now. The vast majority of REO-CAMs in the ground construction projects have fixed contracts, which provide a high degree of cost certainty. When it comes to new project starts, REO-CAM will continue to exercise a high degree of discretion, scrutiny, and judgment in assessing whether cost and revenue conditions are suitable before we proceed. Our future development sites are typically active retail sites that currently generate high-quality income. As such, when conditions suggest that timing isn't favorable for development, we can simply elect to wait. Now, I'm not for a second downplaying the obvious volatility in the macro-level environment, but we face these conditions confident that we have strategically and responsibly managed every aspect of our business over which we have control. Our efforts over the years have set RioCan up for success. We're hitting our stride and executing on key growth initiatives. We remain confident in our growth trajectory and the ongoing demand for our scarce and high-quality real estate. The objectives in our five-year plan were established with purpose and conviction. In concert with RioCan's many differentiating attributes, these objectives are achievable in almost any environment. Aligned with our strategic pillars, we'll continue to grow responsibly and sustainably. We'll continue to support this growth by investing in talent and structuring our team to maximize alignment with our objectives. With this in mind, I'm pleased to announce the recent appointment of Oliver Harrison to the position of Senior Vice President, Leasing and Tenant Experience. This hybrid role was designed to support our commitment to customer centrism by optimizing value to our tenants from lease execution all the way through construction, onboarding, and renewal. I'm also pleased to share that RioCAN's Board of Trustees continues to evolve with the recent election of Marie-José Lamas. Ms. Lamas is well known for her expertise in global branding and digital transformation. Her experience is especially relevant for RioCAN as we continue to support our tenants through the merging of e-commerce and physical retail. With that, I'm delighted to turn the call over to Dennis Busuti to take you through our balance sheet metrics and provide insight into how an active disposition program has supported them. Dennis, over to you. Thank you, Jonathan, and good morning to everyone on the call.
Jennifer
Despite a very volatile market backdrop, RioCan had a very productive quarter. We have a lot of ground to cover this morning as we discuss the fundamental strength of our business and the attributes that will drive our success in any environment. First, as Jonathan mentioned, we had another strong quarter operationally. This is driven by our best-in-class team and high-quality portfolio, which continued to deliver results. These results and the outlook for our business gave us the confidence to once again reaffirm our FFO guidance for 2022. FFO per unit was $0.43 for the quarter. This year-over-year growth of 7% was driven by the straightforward building blocks that we laid out at our investor day. Same property NOI growth and development deliveries. SP NOI growth for the quarter was a robust 6.2%. When we adjusted for the impact of the pandemic related provision, as well as legal and property tax settlement gains in the prior year, our high quality operations posted a solid 3% SP NOI growth. Our development deliveries and ongoing development activities also contributed with growing residential rental income, gains on condo sales, and fees we earned as development manager. Altogether, development activity added $0.03 per unit. FFO in Q2 was also impacted by some restructuring costs. Excluding these costs, FFO per unit was 44 cents, or 10% growth over the prior year quarter. Our strong operational performance and development progress also provides us confidence in our growth expectations for 2023. From the perspective of our fundamental building blocks, we anticipate SPNOI to remain strong as the robust leasing activity in the current year will translate into full-year NOI next year. We expect to deliver an industry-leading 1.7 million square feet of development over the course of this year and next, With the commercial component of the well expected to meaningfully contribute to FFO in 2023, as the majority of that project will be delivered and earning rent over the second half of this year and the first half of next. We have provided additional information on this timing on page 43 of our MD&A. We also note that the impacts of the current higher interest rate environment on 2023 FFO have been muted by our financial risk management activities. In 2021, we preemptively refinanced $250 million of debentures and $345 million of mortgages at very attractive rates. Our weighted average interest rate on 2021 financing was 2.6%. That left $448 million of debt due in 2022. We hedged $500 million of the GOC component of planned 2022 financing at an average rate of 1.56% for seven-year bonds. which has been significantly below the actual rate. In April, we utilized $250 million of the hedge when we raised seven-year debentures at an effective rate of 3.83%. As Jonathan mentioned, we intend to utilize the remaining hedge for financing activities that we expect to complete in the coming months. As a result, the interest rate impact on 2023 FFO relating to financing activities completed or planned in 2022 has been minimized. Looking at our 2023 refinancing requirements, those are distributed throughout the year, again reducing the impact of 2023 FFO. To assist with modeling, we have provided a breakdown by quarter on page 44 of our investor presentation on our website. We continue to evaluate all options for these financing activities to ensure that we optimize the cost of funds and our financial flexibility. Now turning to our development and spending. We reduced our guidance for the year by $50 million to a range of $425 to $435 million. This is the result of minor shifts in timing of projects following strike activity by certain trades in the second quarter that are now resolved. Looking forward, our basic assumption of annual development spend of about $500 million per year in the five-year plan that we presented at investor day remains unchanged. We continue to believe that our development pipeline, which includes 16 million square feet of zone density, is an attractive use of capital. However, we do have ability to scale this back if the macro environment warms it. As Jonathan mentioned, we have the ability to pause projects that remain productive retail assets until the market is ready. I would also point out that the projects that contribute FFO in our five-year projections disclosed at Investor Day are already underway. Any potential deferrals mentioned in our comments today would be related to the start of new projects that would be delivered beyond that five-year horizon. With that said, we would have the ability to pause projects and reduce spend by approximately 25% in 2023 and 50% in 2024 if required and be prudent. Beyond those years, the spend is virtually all discretionary. The balance over development spend in the two years mentioned is already under construction and substantially contracted, so the exposure escalation is mitigated. Moving now to our valuations. We booked a 46 million fair value loss in the quarter. We took a targeted approach to this, which I will unpack further. Within that number is 108 million of reductions in fair value, largely related to enclosed malls and secondary market assets. Given discussions we've been having in the market, we see these types of assets which comprise a relatively small percentage of our asset value as being at the highest risk of impact in a rising rate environment. This was offset by a $41 million increase in the fair value predominantly related to higher NOI forecasts across many of our properties, driven by a strong leasing activity in the first half of the year. We also recognize the $21 million gain on development properties, predominantly relating to advancements of our lease side and Shoppers World branded projects. On an overall basis, we view our asset values as relatively conservative, and the following two factors support this assertion. First, we took write-downs as of December 31, 2020, of $527 million as a result of the COVID pandemic, and we did not reverse much of this in spite of strong asset level performance. Our cumulative fair value movements from that point until now remain in a lost position of $410 million. Second, we have taken a conservative approach to value density. 95% of the value for our properties under development recognized on our balance sheet relates to projects that are currently under construction. We ascribe relatively low value to the remainder of our zone density as we apply a strict set of criteria before we recognize that value. We can also look at our valuations from a cap rate perspective. We note that our weighted average cap rate today of 5.33% compared to 5.28% pre-pandemic at the end of 2019, inspired in spite of market evidence of cap rate tightening over the past couple of years. However, it is important to note that this five basis points increases on an absolute basis. On a same property basis, our weighted average cap rate is 18 basis points higher than it was at the end of 2019 as a result of the above noted write downs. This increase is partially offset by 13 basis points decrease in cap rates related to asset mix as portfolio quality improved through the development deliveries and acquisitions combined with the disposition of lower quality assets. While rising rates pose a potential risk to our values going forward, and we continue to monitor markets closely. We believe these mitigating factors, combined with our income growth and advancement of our development pipeline, provide defensive attributes. Next, I wanted to add a few comments regarding our capital allocation for the quarter. Our asset sales program has progressed well with $123 million of completed dispositions during the first half of 2022, and a total of $376 million when adding firm and conditional deals. These were at an average cap rate of 6.7% as we have been selling lower quality assets, further improving our overall asset quality and reflecting that capital into more productive uses. During Q2, we allocated capital from disposition proceeds and retained earnings to our development program, as well as unit buybacks through our NCIB, which totaled 129 million or 6 million units. This is in addition to the 8 million units that we repurchased in Q4 of 2021. We see these buybacks as an attractive use of capital. At recent unit prices, these repurchases this quarter reflect an implied cap rate of over 6%. This implies that the unit price of these purchases was at a discount for income-producing properties and ascribed effectively no value to our development pipeline. Expressed another way, the price implies a value of approximately $340 per square foot of our income-producing properties, or $230 per square foot based on our income-producing properties plus zone development properties. When compared to the replacement cost metrics that Jonathan mentioned earlier, these numbers are quite compelling. To round out my comments, I will briefly highlight some of our balance sheet metrics. Our net debt to EBITDA has continued to trend downwards. and was at 9.4 times at the end of the quarter. We finished the quarter with $1.4 billion of available liquidity and unencumbered asset pool of $9.2 billion. These items provide us with substantial financial flexibility. Our unencumbered asset pool has decreased slightly since the year end as we have added construction loans to development projects and sold some unencumbered assets. We expect this to decrease further in the next quarter as we are in the process of raising approximately $300 million through secured mortgages. We are doing this pathetically given the current disconnect in interest rate spreads between secured and unsecured debt markets. At the same time, we continue to seek opportunities to raise low-cost CMHC secured financing where it makes sense. In the long term, we are not changing our strategy to move to a greater proportion of unsecured debt and maintaining a large unencumbered asset pool. We hope the information provided in our materials and on this call helps our unit holders to better understand why we believe that the quality and resilience of our portfolio combined with our strong balance sheet position RioCAN to perform well in any environment. With that, we have concluded our remarks and we'll pass the call over for questions.
Operator
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. The first question today comes from the line of Sam Diamani from TD Securities. Please go ahead. Your line is now open.
Sam Diamani
SAM DIAMANI, Thanks, and good morning, everyone. Congrats on a great quarter. First question is just on the pace of dispositions and further NCIB activity. Can one of you just give us a sense as to how we should expect disposition completions to look in Q3 and Q4 and resumption of the NCIB?
Jennifer Seuss
Sure, I can start and I'll hand it over to Dennis for any further color. I hope you're doing well, Sam. And I think dispositions, as we had suggested coming into the year, are largely based this year on qualitative assessments where we can make our portfolio better sort of addition through subtraction. And we didn't really rely tremendously on the quantitative element of dispositions this year as we have more so in years past. So we didn't set dramatically high targets for disposition. and we're well on track to be well within those targets in terms of the dispositions that we're doing. Most importantly, though, some of those dispositions will make our portfolio better and higher performing and higher growth. The disposition market is not dead by any stretch. We are actively in the midst of a few transactions on various types of assets in various geographies within Canada. And I don't think we've disclosed exactly what our target is for the rest of the year, Dennis.
Jennifer
No, I think you just mentioned that we have the 370 if we include the firm and conditional to close out.
Jennifer Seuss
Yeah, so I think that's an accurate sort of gauge on where we're going to be. And then with respect to NCIB, as Dennis mentioned, we've been very active. I mean, it really is a compelling use of our capital at this point. And in terms of our plans going forward, it really does depend on where our balance sheet is. We will not partake in NCIB if it comes at the expense of balance sheet metrics. And so if we, like last year, where we sort of outperformed on dispositions and we sold a little more than we prognosticated, we utilize those excess proceeds to buy back shares. And I would say the same thing is in line for this year. So really only if our balance sheet metrics permit it, it's something we would absolutely, I think, be prudent to consider as a logical use of capital.
Jennifer
Dennis, anything further than that? I think that's bang on. I think the numbers in terms of the value accretion, you know, replacement cost metrics, et cetera, are very compelling, but we absolutely need to be appropriately cautious in this environment, make sure that we always have one eye on our balance sheet, on our liquidity, and before we make any of those decisions. So we'll continue to monitor the disposition market. We'll actively work to close the dispositions we have in process, and presuming that capital arrives, we'll evaluate.
Sam Diamani
That makes sense. Thank you. Next question. Just on the widening gap between in-place and committed occupancy, Anything going on behind the scenes that drove that in the quarter and how do you expect that to evolve over the balance of 2022?
Jennifer Seuss
So I'll start and then hand it over to John Ballantyne. I think that what we're doing is actually getting closer to historic norms with about 100 basis points separating the two. And I think it just speaks to the different nature of tendencies that we are putting in place where there is a little more work and a little bit more time involved between the time they sign the lease and the time they move in. For instance, the well, these are more complex processes in mixed-use environments. where, again, it just takes a little bit longer for the landlord work to be completed and then ultimately the tenant work to be completed. But as I said, I think what was the anomaly was how we tightened that gap so significantly over the last couple of quarters. I think we expect it to be somewhere in this range, not far off it going forward, maybe a little bit lower. But I think it just generally is in keeping with the nature of tenancies that we're now entering into. But, John?
John Ballantyne
over to you yeah i agree with that i would say the historical norm is probably more like 70 basis points uh sam i would also add that we do have a bunch of office back fills that we're working through these are typically slower and i have to say and andrew would probably agree the person especially in the greater toronto area has been dramatically slowed over the last couple of years and we're hoping that that speeds up a little bit
Sam Diamani
That's great. That's helpful. Last question for me is just on the leasing pipeline. When you look at the list of all the potential leases and the discussions on how does that sort of look today versus historically? Are you seeing any sign of slowdown in, I guess, retailers' interest in committing to new leasing?
John Ballantyne
Yeah, I'll answer that as well, Sam. You know, it's really the supply-demand dynamics of the market right now. We are very much benefiting from that, especially on the larger box side. We have had some tremendous response from grocery operators over some available space in three different markets to the point where we're seeing some competition there for this space. So obviously that really benefits pricing. If you look at kind of the list of major retailers in Canada, being Loblaws, be it Empire, be it Canadian Tire, be it Metro, they are all looking to expand store count right now. There has not been that much retail built over the last five years, and I doubt there will be a ton built over the next three. So we are definitely benefiting from that demand. Where we're seeing a little bit of slowness still, again, is on the office side. Although the space that we're leasing out specifically in our Young Shepherd asset was full-force space given back by one of the bigger banks. It's taken a little bit longer to divide up and put people in, but for the most part, we're very happy with glossy with demand and with existing tenants wanting to keep their space as well. Our retention of 93% is well above our historic norm. It's something that we will definitely see go down as we get a little more picky and choosy over the next three or four years, but again, demand has been great.
Sam Diamani
That was great. Thank you very much, and I'll turn it back.
Operator
Thank you. The next question today comes from the line of Mark Rothschild from Canaccord. Please go ahead. Your line is now open.
Mark Rothschild
Thanks, and good morning. Kind of continuing on the point you were just addressing, that there hasn't been a ton of new retail development and Obviously not much near the assets that you own, but are you seeing this slowing down even more to the point that it would impact rental rates and does rising development costs and rising costs in general impact the rental rates you're getting? And specifically, would this lead to better leasing spreads over the next year or two?
Jennifer Seuss
Yeah.
spk04
Yeah.
Jennifer Seuss
Yeah. I think that the market dynamics are very favorable. for landlords such as Ryokan, where we own space in high demographic neighborhoods, and we are definitely seeing that the ability to replace and create new space has become very, very, very difficult. And that means that, and I think couple that, Mark, with I think the reconciliation that occurred during COVID where I believe a lot of retailers, and I say this with a lot of discussions in the background with our retailers, they have recognized the importance of being able to distribute from these stores. And so that along with the supply-demand constraints have, I think, increased the desirability of our shopping centers, and it has created upward pricing tension, and we believe that it will continue to do so. And while I can't assure you that leasing spreads will be consistent in this sort of double-digit number, we do stand behind our guidance from our Investor Day presentation where we said it will be in the high single digits over the span of a five-year period. And, of course, it ebbs and flows quarter to quarter, but we think over the long run, because of those dynamics, those are sustainable numbers.
Jennifer
I think, you know, Mark, we look at internally, obviously, the economics of any of these new retail developments all the time. And even with them, you know, we're building on pre-existing land that's carried out at a very low cost base. And even with that, you know, it becomes challenging to make these projects pencil without, you know, pretty good market adjustments. If we layer in the market value of land, if someone were to go out and actually buy that land and build new retail, Our view is that it would be virtually impossible to make the numbers work right now at current market rents. So at some point, that pricing dynamic has to give if supply is to come on. But unless it's part of a high-density mixed-use project or on pre-existing land, we really think that the economics are very, very challenging for anyone to develop.
Mark Rothschild
Okay, thanks. And just following up on the numbers that you gave, Jonathan, my understanding is that while you expect the leasing spreads to be strong, you don't expect it to generally be in the double digits?
Jennifer Seuss
Well, again, what I said, Mark, was that our guidance of high single digits over the course of five years is something we stand behind.
Mark Rothschild
Okay, great. Thanks. I'll leave it there.
Operator
Thanks.
Mark Rothschild
Thank you. Thank you.
Operator
The next question today comes from the line of Mario Sarek from Scotiabank. Please go ahead. Your line is now open.
Mario Sarek
Hi, thank you. Good morning. I just want to turn to the occupancy, the in place of 96.2% embedded within your guidance for the year. Can you remind us of whether you believe you can maintain or slightly increase that occupancy by year end?
Jennifer Seuss
Yes, I think it is certainly something we're comfortable saying that we can maintain and slightly increase. I mean, as we said, the conditions are very favorable, and truthfully, I mean, we believe that the numbers we are at, it's almost as though we are stabilized. So I think once you start getting 98% committed, you actually can't really or don't want to go much higher than that, but there's still a little bit of room there.
Mario Sarek
And then in terms of the well, it was noted that the kind of least or in discussions about 81%, that's up 200 basis points quarter-by-quarter. Given we're approaching completion of construction over the next 12 months, can you give us a bit of sense in terms of the trajectory and expectations of getting that 91% up to a stabilized figure?
Jennifer Seuss
So we feel that the Given that the physical plant is now much closer to being completed and some of the retailers that we're trying to get at the – that we're confident that we will get at the well are those that really – they're more local in nature. They're not ones to sign at least two or three years in advance. We feel that now that we're in that sort of home stretch of the last 12 months, we will be able to start increasing that occupancy number on a consistent basis month over month until we do have our grand opening. Remembering, too, that a grand opening is just really a date for a ceremony. We will be opening tenants in advance of that date, and I think that the leasing velocity, just given the momentum of the site, given its aesthetic, and given that there's a lot more hype around it right now, will continue to, I think, move towards full occupancy at a reasonably consistent pace. So we are not in the least bit concerned about getting the appropriate tenant mix there in the appropriate time before that grand opening date. I can't promise you that it'll be 98% occupied within a year, but I think, again, for us, the more important outcome is the tenant mix, and we feel confident that we'll be getting close to that over the course of the next medium to long term. Okay.
Mario Sarek
And then in terms of the pretty strong lease spreads that you announced, would the numbers be, would be different on a net effective basis in your view?
Jennifer Seuss
For the numbers of leasing spreads on a net effective basis, I don't think they would be significantly different. John, is that accurate?
John Ballantyne
Yeah, that's accurate. Costs of deals have not increased over and above what we're seeing in just general construction cost increases. But as far as dealing with tenants extracting higher rents, we are not paying higher tenant allowance packages.
Mario Sarek
Okay. My last one is just pertaining to the assets that you have on your discussion for disposition. Would it be fair to say that those are mostly concentrated in the enclosed mall part of the portfolio? And then secondly, what would the kind of mortgage debt attributes associated with those financial dispositions be? Are they generally student credit debt or do they have leverage on them?
Jennifer Seuss
I would say that there is an emphasis on the enclosed mall portfolio, but that's not the entirety of it. We are focused just on lower growth assets, and the debt attributes really vary. Our unencumbered pool of assets is significant, which means that some of the assets we are going to sell will be free and clear, but some of them do have mortgages attached to them. And those rates, given today's market, given the fact that most of them have been refinanced over the last five years, they're generally favorable mortgages at this point, which makes the saleability of them enhanced. And Andrew Duncan, I'm not sure if you have any new data to that.
Andrew Duncan
No, that's bang on, John. It's a mixed bag. There is some enclosed components, but there's also some unenclosed components that are lower growth. And some have leverage on them, property-level leverage on them, and some don't. Great.
Mario Sarek
And then in terms of expected timing on these positions, is this a Q3 event or do you think it can bleed into Q4?
Jennifer Seuss
It could bleed into Q4. I mean, I think the number that we've given in terms of properties that are under contract, those could definitely bleed into Q4.
Jennifer
Yeah, I would probably assume, Mark, just looking at it, we kind of spread them pretty evenly over Q2 and Q4 from a conservative perspective.
Mario Sarek
One last quick question for me, more of a general question. Strategically, I think RealCamp has been one of the most active in terms of the share buyback. The management team has been pretty responsive to your change in cost of capital, maybe relative to some others. You've laid out this five-year strategy recently. The implied cap rate is up about 65 basis points this year. Does the volatility in the public markets that we're seeing, does that change anything on the strategy on the margin?
Jennifer Seuss
No, I think what we've said is in the way we raise debt capital, we did suggest in our invest today that we were going to look to lean more into the unsecured market rather than the secure. Given the volatility in the unsecured market right now and the pricing differences Dennis had referenced in his remarks, we are going to tactically start looking at some secured debt just given that price difference. But overall, again, if I look at that five-year plan, I look at our objectives with respect to multi-res, with respect to the way we diversify our tenancy, the way in which we're actually going to apply capital intelligently to our shopping centers to make them just a better offering, the way in which we're going to invest in technology and ESG in our people here at RioCamp. I don't believe the current volatility in the market is in any way going to impact those around the margins or otherwise. Those objectives, those pillars that we came up with, were intended to be versatile and be in place regardless of the economic backdrop.
Jennifer
And what I would kind of add, and Jonathan said it exactly right, things like shifting to more of a secured financing in the short term, that's a tactic, not a strategy. Likewise, I made some comments around our ability to defer development starts if that came to pass. That would be a short-term capital preservation move. But again, that's a tactic, not a strategy. You know, everything we're saying is really trying to highlight the ability, our flexibility to adapt in these volatile times. But in terms of the long-term goals, we're not changing those.
Operator
Okay. Thank you. Thank you. The next question today comes from the line of Tammy Burr from RBC Capital Markets. Please go ahead. Your line is now open.
Tammy Burr
Thanks. Good morning. Just giving the comments around the 2023 refinancing, you mentioned some higher anticipated costs there. And then you also made some comments around, you know, same property in Hawaii. What can you share with us in terms of, you know, maybe your thoughts on hitting perhaps that, you know, that 5 to 7% annual, average annual, sorry, FFO growth target for next year?
Jennifer
Yeah, I think those comments that I made earlier were directed at the fact that we believe that is achievable. I think the steps that we've taken from a financing perspective this year, protect our FFO and our interest expense next year, we've given some more detail on the timing of some development ramp-up, including one thing we do want to clarify, and you'll see it in our MD&A, is that There's actually a very small gap, if any, between what we define as completion on the well and rent commencement. And that's because the fixturing periods are so much longer at the well than our typical retail sites that we took the conservative approach of not calling them complete until in fact that extra work was done. And so there's a very, very small gap there. That's a strong ramp up and much of the leasing there is complete, certainly on the opposite side and progressing well on the retail side at attractive rent. And then when we look at leasing spreads this year, getting a solid leasing spread in the first half of 2022 actually really drives more towards full year results in 2023. So the positive leasing momentum this year contributes next year. So putting all those pieces together, we feel pretty good about hitting in that range. Certainly there are risk scenarios that exist, but in almost any environment, we feel good.
Tammy Burr
Great. No, thanks for that. You mentioned earlier that net effective rents haven't really changed, but just looking at maintenance cap XETIs, they are running maybe a little above last year, but still below your guidance. You've also done, of course, some more leasing this year. So I'm just curious, you know, what are tenants asking for today that might have changed, say, versus pre-COVID, you know, whether it's the lease terms or maybe even the types of inducements?
Jennifer Seuss
Well, again, I think, and I'll turn this over to John to get more on the ground color, but my view is that tenants are asking for as much as they can get. And thankfully, because of the shifting dynamics and demand, we are able to ask for what we want in return. And so we're seeing a nice balance now where there's actually a logical tenant inducement allowance that is similar to where we were pre-COVID, depending on the space, depending on the tenancy. There really isn't any sort of outsized measure of TIs. And with respect to landlord's work, really it's also very similar. Other than that, work has gotten more expensive for us, given the inflationary environment in construction costs. But tenants also, of course, ask for low growth and we ask for high growth. And there's a dynamic there that you obviously have to negotiate. And thankfully, given the market, we are able to extract reasonable year-over-year growth in many cases from our tenants, which is why we have a strong belief in our growth profile and our same property and our trajectory going forward. But, again, in any environment, tenants are going to ask for as much as they could possibly get. The real question, though, Tommy, is what we're able to negotiate based on those requests and what we can get which is in favor of the landlord, which, as I suggested, is really kind of in line with where we were before COVID. A reasonable TI, reasonable landlord's work, not a lot of rent-free concessions, and reasonable growth year over year. But, John, you have more color on this?
John Ballantyne
Yeah, the only thing I can add, Tommy, is further what Jonathan said earlier about, you know, tenants are really embracing the fact that their physical space is, you know, the factual fulfillment centers for the consumers. They want to be able to get people in and out as efficiently as possible. So we are spending more time with them to make not just their units better, but our shopping centers, more contingent people getting in and out of the centers quickly. So that means Working with parking areas, working with shipping areas, giving larger back of house. You know, as Jonathan mentioned in his script, we now have created something called our tenant experience department. That's to do exactly that. It's not just to build out specific tenant space. It's really to have a white glove treatment with our tenants to ensure that they're maximizing the efficiency of their space. So again, it's not necessarily costing us more, but we're putting more intensive resource efforts into it.
Jennifer Seuss
It's a great point, John. And I think the other things we're doing is just investing in technology and other elements that make the tenant experience better so that we are in a better position to ultimately get better economic terms from our tenants because they will ultimately, when needed to make a decision, as to be in a Rio Can Center or elsewhere. We hope we'll elect to be in a Rio Can Center and be willing to pay to have that benefit of all of these services that we would like to offer to differentiate ourselves.
Tammy Burr
Thanks. That's great, Collier. Just maybe on that point, better terms, are you... Are you getting better annual steps in the leases in some of maybe your stronger markets, like maybe the GTA? And if you can kind of share what those steps might be and if they're being built in on an annual basis.
Jennifer Seuss
It's certainly something we're attempting, and it's really tenant by tenant. Historically in Canada, you saw steps every five years. But based on our experience down in the U.S. where there was more of the norm to actually get annual bumps, we've started – instituting that in as many leases as we can here in Canada. And it really is market dependent and tenancy dependent, but we are able to negotiate that in many cases. With respect to the actual percentage of growth each year, I think it's in line with some of the same property NOI numbers that we're trying to achieve. You know, it might not be 3%, but it's certainly, you know, we attempt to achieve 2% growth bonds each year. But as I said, that really does vary widely between tenancies. John, do you have any further color on that?
John Ballantyne
Yeah, no, the only thing I'd add, absolutely, we try for 2% to 3% a year. I would also say tenants are really trying to extend lease terms out longer than the typical five-year rule. They're also trying to tie up space before expiring. So we have a bunch of national guys coming to us a year, two years in advance saying they want to lock in space now, and it really gives us the benefit of building in that future growth.
Tammy Burr
Thanks. Just last one for me, just coming back to the well. Any update on the types of tenants that you're speaking to on the retail side and on the balance of the space? Any changes in the strategy, just given the broader economic backdrop?
Jennifer Seuss
Again, I'll start and then hand it over to John, but no, we're not, first of all, we're not changing the strategy. We really do want the appropriate types of tenants that define that downtown west corridor, the types of tenants that will be suitable for not only the constituents within the office there, but also the residents and the residents around in that neighborhood. So a lot of S&B, a lot of experiential uses, but then also some uses that help with the day-to-day needs of all of the people around that retail component. So I think you'll see that the mix of tenants is totally appropriate within that context, and that's been our strategy for a number of years, and it hasn't changed at all based on this. economic backdrop. This is a generational type of asset, one in which we feel that a blip in the economic backdrop is not going to alter the way in which we fashion it. John, any further color on that?
John Ballantyne
No, I think you've got it all. Again, emphasis is really on food right now, especially infilling in our market. We've got 1.2 million square feet of office. People are going to be there every day as well as residents. We know it's a very important component of this for the people living and working there, but also as an attraction of people throughout the city. So we have a team of people working specifically on the food side, and I think what we're coming up with is going to be pretty exciting there.
Jennifer
I'm just giving some breakdown of five types. I'm not going to name names necessarily, but it is that mix that both Jonathan and John mentioned. So we have you know, necessity-based type tenants like, you know, 16,000 square foot pharmacy, a 15,000 square foot medical office, a dental office, et cetera. These types of, a couple of bank branches. So these types of things that residents need day in and day out. We have a large food purveyor. We have the market hall. And then some proprietary brand type athletic wear types as well. you know, getting that mix is, you can see it's a pretty wide slot.
Tammy Burr
Thanks very much. I'll turn it back.
Jennifer Seuss
Okay, fine.
Operator
Thank you. The next question today comes from the line of Tal Woolley from National Bank Financial. Please go ahead. Your line is now open.
Tal Woolley
Hi. Good morning, everyone. Good morning, Tal. Hello. Hey, good to hear you. Just to put a bow on the guidance conversation, it seems to me like basically based on what you're seeing, you feel comfortable with the growth outlook for 23 and for the remainder of the plan that you had laid out earlier this year. Is that a fair statement? Yeah. Okay. When you're looking at new projects right now, I'm just wondering if you are – looking at a new residential project, would you be more likely to kind of look at the condo prospects for that property or the rental prospects for that property?
Jennifer Seuss
Well, I think we are looking at it the same way we always do, which is one, it is site specific. So it really depends on how many units we are planning on creating. And if we sense that there's too much absorption for multi-res rental, we're also going to supplement that with some condo. Two, we're looking at sort of the balance sheet within that project. And oftentimes, as you know, building multi-res rental alone is quite difficult. cost prohibitive and you're going in yields are not tremendous and we look at everything on an IRR basis not necessarily going in yields because that doesn't tell the whole story but oftentimes you're aided by the sort of the upfront cost recovery and profit that you get from a condo building and that helps you succeed in building your multi-res rental building we have a We have a defined ambition to get to between $55 and $60 million of residential NOI within that five-year period, which is now we're six months into it, so call it four and a half years. And we believe that is the right thing to do for our company long-term and for our unit holders. So we will still continue to build multi-res rental, but of course we will supplement it with condo where it makes sense. So I know that's a bit of a vague answer, but it really is project specific. But from a overall corporate objective perspective, we are still very much focused on growing a multi-res platform and having the Rio Can Living brand utilize its scale and its capabilities to make those environments really, really exceptional for our residents, which will, of course, in the long term, provide much needed living space, but also provide, I think, enhanced rents and growth for our organization.
Tal Woolley
And can you just remind me, is there a big difference in the development charges or associated fees with respect to building a rental versus condo?
Jennifer Seuss
Well, the big difference is that we get charged HST on building a multi-res rental property, and we do not get charged HST when we build a condo. That gets flowed through to the ultimate buyer. So, I mean, again, I'm not going to criticize taxation policy, although I will point out that it does make it a little more difficult on a multi-res rental project to make the numbers work based on that. And I think, again, if we are seeking enhanced supply out there, which is needed to address what I think is a housing crisis, that HST factor does definitely make a difference. when it comes to building multi-res. But in terms of actual development charges and levies and things of that nature, My belief is that there is total consistency between the two, but I'm going to look over to Andrew Duncan just to make sure that I didn't get that wrong.
Andrew Duncan
That's right, John. The only exception to that is in cases where there's some consideration for fees related to doing affordable rental in certain jurisdictions where it's an affordable housing policy, like in Toronto where the open door policy where there's a break on some development charges related to those units you are delivering that are affordable. But overall, Whether it's a condo unit or a market rental unit, the fees and development charges are exactly the same.
Tal Woolley
Okay. My last couple questions are more on the retail side. Just to go back to your earlier discussion on the grocers, they had sort of been pretty quiet in terms of growth prior to COVID. When you're talking to them now, What are they seeking? Is it about relocating into bigger box sizes? Is it about absolute unit growth? Or are we looking at new entrants? What do you think drives the growth in that category?
Jennifer Seuss
I think it's a combination of things. The color that I get from speaking to some of the high-level executives is the national grocery changes. A lot of them have acquired new banners that they want to expand. Some of them have discount banners that are doing better or just sort of are requiring more growth than their mainline banners, so they want to grow those out as well. And some have ancillary businesses like pharmacies, which they're very hyper-aggressive in their growth plans. What that leads to is, one, an expansion of some box spaces that they already have, but I think mostly it is actually just acquiring that new space, whether it's existing boxes or having new boxes built for them. But as we suggested, the whole prospect of building new boxes for them is becoming increasingly difficult, and that's why there's so much demand, and we literally are seeing some reasonably fierce competition for any boxes that open up that are, I would say, that can accommodate grocery stores because of these expanding profiles.
Tal Woolley
Okay. And nothing new on the entrance side then? No major new entrance or anything like that that you're seeing at this point?
Jennifer Seuss
No, more just expansion of smaller, you know, newly acquired properties like, you know, T&T, for instance, or Farm Boy or I know No Frills is also, Loblaws is looking to expand them aggressively. So those, I think, will keep us busy. And I think we'll definitely, I think our grocery store change here have done a remarkable job of evolving. And I think because of that evolution, they're going to be seeking new space opportunities. But I have not heard like some of the U.S. biggies. You know, like Aldi and Lidl, we've always kept an eye on. I haven't heard anything definitive about them and their Canadian expansion plans, if any. So it really is just the same players in Canada looking to expand and extend.
Tal Woolley
Okay. And then now that the duck has somewhat settled on, you know, COVID, you know, across the retail landscape, I'm just wondering, like, as you look around Are there opportunities out there where a large retail platform like yourself could be a little bit more opportunistic in retail? I'm thinking maybe there's street rent that obviously in certain areas is under pressure or office retail. Are there any other parts of the retail space complex that you could be getting more involved
Jennifer Seuss
Well, I think the first place we turn to is inwards, and we have some tremendous properties that can use some more attention within our own portfolio, and that's something that we're hyper-focused on, investing and actually making our own portfolio better, not just through these massive redevelopments into mixed-use properties, but also even our ubiquitous suburban shopping centers, just making them, as John suggested before, making them more amenable to providing the services that our tenants need to make their stores better in this kind of hybrid online environment. But in terms of other opportunities, the truth is retail in Canada has fallen into the hands of some very well-heeled and responsible balance sheet heightened entities that aren't really desperate to sell en masse. So there might be certain opportunities around the edges where if available, we will certainly look to avail ourselves of But I don't think they're that rampant. And I think everyone is sort of waiting for a shoe to drop based on higher interest rates, that all of a sudden the market's going to fall off a cliff from a values perspective, allowing people like us to have a tremendous amount of opportunities. But it's not just interest rates that create pricing. It's also flow of capital and flow of funds. And we have a sense that there's a lot of people with capital who really like the retail space. And so I don't think there's going to be large-scale opportunities out there, but you can rest assured that if they exist, we will find them and try our best to take advantage of them. So that's really what I will say there. I don't know, Dennis, if you have any further thoughts on that.
Jennifer
I think that's bang on, and it's one of the reasons why quarter in and quarter out, we talk about our liquidity. both as a defensive position for us going forward, but also as an optimistic position if the rising rate environment does create some opportunity down the road as people get jammed up by refinances, etc. Okay. That's perfect. Thanks, gentlemen.
Jennifer Seuss
Thanks, Sal.
Operator
Thank you. The next question today comes from the line of Jenny Ma from BMO. Please go ahead. Your line is now open.
Jenny Ma
Thanks. Good morning, everyone. Just wanted to ask about the debt strategy. Dennis, I'm not sure if you had mentioned what the gap between unsecured versus secured debt is. So if you could give us that, that'd be great. And then you also talked about leaning a bit more towards secured debt for some of the near-term maturities. And I'm wondering, tactically, is there a view of playing around with short-term versus long-term in order to get a more attractive cost of capital, or is the preference to really term it out as long as possible?
Jennifer
Yeah, so I think, yeah, thanks, Jenny. So I guess the first question is that we have been seeing in the neighborhood of what's called 75 to 85 basis point gap and spreads between secured and unsecured on financings that we're active in right now. So that is... know a fairly substantial disconnect so we will take advantage of our uh security asset pool to do that and you know i think um it's hard to know exactly why that is uh there's a lot of fun slow dynamics and market dynamics out there that people have to think about but i think one thing that a mortgage lender does at a business level that a fixed income portfolio manager can't necessarily do is they are underwriting down to the asset. So they're taking the couple months that it takes to go lease by lease through an asset, get comfortable with the credit quality, and underwrite on a very different risk basis than a typically fixed income investor can do. And we think that is helping the viewpoint there. It'd be interesting to see how these converge over time, but that's where it stands today. We are active on $300 million of secured financing now that would be used to refinance our upcoming maturity of our venture in October. And we are looking at seven-year because we have a hedge in for seven-year on the GOC component. So that kind of takes care of the balance of this year. As we go into next year, so we don't have any major financing after that until we get into – half of next year our mantra right now is just making sure we know what all our options are so we're looking at a term or looking at type of debt of all types that will continue to do that we always have to have one eye on the ladder and the risk so our preference would be to go longer The way the curve is right now, it actually is kind of attractive to go longer. But again, the way the markets move these days, it's hard to know how that lasts. But we have an inverted curve. The 7, 10-year end of that curve has come down a lot in the last few weeks as well. So we continue to monitor. Okay.
Jenny Ma
Okay, great. And then turning to your strategic initiatives and the guidance, it sounds like you're fairly confident about hitting the 5% to 7% in 2023 based on where we stand today. But I'm just wondering in the fullness of your five-year plan, when you think about the performance of hitting those goals, do you look at sort of the 5% to 7% FFO unit growth discreetly year by year, or is there room to say in five years' time you look back and if you get to an annualized number of 5% to 7%, that that's satisfactory as well? How should we think about your goals on a year by year basis?
Jennifer
So our model that we put out on Investor Day was an average five year. So it's a CAGR basis over that five year period. So there could be bumps in the road. You can always find scenarios that could be negative, but we think they would be temporary. So you read that in the market, things like stagflation, low growth, high interest rates. To be honest, at this point, we wouldn't do much to impact 2023 because we've advanced a lot of the leasing already and taken care of a lot of the financing. but you start getting into 2024, maybe that's an issue. But in the fullness of time with a five-year plan, these things tend to normalize and we feel comfortable running a lot of different scenarios, including some pretty high interest rate scenarios that these numbers remain achievable over that period of time.
Jenny Ma
Okay, great. That's helpful. And is there a plan to issue 2023 guidance next quarter or is that going to be something in early next year?
Jennifer
I think we would typically do it like we did this year. We would launch something or put that out in early 23.
Jenny Ma
Okay, great. Thank you very much. I'll turn it back.
Operator
Thank you. I'm showing no further questions at this time. I would now like to turn the conference back to our President and CEO, Jonathan Gitlin.
Jennifer Seuss
Thanks, Bailey, and thanks, everyone, for hanging out with us this morning and for reading through our results. And we're very pleased with where we are and where we're going and looking forward to speaking to you all again very soon or at the very least next quarter when we report again. Thanks.
Operator
Thank you all for your participation. You may now disconnect your line.
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