SmartCentres Real Estate Investment Trust

Good day, ladies and gentlemen. Welcome to the Smart Center's REIT Q2 2021 conference call. I would like to introduce Mr. Goldhar. Please go ahead.

Thank you. Good afternoon. Thank you for joining us. I am Mitchell Goldhar, Executive Chairman of Smart Centers, and will be chairing this call. Joining me on the call today are Peter Sweeney, Chief Financial Officer, Rudy Gobin, EVP, Portfolio Management and Investments, and Mauro Pambianchi, Chief Development Officer. Peter Ford will not be joining us on the call today. He extends his regrets as he continues his leave. Our commentary will refer mostly to the outlook and mixed use development initiative section of our MD&A, which are posted on our website. I refer you specifically to the cautionary language on pages three and four of the MD&A materials, which also applies to comments any of the speakers make this afternoon. Our results this quarter speak for themselves and demonstrate again what we have been saying since 2015 when we combined the public and private companies strategically to affect these changes. Let me summarize this quarter in the following way. Our intensive mixed-use pipeline is into its second year contributing to FFO, and we expect this to be permanent for all intents and purposes. Our entrepreneurial mindset and culture and core competencies continue to drive profitability in land development through intensifying and repositioning our assets. Our open format portfolio is an excellent starting point from which both us and our retailers can easily change, and we are. tenant interest accelerated through the quarter. This is off of our lease occupancy of 97.3%. Therefore, we expect to see improvement, continued improvement in cash flows going forward. Pages 21 to 23 of the MDMA highlights in excess of 55 million square feet, the updated net incremental density to be built with our partner's share of on lands within our owned centers. In our flagship smart CMC, we closed on 70% of the transit city three condos, 439 units, in the quarter, generating $12.9 million in FFO, or seven cents, with the balance to be closed in the third quarter. Two additional towers, TC4 and 5, 45 and 50 stories respectively, 1,026 units combined, are sold out, are under construction with 20% deposits in place from the purchasers. The purpose-built residential rental tower, 451 units, which we call the Millway, is under construction. And we are near completion for the launch of the next phase of high-rise condominium in Smart BMC, named Artwalk, with over 600 units. We commenced construction this quarter on a 174-unit rental apartment building along with 228-unit seniors' residence at our Laurentian Place property in Ottawa. And we also commenced construction this quarter on two purpose-built residential towers in Mascouche, Quebec, a suburb of Montreal, with our JV partner, Cogere, with the trust retaining an 80% ownership interest. We have also commenced the redevelopment of a portion of our 73 acre Cambridge project for residential condos and rental and other complimentary uses. This project sits on our books with a $92 million IFRS value based on a retail rents existing in our 700,000 square foot retail center. Whereas with the recent rezoning We are now approved to develop over 12 million square feet of mixed use on these lands. Keep in mind, we do all this while simultaneously maintaining our conservative balance sheet with ample liquidity. We will only move forward with capital intensive construction initiatives as market conditions warrant. Sufficient pre-sales have occurred in the case of condos. and only when financing is fully available and in place. Additionally, on the capital recycling front, we now have nearly $200 million in conditional deals in process so far this year at an average of low five cap rates. The assets are non-core, and the proceeds will help fund our extensive development pipeline. The last... 18 months has been an interesting real life test of what we have been saying about our portfolio. That is, it is a strong and strategic one with a lot of embedded value. Now, we'd like to turn it over to Rudy Golding.

Thank you, Mitch, and good afternoon, everyone. Throughout the quarter, we saw tenants preparing to reopen, along with a renewed demand for space from tenants previously waiting on the sidelines, but now ready to lock up new locations. The acceleration was both small and large tenants asking to be co-located with Walmart Anchor sites, having just experienced the alternative, and especially those coming from enclosed malls. Interests ranged ranges from a fast food resurgence to pet stores, medical offices, and even financial institutions. We've received mid-box requests from dollar stores, outdoor sports and recreation, houseware stores, and a surge in demand for larger spaces as well, like the TJX, furniture stores, fitness, even home improvements, and full-line grocery stores. You know, and while 100% of the REITs properties include grocers as an anchor or shadow anchor, and 60% of the REITs tenant base is comprised of essential services, our essential services percentage increases to 70% in markets outside the greater Vectum area, where our occupancy rates are at or near 100%. In these smaller markets, our shopping centres are often the essential service hub of the area, and are in all cases anchored by a Walmart store. The shopping basket size and frequency of these markets continue to increase as segments of the population relocate from the downtown core. This not only strengthens our shopping centers, but further enhances the opportunities to intensify on our existing lands in these markets. Our tenants continue to work with us to adapt by expanding their e-commerce, product lines, delivery model, pickup, and space utilization, all while striving to maintain customer loyalty and sales. And we are there to support them every step of the way. As we have highlighted previously, Walmart plans to spend $3.5 billion over the next five years to make the online and in-store shopping center experience simpler, faster, and more convenient. This continued commitment to its retail operations in Canada speaks to the ongoing strength of Walmart and its growing ability to drive traffic to our centers. As you know, virtually all of our revenues from shopping centers are from open air centers, providing a safe and comfortable environment for customers to practice physical distancing while shopping for their everyday needs. For Q2, We completed nearly 260,000 square feet of new leasing, improving our leased occupancy to 97.3%. With regard to our premium outlets, both are now open and are at full occupancy. While sales were impacted during the period when they were operating only with curbside pickup, since reopening, we are seeing traffic counts that are already approaching the pre-pandemic levels of 2019. and sales have shown great resiliency, with higher conversion rates than in the past. With the pent-up demand and accumulated savings being reported, and the recent reopening of the U.S.-Canada border, we hope for and expect a strong fall and Christmas shopping season. By June 30th, we completed nearly 3 million square feet of renewals, nearly 73% of 2021's maturities. And finally, while small independent retailers make up only 6% of our contracted rents, they are an important component of the Canadian economy and our portfolio, deserving of our focus and assistance throughout this period. As Mitch said previously, we are built for heavy weather. Our high-quality portfolio will continue to adapt, intensifying with residential and other real estate asset classes, strengthening with an expanding tenant base, improving customer traffic, and a leading occupancy rate, and of course, reliable and growing cash flows. And now I will turn it over to Peter Sweeney. Thank you, Rudy, and good afternoon, everyone. We have continued to focus on further fortifying the strength of our balance sheet, even during these most uncertain times. In this regard, we note the following highlights for the second quarter of 2021 as compared to the comparable quarter in 2020. Number one, in keeping with our strategy to repay maturing mortgages and to grow our unencumbered pool of assets, unsecured debt in relation to total debt increased to 70% from 65%, and our unencumbered pool of assets continue to grow, increasing by approximately $293 million to $5.9 billion. And as we maintain our strategy to continue to repay these maturing mortgages, we expect these metrics to further improve in the future. Please note that this strategy permits us further agility when considering opportunities and alternatives for a portfolio of mixed-use developments. Number two, our BBB high credit rating from DBRS permits us to continue to attract debt capital at low interest rates for longer terms, and in keeping with our strategy to take advantage of lower interest rate environments and pursuant to our refinancing activity over the last 12 months, our weighted average interest rate for all debt continued to decrease and at the end of the quarter was 3.27%. This compared to 3.46% for the prior year. This 19 basis point reduction is expected to yield approximately $8.5 million in in savings in annual interest expense, while concurrently we have extended our weighted average term of debt to 5.3 years as compared to 4.8 years in the comparable prior year period. Also, variable rate debt in proportion to our total debt stack was approximately 3.9% at the end of the quarter. This continued focus on both increasing the weighted average term of our debt and fixing interest rates is deliberate and is yet another example of the risk mitigation strategy that we have employed to insulate the trust from interest rate volatility. And then lastly, number three, our interest coverage ratio net of capitalized interest was maintained at a very strong 3.8 times level This, in spite of the impact that COVID-19 has had on our operating results over the last 15 months and further confirms the foundational strength and stability of our core business. Also, our adjusted debt to adjusted EBITDA multiple was 8.2 times as compared to 8.8 times in the prior comparable period. Again, reflecting the business's strong and stable ability to fund its obligations with our continued commitment to our balance sheet. From a liquidity perspective, as we look to the immediate future and continue to manage through the current uncertain capital markets environment, in addition to the conservative debt metrics noted previously, Please also consider that when factoring in our new $150 million line of credit that was completed subsequent to the end of the quarter, together with the $250 million accordion feature associated with our existing undrawn $500 million operating line, our liquidity position exceeded $1.1 billion at the end of the quarter. this after reflecting the repayment of $323 million in maturing Series T debentures prior to the end of the quarter. Recall also that the next series of debentures in our portfolio does not mature until May of 2023. And notwithstanding the challenges associated with COVID over the last 18 months, our business has continued to demonstrate its ability to generate sufficient cash flow to fund our operating needs. Accordingly, we anticipate our requirement for additional funding over the next 20 months to be limited to construction financing associated with the projects in our development pipeline. However, we are continuously considering opportunities to early redeem debentures and mortgages when appropriate. And with that, I will turn it back over to Mitch.

Thank you, Peter. We will now open it up to your questions.

All right, so just to remind everyone to queue up for a question, please press star one on your phones. And the first question we currently have in the queue comes from Mario Saric from Scotia Capital. Please go ahead, Mario.

Hi, good afternoon, and thank you. So one quick question on the development pipeline, which is clearly very large and very valuable. I think the metrics that you provided on Cambridge alone, $92 million is about $7 a square foot implied buildable, which is extremely low. So the question is really, when you look at the vast opportunity that lies ahead of you, how do you think about balancing the vastness of that opportunity with potentially crystallizing a bit more value in the short term?

Yeah, sure.

You know, I actually got disconnected right in the middle of the question. You were asking about Cambridge's embedded value.

I guess the question is, you have a vast kind of development opportunity ahead of you for decades. How do you balance that long term opportunity with the potential in this environment, given the quality of the assets to monetize some of that long term upside? into your NAV today via dispositions?

Via dispositions? Correct, yeah. Yeah, I mean, we look at it. I mean, exactly like you're implying. I mean, there are going to probably be situations where I guess we're ready to go on, let's say, Cambridge and Pickering and Westside and you know, maybe 1900 Eglinton. And so, you know, given what that may mean to us and our balance sheet, we might sell something if the price is right. So this is something, you know, we will be monitoring. I mean, if everything we're about to start or able to start all in the same sort of, you know, day, so to speak, we would probably look to, to that. So we're, we're, We're keeping all those channels open. It is a good opportunity at the right price to capitalize on some of that embedded value. We are also involved in exploring the idea of bringing in some potential partners on some of those projects as another lever of raising capital at market. So it's also another way of selling apart interest.

And the $200 million of conditional deals that you highlighted at a low five cap valuation, what were some of the defining characteristics of those transactions that led to the planned disposition?

Yeah, they don't have the development or intensification potential. So one of them has a characteristic that you know, is beyond that, but I don't want to get into that because it would maybe be, in a sense, de facto revealing what it is, and it's still in a conditional period. But for sure, that is a common characteristic is that we don't see them as having sort of any intensification or redevelopment potential in the foreseeable near future.

And then maybe someone related in the MD&A or I think in your letter to unit holders, you mentioned the expectation that we could start seeing some fair value gains from your IPP portfolio. Would that be kind of correlated to the pricing that you're seeing on these types of transactions?

Yeah. We do see we have more options. We were fine even a year ago. Nothing, we did not slow this program down. And we also may have even accelerated it a year ago. But now we do have a tiny bit of maybe, I don't know, maybe a little bit of a headwind in respect of our options on the number of these properties. So that weren't available a year ago. So yeah, we're increasing leasing interest. Interestingly enough, it's not always not all retail. but also retail and then, you know, development options as well.

Okay. My last question is maybe shifting focus to the operations. Q2 showed a vast improvement in terms of same property and Y growth, both kind of including and excluding bad debt expense. Do you have any color or guidance in terms of when you think the same property and Y growth can turn positive when we back out the bad debt expense year over year?

Rudy, do you want to take a shot at that? As you know, in the same quarter last year, we had a significant ECL provision, and that provision got smaller into quarter three and smaller into quarter four. It's significantly less in this year, as you know, and we've only seen an increase in tenant interest and an increase in the cash flows coming in. So, Depending on when the tenancies had taken their CCAA and bankruptcy filings in the prior year, Muriel, and when it happened in terms of through the trustees, and when that happened because those tenancies paid rent throughout the bankruptcy period called occupancy rent, as you know, So, those rents carried on, but those ones that did not go through it, we ended up taking that provision. So, when you see it through the three months in June and maybe see it in September, we expect just a continued improvement over the next two quarters. We know what it is now in terms of the variance, but same properties excluding was negative. So... So we see improvements in each of the next two quarters. Yeah.

Okay. Thank you for the call.

You're welcome.

All right. Next question comes from Sam Damiani from TD Securities. Please go ahead, Sam.

Thank you, and good afternoon, everyone. Yeah, Rudy, just back to the leasing side. Can you talk about, I guess, the most challenged categories in the tenancy today and what your outlook is for those tenants after the rent subsidy ends? And I have a follow-up question as well.

Sure. Sure, Sam. You know, it hasn't changed. The ones that are most affected, and again, we don't have a lot of these, the very small independent tenants that are non-essential tenants who are forced to close. We have about 6% of that in our portfolio. They are the most affected in our portfolio. And again, knock on wood, there's been no filings this year in our portfolio in the open format. So it's been great. The tenants who are carrying on and some are still struggling to pay their full rents, given that you've seen the 95% recovery, they're paying part of their rents, and they're paying as they get their SERS funding from the government. That will carry on, and we are putting in place deals for every one of those tenants to help them, to help defer rent. In some cases, as you saw with the lower rent, to lower their rent in the short term and help them recover that in the medium and longer term. So apparel, small tenants, fitness, struggles, as you know, sit-down restaurants, would be another category that struggles because, again, they did pick up. They did outdoor when the weather is good, but when the weather isn't good, they can't do that patio. And right now, with everything reopening, there's a big resurgence of interest. It's amazing what started happening in the middle of the quarter, second quarter, and then throughout the quarter and even now. So, we're seeing some very welcomed improvement.

Just on the fashion and the fitness side there, not really weather dependent for their operations, how are they doing with the reopening in Ontario?

Well, as you know, they're all open. Everybody's open across the country and in Ontario. Limited in Ontario in terms of doing fitness and outdoor activities. But as you know, the fitness guys did receive funding and did receive government and bank funding and stayed open. So they're still open, they're operating, they're paying their rents. So they're expecting a resurgence, people coming back with the double vaccinated You know, whether they implement that as a mandate coming into their premises or not is still all up in the air, as you know. But there is a very bullish sentiment of our tenants in the open format space, especially because the traffic has just been very good throughout this period. So, you know, if that traffic wasn't there, I wouldn't want to, you know, like, again, we're getting the interest from closed malls. tenants of similar types of tenants, by the way, even fitness wanting to be now co-located in our, in Walmart Anchorage Center. So yeah, it's been, it's been very positive.

Thank you. Just lastly, you know, with the headlines we're all seeing about the Delta variant, is that presenting a bit of an obstacle in terms of closing, closing lease deals these days?

In closing lease deals? Not, not really. You know, in Canada, I mean, they may not may be an issue in the United States, but in Canada, we've been carrying on, we are still exercising, you know, our good diligence from a from a social distancing perspective, in our properties in our premium outlets, in stores. So This hasn't really been an issue here in Canada. The numbers are small, as you know. We monitor it across the country, municipality by municipality. It did heat up a little bit, as you know, in Alberta. It did heat up a little bit in parts of Vancouver. But generally, people are outside and they're shopping. And our open-air format really makes a big difference in that arena, if you will, as opposed to the enclosed mall type. So, So not really seeing, and again, things may change, but not really seeing an impact on our portfolio. The interest is just, again, ramping up.

Okay, great. Thanks very much.

Thanks, Dan.

All right. Next question comes from Jenny Ma from BMO Capital Markets. Please go ahead, Jenny.

Thank you, and good afternoon. I just want to revisit the question about your expectation of booking some more fair value gains over the next few quarters. You had mentioned that some of it is coming from some development costs that you're seeing. But I'm just wondering if you have some more color on sort of what's driving that view. Is it a reversal of some of the write-downs you took from last year? Is it changes in cap rates or rents? Maybe just a bit more color on what you think is going to drive that over the next few quarters.

Well, okay, Rudy or Peter, you want to?

Yeah, yeah, Jenny, it's Peter Sweeney. What we're hearing, Jenny, from the appraisal groups and professionals who assist us in our portfolio evaluations every quarter is that there continues to be or there has certainly been a return to the marketplace of institutional investors who chasing investment-grade properties, including retail properties. And there's, again, a robust level of demand for these types of properties in the marketplace, resulting in further compression in cap rates. So as we went through the quarter and as we went through the property valuation exercise, all of the appraisal groups with whom we work had the same comments and the same themes. that as we think about the balance of the year, again, all things being equal, that we should expect to see some compression in cap rates and discount rates on our portfolio properties.

Okay, so is it fair to say that, you know, what the timing would be dependent on is maybe seeing some more data points in the market to support those valuations?

Yeah, I think it's fair to say the appraisal firms, Jenny, are there. Well, there. Are seeing it already in some of the activity in the marketplace, vis-a-vis cap rates being paid or prices being paid on properties that are available. And when you translate those metrics and that experience against our portfolio, again, they're suggesting to us that we should expect to see some compression over the balance of the year.

Okay.

I would add to that that we're seeing more contact, you know, we're getting more calls from different types to potentially enter the space or, you know, invest further in the space in the last, I guess, last quarter than we have in maybe the last year or so.

So incoming interest in your property?

Yeah, like just, you know, yes. You know, institutions and others interested in knowing if we're inquiring into whether we would be interested in selling, you know, at interest in cap rates. you know, so it just is kind of this feeling like there's, you know, capital, increasing capital, you know, moving, more of it's moving into retail.

Okay, great. Is it really just cap rate or are we starting to see a little bit more confidence in the NOI numbers? I know last year that was sort of a question mark. Is it firming up or is it really cap rate driven with still some conservative views on NOI and NOI growth?

No, it's, it's not, we're not, it's not like, um, um, you know, they're not because some bottom feeding kind of, you know, what can we, you know, how good a deal can we make here? Uh, they're, they're genuinely feeling like, uh, you know, relative to everything else. Uh, You know, all the scary stuff around retail just got tested. It didn't materialize quite as advertised. And there's, I guess, a more, you know, there's a calmer, you know, more confident feeling around retail. You know, retail is not going away. I'm sorry. I mean, the world doesn't work in black and white. Retail is changing, but it's absolutely going to be here for the foreseeable future for a long time. And people are starting to understand that it isn't one or the other. So, you know, you kind of get the feeling that this is a great test for everybody to watch and observe, great experiment in a sense. And now that things are opening up, people see what the parking lots look like and they can understand the seamlessness between e-commerce and physical. And so it doesn't seem as if there's this, you know, don't talk to me about retail, you know, thing that was irrational, but was there, you know, a year ago or whatever. So there's a certain percentage of that. And also, no, it's not like, you know, how low will you go at all? It's none of that at all.

Okay. I'm glad we're all on the other side of that test. With regards to the condo development, the new Artwalk project, are you able to talk to us about what kind of pricing or return expectations you're getting? Would the return be to a similar level as you saw for PC 1 to 5, or has it shifted at all?

Yeah, so just to remind you that PC 4 and 5, which was the latest ones that we went to market on, were sold at – an average, I think, of $885,000, I think, something plus or minus. And then the property across the road, Festival was sold. They sold out their entire portfolio that they wanted to sell. I think they held back some. I think they averaged, you know, over $1,150 a foot. So with TCF, Four and five, you know the numbers on that. The REIT owns 25% of four and five. The REIT will own 50% of park walk. And you can assume that, you know, we're next to the subway. The one I was just referring to is across the road. So they, yeah, so you can sort of assume that we're expecting to do better on a per square foot basis than we did at four and five.

Okay.

Now, how does that... Yeah, I will tell you, construction prices have gone up. Yeah, I didn't realize that question. But it's not nearly in proportion to the pricing difference and the ownership difference. Because we sold our respective 50% interest, our 25% interest, the 50% interest to our condo partner there at a pretty good low as in low price. But that was early days and that was also, yeah, I mean, that was early days.

Okay.

The reason we're not doing it in partnership there is simply because we want to get the benefit of the whole thing. We built the capabilities, but CenterCorp were and continue to be fantastic partners.

Great to hear. And then shifting to the balance sheet, so you continue to make good headway on getting more of your debt to be on the unsecured side, and it sounds like from the commentary that that number should continue to grow. Do you have a goal for that? Like, do you want to get – is there a specific number in place, or is it just going to be more organic over time as you roll over mortgages and just continue to expand that number?

Yeah, I think the – Yeah, do you want me to take this from Mitch?

Yeah, I was just going to say, we're going to keep doing it until everybody doesn't want that, and then we'll want to, you know, property-specific mortgages, of course. But, Peter, go ahead.

Yeah, Mitch is right, Jenny. We don't have a specific measurement or metric that we're trying to guide to. However, you know, I think we've said now for a few years that our goal is to, for the most part, replace maturing mortgages. with unsecured debt. And I think as we've mentioned, it gives us tremendous flexibility as we think about some of the development needs going down the path or into the future with many of the properties that we're going to be doing mixed use development on. So we're finding that if a property is unencumbered, it gives us virtual certainty on flexibility of putting any type of development on any part of that property without the need to engage with a financial institution on discussing security. So among other things, that's one of the perhaps hidden advantages. But I think in a perfect ideal world, you would see us having a balance sheet that was principally unencumbered, save and except for the construction financing initiatives that were incurring. And to the extent that we've got partners on projects like apartment buildings, as we think about the future, the CMHC is providing very, very attractive low rates subject to taking security in those apartment buildings. So that might be the exception when we think about the future, Jenny, for many of the apartment buildings that we'll be building. We will likely be at least seriously thinking about mortgages through the CMHC for those types of buildings.

Okay, great. And then one last quick question on the $200 million of assets conditional. Are those unencumbered?

For the most part, yes.

Okay, great. Thank you very much. I'll hand it back.

Thanks, Jennifer.

All right. Next question we have comes from Tal Woolley from National Bank. Please go ahead. Hey, good afternoon, gentlemen.

Good afternoon, Tal. Hi. Mitch, I just wanted to ask, you know, I live right downtown in the city. I'm seeing a lot more penguin pickup depots over the last little while. I'm wondering, is that business starting to get to a scale where it might make sense to be inside the REIT, or does it not ever really make sense inside the REIT?

I mean, I don't know if I've ever – we've ever talked about this before, but I, I believe a few years ago, I mentioned that it's, it's certainly being discussed and it's a possibility. Um, so yeah, I mean, we'll, we'll continue to, to talk about it. There has been, you know, interesting inquiries from other entities. And so, um, yeah, I mean, I, I, I wouldn't dismiss the possibility. It's a growing business. It's, uh, growing, you know, rapidly, both in terms of location and number of parcels that it processes and handles. And we've recently signed up Ikea. And that's been going gangbusters. So yeah, it's a really cool business. And we're well on our way to going national. We were in some space in Vancouver, we're getting good coverage in Montreal and slowly but surely moving across the whole country.

And, you know, Walmart's online grocery business, like they are still running a ship to, you know, direct to consumer, ship to home business too as well. It's kind of hard from the outside to know, you know, how serious that is, you know, how serious they're taking that. But one of the questions I wondered is just given your relationship with them, do you have, you know, is there a way smart centers could participate in sort of if they really go fully commit to a shift-to-home strategy that smart centers could participate in building or developing some of the infrastructure for that business?

Yeah, I mean, I will tell you that I certainly can't speak out of school here on, you know, things that Walmart will be probably announcing, but we are involved – you know, on a number of fronts with Walmart with a number of their initiatives related to, you know, fulfillment and distribution. But I'll just say that, you know, like a lot of retailers, you know, part of the future network is going to actually be, you know, from the actual retail unit itself. So that's going to mean certain changes, potential expansions in certain places, you know, for that purpose. And, yeah, we're involved in some other things with them, which, you know, we call them special projects, and, you know, that'll be something we'll announce sometime in the future. Okay.

And then just on leasing activity this quarter, the spreads on renewals were a little more muted. Should we anticipate that, given that there's been some acceleration in leasing interest, that'll start to improve? And was there anything specific in this quarter that kind of kept those spreads flattish? Well, you know,

last year was unique. But Rudy, do you want to maybe give some additional color?

Sure, I tell. Yeah, I mean, as you know, the renewals for tenancies happen six months, three months, nine months before the lease is actually mature. So when we're negotiating a renewal in 21, that's actually being negotiated in 2020. And in 2020, we had we're in the midst of the pandemic. So we did not, as you saw the numbers when we reported last quarter, we hadn't negotiated a lot of the renewals yet because a lot of tenants were wondering what their future would be and not sure they wanted to renew. And if they were going to renew, they would want to renew at much lower rents. So we are coming out of it. We are negotiating now going forward for the latter part of the year. But the stuff that we had negotiated and we want to lock up the tenants and keep keep the cash flows coming in and keep the occupancy doing well and so on. It did reflect that sort of notice period. So all of that is to say, you know, we've got nearly 3 million square feet of the 4 million square feet leased up now. We're about 0.7%. A large part of that, as you know, is Walmart renewals. And if you took the Walmart side of there, it would be closer to 1%, by the way. without that in there so yeah it is improving and we we only expect it to continue to improve as as the outlook continues to improve and and this sort of period behind us this six months lag in negotiation continues to look forward six months so yeah hope that helps

Yeah, and just looking at your numbers, like, I don't think you guys really disclose, like, new leasing spreads. And if I'm just thinking about your commentary, it's fair to say that we would expect, you know, given the surge in interest, that new leasing spreads would actually be, you know, materially better than renewal spreads in the short run.

Yeah, when you say new leasing spreads, you mean new leasing spreads in a vacant space, for example, as opposed to new leasing spreads in a new build space, because we're doing both. So, obviously, in a vacant space, the new leasing spreads will be different. And again, you know, coming through this sort of unprecedented time, I would say, you know, this is not – this is only going to improve. A number of tenants, I'll give you an example, a number of tenants that are looking to come in in the new leasing spreads, come in to the portfolio that has never been in the portfolio before, which includes things like logistics or types of tenants like appliance that may be in a quasi-industrial retail or outdoor patio, furniture, logistics, last mile kind of, even daycares. The furniture business, for example, so you have some furniture business in designer, depot type centers, as opposed to pure retail shopping centers. So we've seen a lot of those tenants move upscale and want to be with the Walmart anchored sites now. We want to bring them in to the portfolio. They add a really good mix in the portfolio when you bring in daycares and medical and logistics and You know, people are doing the hub and spoke, and you mentioned, it was mentioned before, Taub, with, you know, doing the delivery right out of the premises. So as you know, Walmart is doing that, and you know a lot of them are doing the click and collect. Best Buy has picked up on that now. So, yeah, we see a settling of that space with a lot of newer tenants, and they're finding their way into the right mix now that they've sort of come upscale. And grocery stores, by the way, grocery stores coming into the portfolio, ethnic grocery stores, you know, more of the organic grocery stores also calling us up about a lot of our space wanting, being very interested in being in the portfolio. So the interest has been, the resurgence in interest again, over the quarter and into this quarter, the third quarter now starting up, have been really good.

Okay. And for some of the new asset classes that you guys are, you know, getting into via development, like self-storage, seniors, is it like, you know, strategically speaking, are you only interested in building out your exposure to those asset classes via development? Or would smart centers ever look at, you know, acquiring, you know, a portfolio of self-storage operations in partnership with SmartStop or, you know, same thing on the senior's housing side because, you know, if you're, it might, you know, you could scale up those businesses faster because they have an operating component. I don't know. I just, I wanted to ask that question too.

Yeah, we're not, we're not really out there buying a market, the finished thing. So, but we've looked at it. I mean, a couple of cases where there's some, you know, value add for some reason, you know, in the property or whatnot. But, um, we, you know, we keep our eyes open at that, of those things as well as other forms of, you know, um, real estate that we're getting into, getting into, but we can't really find anything thus far that, that, uh, comes close to the kind of returns that we get doing it in the, from the ground up on our own properties for the most part. Um, you know, in those partnerships. So I wouldn't look for a lot of that happening. But, you know, who knows? Up the road, there might be opportunities. So we'll keep our option open.

Okay. That's great. Thanks, gentlemen.

Thanks, Bill.

All right. Next question comes from Tammy Beer from RBC Capital Markets. Please go ahead.

Thanks, and hi, everyone. Maybe just, Mitch, going back to your comments on bringing in partners on some of your sites, can you maybe just describe the appetite from potential partners, whether it's financial or development partners, in markets like Cambridge or other markets outside of some of the major markets, and how that compares to, let's say, you know, a BMC or some of your major market assets?

Yeah, so... We don't know yet because we haven't actually, you know, really tested it, but we're about to. I would only say that it feels like there's, you know, just on a sort of a preliminary informal basis that there's a lot of interest, and it would be from all of the above because some of our properties are, you know, substantially rental. Some of them are mixed, you know, condo and rental. Some of them... you know, our one phase, you know, not that many of them, but we do have some that are one phase and we have some that are, you know, multi-phases. I mean, look at, look at say Cambridge, you know, it might be five phases. So does that entity buy into, you know, 50% or whatever of, of, of the first phase? Or does that entity buy into the entire center with its five phases? So that kind of thing, I don't know yet. But we're, we, We're open to all of it because we find the right partner and everything. I mean, the metrics or economics are right. We're okay with bringing someone in for all five phases now if we come to terms or just doing the first phase. So we're pretty optimistic that because we're that flexible that we're going to be able to find a few good fits. And you'd be surprised at how many properties there are. you know, I, we can mention Cambridge, you know, Westridge, 1900, you know, um, but there's, there's 407, there's Concord, there's Allison, you know, uh, there's, um, there's point Claire, you know, there's Kirkland, there's Mirabelle, there's Mascouche, there's Laval, uh, Montreal, by the way, it's pretty hot. There's, um, you know, there's, uh, Jean-Claude, I mean, um, And I could go on and on. There's, you know, there's a lot of them. There's more that I didn't name there that are candidates for this. So with all that and the flexibility, I think, you know, we're rightly optimistic that we'll be able to find some entities out there that would be good partners, good fits for us.

Yeah, no, for sure. I feel like the list gets longer every year. Every quarter in the press release in the MG&A, it's definitely been expanding quite a bit. In terms of the – maybe just coming back to the $200 million dispositions, I think that you mentioned were conditional. Can you just, again, provide some context on the markets that those are in and any sort of fully occupied stable assets, or was there some repositioning work required?

Yeah, I mean, we're sort of trying to stay away from naming them. in fairness to just everybody involved, the acquirer and, and just, um, you know, if it doesn't, you know, it's not ideal if they don't go through and, uh, you know, we want to go back to the market, you know, but, um, but suffice to say that, um, one of them is just not our bread and butter and doesn't have, uh, doesn't have, um, any kind of we don't see an angle for any sort of future intensification of any kind so that's one of the criteria for deciding um also that asset i'm referring to if we're leaving upside for somebody who wants to you know work it and lease it and you know grind through that um so yeah i mean if we don't sell it that's what we were going to do but you know we don't mind leaving that for somebody else because it doesn't have the the redevelopment potential so So, I don't want to, maybe if it's okay, I don't want to get into the geography of them yet, but suffice to say, they weren't on our list of redevelopment properties.

Got it. Just, and again, maybe, would it be fair to think that it's quite possible for the REIT to, you know, kind of look to sell, let's call it a couple hundred million of maybe income-producing assets over the next couple years, sort of on an annual basis, or... or is it really not that much in terms of what you would consider perhaps non-core assets in the portfolio?

Yeah, I mean, we're going to pull on that, you know, bringing in some partners, potential partners on the development properties as a capital raising exercise, one of the capital raising exercises. So, yeah, I don't know that we could say we're going to have this, you know, predictable annual disposition program. But we are looking to raise the amount of capital that will keep our balance sheet conservative. And so, yeah, I mean, you know, we're looking at everything all at once holistically. So I wouldn't be surprised if we do dispose assets as as the years go on that would help with that. But we won't know to what extent that will be until we finish this other initiative. So, yeah. I mean, non-core is, you know, not necessarily something that – I mean, core is not necessarily just something that can be redeveloped. I mean, we've got assets in certain markets that are just, you know, Walmart, a bank, you know, beer store, you know, it's, it's a blue chip in a, you know, in a smaller market. I mean, that's very good income, you know, um, so not easy to replace income. So, you know, it's not just if, whether it's redevelopable or not. Um, but, um, so we don't have a lot of non-core assets, but, uh, if necessary, you know, we could sell core assets in the future. If, uh, It was in the service of executing our plan and assuming our plan continued to make sense.

Got it. Maybe just one last one for me. Maybe it's a two-part question for Peter. Peter, just your comments on, you know, potential fair value gains through the back half of the year. Would any of that include density value, meaning marking any of the land values up to perhaps the sites that are zoned, sorry, to their value per billable square foot? And then secondly, if you could just remind us on the development spending over the next, call it one to two years. Yeah, Pami, on the first question, the simple answer is no. The appraisers that we're speaking to are not suggesting that – Their value bumps are a function of enhanced entitlements and additional density on the site. So really all we're talking about are opportunities to improve values on properties based on compressing cap rates and discount rates. I'm sorry, Pami, what was your second question? Yeah, the second part was just, if you could remind us what we should expect from it. Oh, development spend. That's right. Yeah, I think our expectation, Pommy, is for 2021, we're in the $200 million range in development spend. And for 2000, and these are preliminary numbers, and they're always changing. As Amit said earlier, we have every opportunity to pull back as necessary or advance forward as appropriate. But For 2022, at least for now, we're looking at about $250 million. That's great. Thanks very much. I'll turn it back.

All right. Next question comes from Dean Wilkinson from CIBC World Markets. Please go ahead.

Thanks. Afternoon, everybody. I'll just keep it to one question. Peter, with a couple hundred million dollars of non-core sales and the potential for some market gains in the back half of the year, that's going to naturally deliver the balance a fair bit. In the context of how cheap debt is, are you comfortable with where the leverage is right now, or is there an opportunity to take that up? Well, I think Mitch Mitch earlier mentioned, Dean, that we're always trying to ensure that the balance sheet maintains its level of conservatism in every possible way. And all of us know that we've got this, I would call, robust pipeline of development initiatives ahead of us. And it's fair to say that those development initiatives will require large amounts of capital, some of which will be debt. And as Mitch mentioned, a big part may be additional equity as well. So when you do the modeling on those needs going into the future, Dean, I think it's safe to say we'd rather think about the future from a position of strength rather than jeopardizing or perhaps putting ourselves in a position where we might have to limit those opportunities and development initiatives down the road. So if we think about raising capital, as Mitch mentioned, and selling partial interest two new partners, number one. Number two, to the extent that there are value bumps associated with the IFRS increments and that those two initiatives result in improved debt metrics, I think that's just an opportunity for us to establish really a new level for the balance sheet. And if we think about the future, all other things being equal, if we don't raise another nickel of capital and perhaps there is no further compression of cap rates, et cetera, and we have to use that as our anchor point for incurring additional debt in the future to accommodate the development pipeline. I think it's fair to say that we think we'll be in a good position, but, and again, we've said this now many times over the years, our primary limiter or governor is our overall debt metrics and will never jeopardize the balance sheet. We've spent a lot of time and committed a lot of resources to ensure its viability long term. And so we do have the opportunity as we move into the future with these development initiatives to pull back as we see necessary. But what does that mean? It means that at 45 or 46% debt to total assets that we're comfortable at that level, again, given what we've discussed on this call, we would see those levels declining between now and year end. And again, that will put us That will put us in, we think, a strong position to move forward with some of the development initiatives that Mitch has mentioned.

Perfect. Thanks. I'll add to this and say we don't have to do anything. We do have a great portfolio, and so as it is. We're not going to do anything unless it really is safe, and safe includes the low debt levels. Really the only thing that really could bite us It has been lots of people smarter than me and smarter than us in the past because it's very seductive. But being there, done that, and, you know, rather be on the ground wishing we were in the air than in the air wishing we were on the ground. Wise words.

Operator, are you there? Yes, I'm here.

Any other questions?

Not at this point in time.

All right. Okay. And if there are no further questions, we'd like to thank everybody for joining us today, and we look forward to being in touch. Thank you.

Ladies and gentlemen, this concludes the SMART Center's REIT Q2 2021 conference call. Thank you for your participation and have a nice day. Thanks, everyone.