SmartCentres Real Estate Investment Trust

Good day, ladies and gentlemen. Welcome to the Smart Centre's REIT Q3 2021 conference call. I would like to introduce Mitchell Goldhar. Please go ahead.

Thank you. Good afternoon, and thank you for joining us. I am Mitchell Goldhar, Executive Chairman and CEO, and I am joined by Peter Sweeney, Chief Financial Officer, and Rudy Gobin, EVP, Portfolio Management and Investments. This is the first analyst call since the passing of Peter Ford. Peter was a true gentleman and a wonderful partner in the running of the Smart Center's business. We were not just colleagues, but good friends. We spoke to each other many times a day over the past 23 years.

I think of Peter daily, and we all miss him dearly.

Today's 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 the comments any of the speakers make this afternoon. Our results this quarter are the culmination of improving conditions in every aspect of the business. and continues to reflect the strength and resilience of our tenants and of our strategic real estate here in Canada. Our strategy to grow through mixed use intensification continues to gain momentum and bear fruit. This strategy unlocks deeply embedded NAV value to our unit holders on lands they already own. Here are a few highlights of the quarter. Operationally, With 75% of our open-air format shopping centers are anchored by a Walmart supercenter and virtually all anchored by a full grocer, consumer traffic has begun to return in a significant way. This is driving new tenant interest. It is also improving occupancy to 97.6% and cash flow to above 97% already. Both metrics are expected to improve throughout the holiday shopping season.

Was the death of retail greatly exaggerated?

This year alone, we have advanced zoning applications for nearly 22 million square feet of additional density. For those of you not as conversant, that's not a small amount. This is in addition to our current permissions in place. such as SmartVMC. What is it worth? I will not get into the details of that right now, but I will say it is more than zero. We currently have over 3 million square feet under construction, which includes six rental apartment buildings, two in Mascouche, one in Laval, two in Ottawa, and one in our flagship SmartVMC. I expect volume of construction activity to continue to grow in the coming months and years. Also, in SmartVMC, we completed the remaining 192 condo unit closings in the Transit City 3 tower this quarter. This brings the total to 1,741 units closed in the first three Transit City towers, delivering over $60 million in FFO to the REITs. With five sold-out condominium towers, 55, 55, 55, 50, and 45 stories, SmartVMC has become one of the fastest-growing communities in Canada, which says something since there are a lot of communities in Canada that are growing. The next phase of SmartVMC, called Art Walk, will be launched imminently under our wholly-owned residential banner, Smart Living. Artwalk is a 12-acre mixed-use district in the heart of SmartVMC. It's located on the former Walmart Purcell. When fully completed, Artwalk will consist of approximately 5 million square feet of density, including 5,000 residential units and up to 150,000 square feet of non-residential buildings. Phase one of Artwalk includes over 370 condo units, 190 rental apartments, tech office, and event space. It is worthy of noting that Smart Seller's Wreath owns 50% of the Art Walk condos, twice as much as the 25% it owned of the Transit City condos. While SmartVNC represents our vision of the future, it is only one of 94 REIT properties currently slated for intensification. We are literally growing a new portfolio out of our existing one. Pages 21 to 23 of the MD&A highlights over 20 mixed-use projects, totaling in excess of 55 million square feet of net incremental density to be built, some with our partners, and mostly on undeveloped lands within our existing portfolio upon approval of all. Keeping in mind, we do this while simultaneously maintaining our conservative balance sheet with an unencumbered pool of assets in excess of $6 billion and significant liquidity, which Peter will speak to shortly. We only move forward with capital-intensive construction initiatives as market conditions warrant, Sufficient pre-sales occur in the case of condos, and only when financing is fully available and in place on terms that we are happy. Reshaping and intensifying our lands takes us back to our roots. Our mindset of embracing change through forward-looking strategic land use amendments and timely real estate developments. Our third quarter results are a clear indication of strong growth to come. I will now turn it over to Rudy Gobain for some operational review.

Thank you, Mitch, and good afternoon, everyone. Throughout the quarter, we saw the reopening of the balance of our retailers, coupled with the improving leading interest from the likes of dollar store expansions, medical uses, personal services, home decor. grocery, all of the TGX banners, QSRs, fast foods, pet stores, financial institutions, and a host of services, all driving more traffic and improving our tenant mix and occupancy throughout the quarter. And while nearly 100% of the REITs properties include a full line grocery store as an anchor or shadow anchor, and 60% of the REITs tenant base is comprised of essential services, Our essential service tenant percentages increases to 70% in markets outside the greater Vectum area, where our occupancy rates are very near to 100%. Our tenants continue to work with us to adapt by expanding their e-commerce, their product lines, their product delivery models, 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. Recently, we've had some larger tenants approach us wanting to expand their stores to allow for development of an e-commerce platform and distribution network. This demonstrates that the demand for physical space continues as retail continues to adapt to changing customer preferences. As we have highlighted previously, Walmart Canada plans to spend $3.5 billion to make their 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. For Q3, we completed nearly 270,000 square feet of new leasing and therefore improving our leased occupancy to 97.6%. Now, regarding our premium outlets in Toronto and Montreal, both are now open and are at near full occupancy. While sales were severely impacted during the prior quarters, traffic counts are now approaching the pre-pandemic levels and sales have shown great resiliency. With higher conversion rates and with the pent-up demand, accumulated savings and the reopening of the Canada-US border, we expect a strong fourth quarter into the Christmas season and an even better performance in 2022. By the end of the third quarter, we had completed nearly 3.5 million, or 83%, square feet of our 2021 lease maturities. COVID-19 was a real life test of our portfolio's resilience. Our high quality tenants and portfolio continue to adapt, intensifying with residential and other real estate asset classes, strengthening with the expanding tenant base, improving customer traffic, and with a leading occupancy rate and of course, reliable and growing cash flows. And with that, I will now turn it over to Peter. Thanks very much, Rudy, and good afternoon, everyone. The financial results for the third quarter reflect the substantive improvement in our core business that Mitch and Rudy have mentioned earlier. For the three months ended September 30th of 2021, FFO per unit with adjustments after removing the influence of ECL provisions and condominium profits grew by 4.4% or two cents per unit over the comparable quarter last year. This 4.4% increase is principally a reflection of incremental new tenancies and interest cost savings. In addition, Our third quarter results include three cents of FFO from the closings of the remaining 192 units at Transit City 3. ECL provisions were $700,000 in the third quarter as compared to 9.7 million in the comparable quarter. And this is consistent with the theme that we have experienced year to date on continuously improving tenant collection levels. In addition, The IFRS fair value of our investment portfolio improved by $79 million, or 0.9%, to $8.98 billion at the end of the quarter. And lastly, note that our annual distribution level continues to be maintained at $1.85 per unit, resulting in an 87.8% ACFO payout ratio after adjusting for the nine months ending September 30th, as compared to 88.7% for the comparable prior year period. All of these financial metrics represent a common theme of continuous improvement to our core business. We have also continued our focus on further fortifying the strength of our balance sheet. And in this regard, we note the following strong debt metrics for the third 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, our unsecured debt in relation to total debt increased to 70% from 67% and our unencumbered pool of assets continues to grow, increasing by approximately $239 million to $6 billion. We continue to employ this strategy to repay most maturing mortgages. Accordingly, we expect these metrics to improve further 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 current BBB high credit rating from DBRS permits us to continue to attract debt capital at lower interest rates for longer terms. And in keeping with our strategy to take advantage of lower interest rate environments 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 3.25% as compared to 3.37% for the prior year. While concurrently, we have extended our weighted average term of debt to five years. Excluding construction financing, substantially all of the Trust's current outstanding debt is fixed rate debt. 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 3.7 times level This, in spite of the impact that COVID-19 has had on our operating results over the last 18 months and further confirms the foundational strength and stability of our core business. 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 that have been noted previously, consider also that when factoring in our cash on hand together with our new $150 million operating line that was completed during the third quarter and the $250 million accordion feature associated with our existing undrawn $500 million operating line, our liquidity position approximated $1 billion at the end of the quarter. Recall also that the next series of debentures in our debt ladder does not mature until May of 2023. However, as we have previously noted, we are continuously considering opportunities to early redeem debentures and mortgages when appropriate. 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 and any potential acquisition financing requirements that may arise. And with that, I'll now turn it back over to Mitch.

Thanks, Peter. As you can see, it has been an encouraging quarter, but with much work to do. With that, I will now turn it back to the operator to coordinate us in addressing your questions.

Thanks. For people on the phone, if you'd like to queue up to ask a question, please dial star 1 on your phone's keypad. An operator will pull you aside to ask you your name. If ever you wish to withdraw from the questions queue, please press star 2. So again, if you want to queue up to ask a question, please press star 1 now. We have one, maybe more people, and as soon as we have a name, they'll be able to ask their question.

All right.

The first question is from Jenny Ma from BMO Capital Markets. Please go ahead, Jenny.

Hi, good afternoon.

Hi, Jenny.

Peter, I'm just picking up on the comment you just made about your funding needs and the reference to acquisitions. I'm wondering if that is just part and parcel with the general strategy and there's not much to read into that, or are you starting to look at possibly buying some properties at this point?

Are you asking about Peter's comment about the last part of his presentation? Yeah. Potential acquisitions that may arise.

Is that what you're referring to? Well, I'm just wondering if that statement was just, you know, potentially acquisitions in the normal course, or if that's something that you're turning increased focus to now that we've put COVID mostly behind us. and whether or not you're seeing any opportunities in the market?

I mean, we're going to be pretty strategic with any purchase, but yes, we will, of course, have always been, you know, have our eyes peeled, but for strategic acquisitions. So, yeah, I mean, I guess with improvements to, you know, the general environment, climate, might be more likely. Acquisitions might be a little bit more likely than, say, a year ago.

I guess on balance, just given some of the firming prices for essential anchored assets, how should we think about balancing the net investment between acquisitions and dispositions? Because I know you've been selling some assets here and there. Is there, you know, on balance, do they kind of net each other out or are you seeing more opportunities on the buy side?

That's a, you know, that's a, it's a difficult question to answer. I mean, obviously we're, we're not, we are, both are strategic. You know, if we have an opportunity to sell something that is not strategic and not to, not to, overuse the term, but I mean, you know, where we don't see any long-term potential for intensification doesn't mean it isn't an outstanding asset and, you know, the price is right, et cetera, et cetera. It might be something that we would consider selling. I mean, the ones that we have sold recently are clearly on the margins of not strategic, the outside margins. So, you know, they're very specific. Um, you know, there's a very specific agenda with those acquisitions. Again, they're going to be strategic. Um, and I don't know that I would sort of describe them as canceling each other out because, you know, acquisitions are going to be, um, I mean, you know, they're not going to be the same type of assets that we'll be acquiring if we buy and then the ones we'd be disposing of. Um, but, um, In terms of volume, no, I don't think, you know, there'll be an overall strategy in terms of structure and financing in our balance sheet, but they're not, you know, there's not going to be an absolute symmetry between the type of assets and the cap rates we sell at and the assets that we buy. But they'll both be going on, I think, you know, maybe even with greater, there'll be greater activity in probably both areas over the next couple of years.

Okay, that's helpful. I should have been more clear. I meant canceling each other only in terms of dollars, but definitely not cap rates or asset type. My second question is, you talk about an office component in Art Walk. And when we think about the strategy for mixed use, and I recognize office is a very small part of what you guys do, but coming out of COVID, are you thinking about an office component in mixed use projects any differently, or do you see them as being a core part of it, or is it specific to Art Walk given the transit orientation of that site specifically?

That's a great, I love that question, very thoughtful question. First of all, the mentioning of office in Art Walk is not to be interpreted as taking some position on the future of and the changing use of of office, but more that it is a really cool, it's a super cool office building. That's quite small, but we'll, you know, as, as it is small and square footage, it will be, you know, it'll add a lot to art walk phase one. You'll see that in the plan, maybe some other time. I'd be happy to, to show you that. But it's a large floor plate office building, low, low rise. And it's being specced, but it's just animating that first phase. But it is also, you know, also you can, yes, read into that as that we will be wanting and looking for mixed use, including office and BMC. And I should say that we have other interests. in office at VMC in a significant, uh, like, you know, significant square footage interest. I would say if 10 was an executed deal, it's, it's probably a, you know, a three or a four, but it is, you know, it was a one and now it's a three or a four and there's a lot of, you know, they qualify for sure. So, um, there's activity. We wouldn't spec a large office. That's for sure. nor would we have five years ago for that matter. We will never spec an office building, most likely of any size, but we definitely want office and other non-residential uses to complete the full vision of the VMC.

Okay, that's also helpful. It probably is a little bit too early to get into the details, but would there be any significant changes in how you approach office development in the post-COVID world, or is it really more so like internal configurations that are part of that, you know, the end design process that doesn't necessarily affect development or construction?

I mean, we're going to build office for a tenant when we build an office, other than that little building in the Art Walk Phase 1. So, you know, we're obviously, we're all in, like yourself, we're all in the trenches on all these different real estate, you know, all the different forms of real estate. So we are pretty, I think, tuned into what's going on with office, but obviously we're learning all the time from the tenants that we're talking to, potential tenants. So we'll be building to what they think, you know, what they want and what they need. And the architects that we use are kind of, you know, cutting edge in terms of office architects. So they're hearing what everybody's thinking and saying with respect to the offices of the future. Of course, we're not going to get into all those details now, but it's really interesting. And as I say, we're not going to go ahead and spec office. VMC is probably one of the only places we'll be building very much office across the country of our intensification program. But it is definitely... And, you know, by the way, Jenny, it's also part of the momentum is from the movement, not suggesting that there's necessarily not, there's a lack of activity downtown because there's not. But there is increased interest outside the core for all kinds of lifestyle reasons. So we're seeing inquiries we think are kind of driven by that, too.

Yeah, that definitely makes sense. That was very insightful. Thank you.

Thank you, Jenny. As a reminder, if you'd like to queue up to ask a question, please dial star 1 on your phone's keypad. We have a few questions queued up. The next question is from Tal Woolley from National Bank Financial. Please go ahead, Tal.

Hi. Good afternoon, everyone. Good afternoon. Good afternoon, Tal. Let's start with the new condo announcement at BMC. Mitch, I'm wondering if you could put the pricing in context with respect to the prior projects that have been completed now so we have an idea of what you think the appreciation ultimately has been over time in that market.

You're taking away our... You know, the drama around the price list. Yeah, I mean, let's just say it's gone up from our last, you know, release at TC5, which averaged, I think, $8.68 or something a foot. Yeah. So, I mean, obviously I can't say what the pricing is going to be because we're about to kind of launch it and we're just fine tuning it across the road. And again, don't, don't take this as an absolute accurate number, but I understand that they sold across the road from us at, I don't know, 1050, maybe 1075 average. And I don't think they released everything. They sold everything that they released. And I think they held back some. And yeah, so we'll see, but definitely stronger indications from our last launch. And keep in mind, Tal, I mean, we're not releasing that many units in this particular phase for condo. You can see relatively small. So we're, I mean, it's very deliberate, obviously, and the rental unit is also very manageable. So this pricing should be okay, considering there's a lot of market demand and we're not releasing that many units at the moment.

And you think that the margin profile, given everything that's gone on in the world, is still manageable?

You know, we have a bit of an advantage that we have an ongoing program at VMC. So in terms of construction prices, that's not to say that we're not affected and that we're immune to the increases, but we're able to, I think, leverage the fact that we have an ongoing program at VMC. One owner who knows they're going to be building at least one, if not two or three buildings continuously for the next 10 years, I think it helps us in negotiating some of the larger items and the longer-term items. But that's one of the reasons we're just fine-tuning our pricing right now is because we're just buttoning down as much as possible some of the larger items that have increased. So that's a big issue. It's a concern. In some cases in the future, we're going to potentially even tender the project before we go to market. So, you know, to kind of try to mitigate the risk. In this case, the buildings are not, we don't think it's warranted here. I should have mentioned on my previous answer to you as well that we may, you know, we're going to release this building, but, you know, if things go well, we hope to release another building on the coattails of this art walk phase one. So. Okay. They thought that we're going to release this and that'll be it for a bit. Anticipate that if it goes well, we may on the coattails have another building ready to go.

And can you just talk to me a bit about the decision on something like art walk, the choice to go for sale versus rental? I would have thought maybe with the one building going up and progressing well that

you know you might have aimed to add more rental into the into the vicinity we have so much square footage you know so much density at at uh at uh smart vmc that i mean we we um we're not gonna be lacking in rental up there we just want to go carefully uh be cautious obviously i mean when it comes through condo we pre-sell and we have deposits and et cetera et cetera whereas with rental You know, we don't really generally stabilize until a few years after construction is complete. Of course, it requires borrowings and term financing. So it really is just an exercise in managing the overall balance sheet conservatively. There will be some years where it'll look overly conservative. There'll be other years where we'll be very happy that we played it that conservatively. So, yeah, we could do more rental, but it's really a case of a belt and suspenders.

Okay. And then, you know, some of your other, you know, other uses that you've been building up, self-storage, the retirement homes. Can you just talk a bit about how those have been performing, like self-storage, the publicly traded guys across North America have just been on fire. And so I'm just wondering how you're thinking about the progression of that business going forward, too.

I'll start with, I'll start the answer and I'll turn it over to Rudy, but we've been very lucky to have teamed up with who we teamed up with. Well, we're free to team up with anybody, but, you know, just the smart stock relationship has been going really well. They're pros. There's just a good simpatico in terms of the real estate, you know, the real estate minds over there together with their, their, their operational expertise has just been a really good fit. Um, and so we've got a number of those going, uh, it's going, the momentum is strong. We've got a bunch more in the pipeline and they'd be leasing up very well. And I'll let Rudy talk to that. I want to just, um, acknowledge, um, um, Alan Scully, who's done a great job with, uh, with, with, uh, SmartStop, um, right from the beginning. And of course, Peter Ford was very involved and instrumental in the relationship with Smart Stop. But it's a relationship that has a lot of legs. Rudy, do you want to maybe chime in?

Sure, Mitch. Thanks. You know, the relationship that you talked about with these guys is something that we can't say enough of. They are great partners. We share information with each other openly, freely. We talk about how to market. These guys know how to market the properties. They know how to bring it to market after it's open. They know how to compete in each market. There's a lot of diligence that's done in advance, market studies done in advance. And that advantage made us great partners with the lands that we have and the locations we have. As you know, we've got five locations open, four developed out of our lands and doing well. I will tell you that we expect them to do better than Performa once they're up and running. They're not all stabilized yet, but there's time for it to stabilize, but they're performing better than we had thought. These are large multi-storey units, and there are, I think, three or four more under construction as we speak. So we can't say enough about this, and there will be more to come in this area.

Okay. And then, Mitch, just lastly, like, you know, your closest peers in the public markets, you know, their development efforts have been, you know, I guess I'd characterize as predominantly focused on urban mixed use. And your strategy has been somewhat different. You're including these other types of asset classes, and making a real push on them in your head. Is there like a, is there like a perfect mix of these asset classes that you want to be at like in 10 years time? Or is it just, Hey, this is what I think I can get out of this particular piece of land that I bought. And I'm just, I'm focused on what I can do best for that one side.

Yeah. You know, the way, I mean, okay, so no, there isn't a, like a number of, that we're seeking per se, and then that sort of then dictates. I think if we were to sit down and look at any one of our properties that are sort of on the list of intensification and redevelopment, and we went there and we drove around and we looked at the site plan and all the options and so on and so forth, we'd probably come to, like after going back and forth and thinking through, we probably would come up with logically a lot of the same things um uses and and uh and and densities uh so that is to say that you know in each site if you think in the future if you can extend the trajectory of what's going on in any one of these communities and what's going on in terms of you know family structure and you know household incomes and so on you layer it all in you can you can pretty much you know you should be able to predict you know what you know, what, what, what's going to be needed there in, you know, two to 10 years. And that's organic. And what that ends up totaling at the end of, you know, every, you know, analyzing every site, I would say that, you know, in 10 years from now, it's going to be hard just to get to 50, 50, but it's quite possible that we will be 50% or more non-retail income. Um, And it goes back to something you had asked earlier, partly, and that is depends on how much condo versus rental we do. But in terms of sheer square footage, it'll be substantially more than that. But I would say that a benchmark, a thumbnail would be that in 10 years from now, we'll be, you know, 50%, maybe more than 50% non-retail income.

Okay, that's helpful. Thanks, gentlemen.

Thank you, Tel. The next question is from Michael Markitis from Desjardins Capital Markets. Please go ahead, Michael.

Hi, everybody. Thank you. My first question is just with respect to the establishment of smart living. I know at BMC, you've now made a point of taking down a greater proportion, increasing to 50% on the outlaw residential component. Going forward on future projects where the REIT owns 100% of the land, With smart living, will the residential be fully at 100% at smart's interest, or will you look to be bringing in passive partners for a source of capital?

Yeah, I mean, for sure we're going to be bringing in partners in lots of deals, you know, when we find the right fit. So, yeah, we're not trying to be heroes to do everything ourself. I mean, it's a great way, you know, to raise equity after we make some land use, you know, we get land use amendment approvals. But we do want as much as possible to, you know, be the, at the forefront of the development to, you know, build our brand. So, you know, I think that that's probably something we will probably more often than not be the lead, you know, kind of in terms of the, the development manager and brand. But it might happen that we will even sell a parcel of land to a third-party developer who has their own brand equity. Or there might be cases where we just got too much on our plate and we want to hand off some of that horsepower to somebody else. But I think more often than not, we will be the lead developer. when we bring in a partner.

Okay, that's helpful. Thank you. Just on Cambridge, I know you guys are progressing with the first phase of that. Maybe if you could just give us a little bit of color on what that entails, what parcel of the site would be the first part of that question, and then secondly, I don't think it's a new disclosure necessarily, but I think you guys made a point of pointing out that it's actually subject to a leasehold. I'm just wondering if you could also explain if that at all will impact SMART's economics on the site going forward.

Yeah, I mean, first of all, Cambridge, as you know, is now zoned for close to 12 million square feet. We have 700,000 on there right now. So we've got a long, you know, it's a significant upzoning. The phase one is looking really good. Really, you know, a lot of towns. Towns, by the way, is the lingo for town homes in the residential world. So a lot of towns and some mid-rise and then one initial high-rise. And in a part of the project that, you know, is the kind of the most affected by, maybe in all of our centers even, one of the most affected by just the amount of retail in that market, supply-demand. So it's a good place to start. So we're excited to do that. I don't know how well you know Cambridge and the whole Tri-City area there, but it's definitely a whole world unto itself, and we think our timing is good there when it comes to demand for housing just outside on the edge of the city. In terms of the leasehold, yeah, there is the leasehold. It's a land lease. It goes back to one of the early projects that I had sold into the REIT on different terms, more straight-up sales. There were some leasehold sales, which at the time was quite common, or not uncommon, that's for sure, if you look at some of the other REITs. And so as it relates to the development or redevelopment of Cambridge, it does require us to work out some, you know, tweaking of the structure there. I don't want to say too much about it. I mean, you obviously know if we don't work something out. So, but, you know, I'm kind of assuming like everything else over the last,

you know whatever number of years um you know that that'll work that'll work itself out okay thank you for that and then just the last question for me before i turn it back um you know with respect to the jvs that's where a lot of the active development's going on right now and some of its completed income stuff such as the kpmg tower but if we look at that that noi coming from the uh equity-counted investments, and just given that there are now properties that have been completed and leased up, is there any way you could give us some help in terms of how you expect the amount that's there in 3Q will progress over the next, call it, 12 to 24 months?

The amount of which?

NOI coming from the JVs, just because a lot of the stuff that's active or recently completed is in a number, and I just suspect that there's good growth in that component. So just trying to get some, some, uh, some way to, uh, try and put, you mean in that particular JV, you mean in the, Oh no, no, sorry. Just with, within all of the JVs, like a storage, um, there's, um, Oh, I see. Yeah. So there's a lot of stuff that's not stabilized yet.

And just trying to, trying to get a sense of, yeah, I would just say, I'm going to turn that over to Peter, but, um, Peter, I'll give you a second to, um, to, to get ready. But, uh, I think, you know, Rudy was, was, was, was happy that Rudy was conservative in his description of the lease up with our smart stops, actually, because they're going, you know, they are going better than plan and plan was kind of, you know, conservative. So, you know, so it's, it's good to see that, you know, they are outperforming our plan and, And we base things based on our conservative plans. So we're pleasantly surprised. I also wanted to add to that whole smart stop thing. I don't know whether everybody appreciates how great it is to be able to wedge a storage facility on lands that you wouldn't necessarily be able to build anything else. So it's a great, actually, vehicle for us to create, you know, additional income where we probably wouldn't be able to. And because they use so little parking space. and the buildings are somewhat flexible. So, yeah, with that, Peter Sweeney, do you want to illuminate a little bit? Yeah, yeah, sure.

Mike, I mean, we tried on pages 31 and 32 of the MD&A to give you at least at a high level the NOI and income generating results for anything that's equity accounted. Maybe what we can do just to provide some additional information going forward, we can have a chat after this call and you can give us sort of a broader perspective on expectations and what we'll try to do going forward, therefore, is augment this information to accommodate your needs and those of your counterparts. That would be great.

Okay. Thank you.

Thanks very much. All right. Thank you, Michael. As a reminder, if you'd like to queue up to ask a question, please dial star 1 on your phone's keypad. Should you wish to withdraw, dial star 2. The next question is from Sam Damiani from TD Securities. Please go ahead, Sam.

Thanks, and good afternoon, everyone. Just on the VMC, there's been a lot of units that Smart Read has completed and others as well absorbed in the market. Do you have a sense now with many of those units closed. Are they physically occupied? Are they offered for rent? What's the actual market like for occupied units in that node at the moment?

You mean renting up? You mean the actual rental rate for some of the rented condos?

Not the rate. Just wondering if I assume a good portion of the buyers were investors. And I just wanted to know if, you know, if those rental units have been successfully, I guess, leased.

Yeah, I mean, I don't think we know exactly the numbers. So, again, don't go by this. But, Sam, this is very disappointing because I can see that you haven't been up to BMC lately. So we're going to have to do something about that.

I'm actually trying to find an apartment up there right now.

Well, you've come to the right place. That's why I'm here. Yeah, you know, it's busy. I mean, it just feels like it's not, you know, it's funny because obviously they got occupied sort of throughout COVID. There's just people everywhere at VMC now. I don't know the percentage, but I would say that the vast majority of what, you know, when I spoke to Andrew Hoffman, I don't know, a number of months ago, we were talking about the rental, you know, component on the TC, on the transit city projects. He, we were talking about the rental rates and so on. And I mean, he was talking from what they could tell that everything is that was to be rented is rented. And if you go up there, you sort of get the sense. And if you're there at night, you see the lights on up and down, you know, three towers. So I don't know the answer, but it's got to be substantial, Sam. I mean, I don't think there's anything peculiar going on there, like a whole bunch of investors who are unable to lease. I mean, it's on the subway. The buses are rocking and rolling. I mean, you got to go up there. It's just, you know, if there's any, it's got to be a very small percentage. A lot, a lot of people up there now. Obviously, you've got 1,700 units. You've got, you know, anywhere between 2,000 and 3,000 people coming and going out of those buildings every day.

That's good to hear. The other question I had was just on the inclusionary zoning, which I guess is a reality in the city of Toronto. How does that affect your entitlement applications that you're processing at the moment?

It will, but it's not, well, first of all, you know, get into the whole politics of it, but it's not. going forward as imminently as originally thought but if and when it does yeah it'll be part of our it'll be part of our pro forma and it will be part of our decision to proceed but for the most part I mean we were baking it in like in the last number of months we were baking it in and it's not going to most of most overwhelmingly it will not alter our decision to go or no go. But luckily, we don't have to go anywhere. We don't have to do any of this, actually. So now we'll be baking in some of those requirements if, in fact, they get legislated.

Okay, that's great. I'll turn it back. Thanks very much.

Thank you, Sam. The next question is from Pammy Beer from RBC Capital Markets. Please go ahead, Pammy.

Thanks, and hi, everyone. Just looking at the in-place occupancy, it is ticking up nicely here. Based on what you're seeing in the pipeline, what's your sense of how long it may take to get back to the pre-pandemic levels? I think if I go back to 2019, you were running at just over 98%. So just curious, any thoughts you can share there? Rudy, you want to take a shot at that?

For sure. I would have thought given that the lockdown hasn't completely lifted, as you know, they've delayed it a little bit again now for restaurants and so on and clubs and so on. But for the restaurants part of our business, it's a little bit slower, the sit-down restaurants. What we're seeing is so much other interest coming in and you know, From last quarter to this quarter, it was a 0.3, taking us up to 97.3 and 97.6, by the way, with executed deals. I think it'll still take a couple more quarters to get there, but again, assuming the market stays as it's doing now and remains vibrant and the interest continues to hold, it's moving up faster than we had thought and very pleasantly surprised about what's happening and who's coming. I don't think it's going to be long before we get back to that 98.

Good to hear. And just maybe coming back to the leasing spreads, you know, we've talked about it on past calls. And frankly, I guess, look, you know, the flat spreads you've telegraphed and we're pretty much expected. But, you know, on the deals that you are doing today, do you feel that you'll be getting back to some stronger growth in 2022? Or is that more of a 2023 scenario in terms of the renewal leasing spreads?

You know, Mitch and I talk a lot about leasing, leasing the tenants, the rates, the spreads. And obviously we want to, you know, keep the lights on, the space rented, collecting the rents and driving the NOI growth in these properties. tenants are still feeling their way. We're not out of the woods yet with this pandemic. And I think until we are out of the woods, we're not going to see that complete return to what I'm going to call full, full market rent. So right now, we're probably being a little bit conservative and being careful. And tenants who are opening stores are being a little bit more careful. And we will also probably find that we will have a little bit more growth rate in the rents as opposed to doing these 10-year deals where you have bumps every five years, and we'll have greater bumps every year or two, as you see in the Toronto Premium Outlet. So it's getting there, but it's not back to that norm yet.

Thanks for that. Maybe just one last one for me. You know, I think last quarter there was indications of call it roughly 200 million of potential dispositions in the pipeline. You know, I think you've got 90 million help for sale. Some of that did transact, I guess, after the quarter. Can you just comment on, you know, whether there's more to come from a disposition standpoint, you know, closer to that 200 million dollar figure? And then secondly, just on the income producing assets that are in that call at 90 million, um, where's pricing coming in from a cap rate standpoint.

Yeah, go ahead.

Yep.

Yeah. The, um, so two parts of that. So the first part of that is, you know, we're obviously not selling assets where we have intensification potential. It's, these are non-core assets. We don't have a list of assets listed for sale or hail for disposition, by the way. A lot of our smaller markets, as you know, and even our non-core are 100% leased and Walmart anchored, so generating pretty decent cash flows. With that said, there are those who are knocking on our doors and looking for that great cash flow and that Walmart anchored income and not not as much concerned with intensification from their organization's perspective. So we've looked at that. So in our portfolio where we have some of that non-core, maybe smaller, weaker markets, we have been looking at that. But again, the pricing is coming in better than our current IFRS, which has been amazing for what we are experiencing. So we expect that to continue. in that way, and we don't have a target number that we're trying to achieve. So we will continue just collecting the rent, managing the properties as well as we can. And to the extent that those opportunities come up, we will take advantage of them. And again, only where we can have some NAV appreciation in those transactions.

I wanted to just add to something there. We've received offers for some centers in you know our mid markets and um they're you know they're interesting you know they're sub sub six and i'm not talking five nine nine i mean a good solid sub six and um but we do have very strong market share and uh dominate and we really have great you know very strong tenants i mean you know keeping you know think about it like The weaker tenants, generally speaking, don't go to some of those markets because that's not where fashion goes, for example. But it is where LCBO goes and Bierstner goes and, of course, all the banks. So if you look at our profile on those markets, it's very good. I don't really know that there's too many weak markets in Canada. I don't know where that notion comes up. First of all, we're not in any weak markets. I mean, Walmart doesn't. And yourselves, your own institutions, you know, look for the healthiest markets. And that's where Walmart thrives. That's where we are. They may be smaller in population, but our relative market share is exponentially higher. And hence our occupancy. So, you know, to let go of those, and e-commerce is not as big a factor and, you know, there's much less retail per capita. I mean, it's not, you know, So if you think about it and you're really understanding what's going on there, you're not looking to bail there. There are some centers that you'd want to bail in some of those smaller markets. I don't want to get into them, but not the ones we have. But we do want to manage our balance sheet. We do want to manage our energy allocation. And so there may be a price and a time when disposing of those assets might make sense given everything else that's going on, but not because those centers are by any means, you know, problematic.

That's great, Carla. Thanks very much. I'll hand it back.

Okay. Thank you. We have one more question. Do we have time for that? Sure, one more question. Okay, very well. This question is from Dean Wilkinson from CIBC World Markets. Please go ahead.

Thanks. Afternoon, everyone. One question, two parts. Just given the spend that you've got ahead of you with all the development over the next couple of years, How comfortable are you taking the balance sheet up in terms of leverage? Like, to what point? And the second part of the question is, given that the units or tradings are now at above a book value or consensus NAV view, what would the thought to be equitizing some of that spend as you look out over the next six, 12 months? Thanks.

It's very much one of the levers. You mean selling... the land versus developing it out, you mean, to raise equity?

Either that or just going out to the market to raise equity, given that the unit covers the pre-pandemic levels.

Yeah, well, I mean, look, in terms of selling, the units don't reflect the value of the land that we own. So, you know, raising equity by issuing units is may not be the right way to raise equity compared to selling off some of the lands. We are exploring raising equity by bringing in partners to some of the lands at market. That would be obviously much more, like it'd be more creative, more effective, more efficient than issuing units. But yeah, at some point when our units get to what we think is our appropriate NAV, which is up for discussion or up for debate. Um, it certainly isn't, you know, where we are now, however better we are now than we were six months ago. Um, we will, I mean, look at that as an option. You know, we've got lots of levers. I mean, we don't have to do anything, which is the good news, but you know, it's going to be the safe thing. We're going to play it safe all along the way. And we're not going to stress our balance sheet just to say we're building another building. It's just not going to happen. But, We have so many levers, I don't see any limits to us executing what we've got approval for at the moment.

Perfect, thanks.

Thank you, Dean. We do have one more. Is there time for one more? Sure. All right, this question is from Mario Sarek from Scotia Capital. Please go ahead, Mario.

Hi, good evening. Just maybe a question for Rudy on the operational side. If we step back, uh presumably you're going through your strategic reviews and uh budgeting and whatnot at this point like if we sit back and think about 2022 uh and if you have to identify one or maybe two like primary objectives operationally in 2022 for the organization what would those be operational objectives for 2022 well

I know that with my boss on the line, it'll get to 100% least. We have a strong tenant base, Mario, and obviously we want to bring a lot of discipline to keeping our tenants not just happy about being in the center, but keeping our centers operating at full efficiency and capacity, and also ensuring that it is primed ready for intensification, given that's our growth. So everything we do with every tenant we do it with, whether it's in renewals or new tenants, it's always with a view of how do we keep the NAV growth in the property from an overall perspective growing. So it is balancing the growth in the occupancy, in the rents, in the NOI, and managing that with keeping space and land use available for future growth.

Do you think there's been any impact to the leasing spread as a result of wanting to maintain that flexibility for intensification going forward?

I'll jump in on it.

No, because, you know, we're leasing, we're leasing, you know, for the most part. We did get a lot, you know, we do insist, you know, pretty much insist on getting rights to redevelop when we do a new deal. But most of the major sophisticated tenants understand that even if we have to give some relocation provisions or, you know, onsite relocation provisions, I wouldn't say it's affecting our rental rates. There are going to be, anomalous situations where, you know, maybe the speed at which we lease up might be affected as we sort through those things. But most tenants don't decide to come, you know, because they're getting a little bit lower rent, but, you know, they don't like that provision. I would say it's not really a rental rate issue. Rudy, do you have any?

Yeah, I know I was going to. was going to say the you know our land use for doing what we're doing in terms of condo development departments um storage is not a significant amount of land which is why the density is going to be as significant as it is and and as you know there are lots of lots of our projects where we have capacity to build within a built-out shopping center without impacting our tenants and in fact it's it's it's complementing our tenants to have this residential and other uses sitting right beside them. So I was exactly what Mitch said. It's not in our minds, in my mind anyway, affecting the rental rate other than because the people who choose to come want to come because it's the right place to be. It's the right center to be in. Walmart's there. They're coming. Now it's a question of negotiating a market rent for them being in that space and making sure we can accommodate the future use that we're going to do. And these things don't develop Mitch talks about it all the time. The length of time it takes to get everything rezoned and built and occupied, it doesn't happen very, very quickly. And it gives tenants a chance to develop their business and develop their brand and develop their own customer allegiances within that center. So we're going to just keep building it out for them as we go. Yep.

Got it. And maybe just one follow-up on the operational side and In some of the other asset classes like residential, some of the short-lease duration asset classes, there's a positive correlation between lease spreads and occupancy, perhaps a little less so in retail, but do you foresee on your March to the 100% occupancy rate that you mentioned? Is that something that could be a catalyst in terms of improving the leasing spread going forward?

Do you mean taking space off the market because we're redeveloping, improving leasing spreads?

No, I mean, as the occupancy in the portfolio inches up back to pre-pandemic levels and you just have less space to lease, does that conviction or that confidence into having less space to lease result in perhaps maybe being a bit more aggressive in terms of the rent that you charge for that remaining space?

Yes, naturally. Naturally, it will. We're, you know, we just come out of COVID. I mean, we're happy leasing at the rate we're leasing at. We're not being greedy and tenants are being fair. I mean, I think it's been, I don't know, it's brought retailers and retail landlords closer together, by the way, this whole exercise. I feel like everyone's treating each other, you know, really fairly. And then I guess as things tighten up a little bit and things get back to the normal rhythm, you know, I think there'll be a lot less meetings. total square footage, but some is a little bit less per square feet per capita, and it will result in improvement. I have no doubt new space and redeveloped centers that have retail in them will generate higher rents than the pure sort of larger retail centers without any mixed use over the next number of years. I think you'll see some of the higher rents in those mixed use projects. as people are living on the site and shopping, you know, living on the site and shopping on site.

Okay, maybe two more quick ones from just in capital allocation. When we look out over the next three to four years, can you give us a sense of kind of the ballpark estimated development spend per year and development completions? I know you've provided great detail in terms of individual properties, but if we think of it holistically, even over the next five years, How should we think about the spend and completion rate?

Peter Sweeney, you want to take a shot at that?

Yeah, I'm sorry, Mario, just so we understand the question. Are you asking for our capital spend expectations for the next few years? Is that the question?

Yeah, so if we look at over the next five years in terms of your expected development spend per year and then the amount of development completion that you're looking for, high level, how should we think about that? going forward.

Yeah. Again, I think that the caveat here, the key item to always remember, and Mitch mentioned this earlier, is that we don't have to do any of this. We do have the opportunity to put the brakes on any project before it begins. But notwithstanding that, I think it's fair to say, given our current thinking, capital spending for next year at least is somewhere between $100 to $150 million net and the year thereafter, so 2023, we would be, again, based on current projections, up around the $300 million level. Again, those could change, but at least for now, that's our preliminary thinking for the next few years. Once we go out beyond... 2023 you have to keep in mind transit city four and five will have closed we expect them to have closed number one number two the town has project in Vaughan again units would have closed so with the recovery of all of that initial capital and the expected profits from those various phases The actual cash spend or cash capital requirements for these projects for 2024 and going forward may rise, so it may increase from the $300 million level that we expect for 2023. But if it does, again, it'll only rise in the event that our balance sheet and the metrics associated with our balance sheet tell us that we're not putting the balance sheet at risk. Otherwise, as Mitch said, we have the opportunity to hold back on things. So for now, it's still the conservative approach to spending on these projects. And we can say with some level of expectation that next year we'll be in the $150 million range and perhaps all other things being equal in the 2023 year doubling up on that.

Thank you very much for the call, Peter.

Okay. Thank you, Mario. That brings an end to our Q&A. I will pass it back to Mitchell Goldhart for final remarks.

Thank you. And again, thank you all for taking the time to participate in our third quarter call. And of course, please reach out to any of us for any further questions. Continue to be safe and have a good evening.

Thank you.

Ladies and gentlemen, this concludes the SMART Centre's REIT Q3 2021 conference call. Thank you for your participation. Have a nice day.