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spk11: Good day, ladies and gentlemen. Welcome to the Smart Center's REIT Q4 2021 conference call. I'd now like to introduce Mitchell Goldhaar. Please go ahead.
spk03: Thank you, Mike. Good morning, and thank you for joining us today for our year-end conference call. I am Mitchell Goldhaar, Executive Chairman and CEO, and I am joined by Peter Sweeney, Chief Financial Officer, Rudy Gobin, EVP, Portfolio Management and Investments, and Mauro Pambianchi, Chief Development Officer. Today we will provide you with our Q4 highlights and update you on some of our major projects. 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 one to six of the MD&A materials, which also applies to comments any of the speakers make this afternoon, shall I say this morning. Momentum from early 2021 carried on throughout the fourth quarter with a strong performance reflecting the strength and resilience of our tenants and portfolio. Small and mid-sized retailers were back, and even with some intermittent restrictions, occupancy and cash flow grew steadily throughout the year, reflecting the need for and role of well-located value-oriented open format retail with walmart and food store anchored centers making up virtually 100 of our portfolio physical stores met the online challenge head-on with a quick pickup more selection delivery options and easy to navigate websites demonstrating that physical and online can work together our portfolio comprised of nearly 95% prominent strong national and regional tenants provides the financial covenant and stability that has returned us to over 98% rent collections and 97.6% leased by the end of 2021. While COVID tested us operationally, our portfolio has remained strong. Retailers solidified their positions with us with new and renewing locations. while simultaneously enhance their product lines and improving the customer experience, which has allowed us to maintain full distributions to our unit holders, a decision that we are proud of. Our wholly-owned Smart Living residential banner, a name that you will hear a lot more about, and our other mixed-use developments continue to enhance value through continue to enhance value throughout 2021, unlocking deeply embedded NAV and to our unit holders on lands we already own. Here are a few highlights of the quarter and the year. Phase one of Smart Living's Art Walk launched in Q4. Art Walk is a 12-acre mixed-use art district in the heart of our flagship transit-connected smart VNC development. in the Vaughan Metropolitan Center. Located on the former Walmart parcel, when fully complete, Art Walk 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. The phase one release in Q4 included over 320 condo units, nearly 95 of which sold by the end of the year. It is worth noting that SmartCenters REIT owns 50% of these condos, twice as much as the 25% it owned of the Transit City condos. In December, SmartCenters more than doubled its ownership in SmartVMC by acquiring a two-thirds interest in 53 acres within the 105-acre master plan SmartVMC city center. This acquisition united ownership across the property, making SmartCentre the largest owner in Bond's dynamic TTC subway connected downtown. 45,000 new residents are expected to call SmartVMC home, ultimately. And it is, of course, the jewel in the crown of SmartCentre's portfolio. SmartVMC, we are expecting to launch Park Place, which will be a new 1,100-unit two-tower project on the west portion of the SmartVMC, which we purchased just one and a half months ago. As you may recall, in SMART BMC, we completed the remaining 192 condo units closing in the Transit City 3 Tower in 2021, bringing the total to 1,741 units closed in the first three Transit City Towers, delivering over $60 million in FFO to the REIT, and that's at 25%. Also within the SMART BMC, Transit City 4 and 5 continued beyond schedule, with expected closings in 2023. The Millway, Vaughan's first purpose-built rental tower, is now available to rent, with the first department units taking occupancy potentially in the fall. This is being leased out of our sales center, permanently located at the heart of our at the heart of the VMC. These development updates are in addition to our current permissions in place. In 2021, we have advanced zoning applications for over 25.5 million square feet of additional density. as we continue to accelerate our transformational plans. Over time, you'll begin to see the NAV growth in fair value increments on completion of successful land use entitlements for our master plans, combined with developments having been already initiated. We currently have over 3.1 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 SmartVNC. In total, we have 59 projects either underway or for which work is currently being undertaken to start construction in the next two years. Well, SmartVNC represents our vision of the future. It is only one of 93 REIT properties currently slated for intensification. Pages 20 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 partners and mostly on undeveloped land within our portfolio upon approval of all. On the financial side, maintaining our conservative balance sheet is always top of mind. With an unencumbered pool of in excess of $6.6 billion, a 42.9% debt level and significant liquidity, which Peter will speak more about shortly. We will continue to 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 in place. We told you earlier in the year that we would undertake strategic and targeted capital recycling to strengthen the portfolio and assist with funding requirements. In this regard, we completed just over $100 billion in dispositions during the year, consisting of assets where no intensification were identified and NOI was below market. Lastly, the world is facing sustainability challenges. such as climate change, an aging population, and inequality. At Smart Centers, we prefer to do the right thing and have the results speak for themselves. Our actions over the past three decades speak to our commitment to the communities we serve. ESG is woven into the fabric of our organization. Smart Centers was founded with the economic realities of the average Canadian household in mind. We focus on bringing value and convenience-oriented retail to the Canadian market with like-minded retailers. ESG is embedded in how we operate, oversee our business, engage with communities, and develop and energize our associates. Although ESG is getting much more airtime today, it's not something we just started talking about. It has been part of our DNA since the beginning. And when you assess our portfolio, you can see these principles applied everywhere. We have been working to formally improve our retail centers through BOMA BEST certifications, through improved resource management, occupant safety and stakeholder communications, and we continue to work towards an 80% certification by the end of 2022. These days, Canadians want transit-connected homes with urban amenities, so smart centers is evolving from shopping centers to city centers, and smart living has emerged with our $15.2 billion transformational plan to enhance Canadian communities. Smart living apartments, condos, towns, and seniors' residences are designed around public squares and central parks within pedestrian-focused, transit-connected master plan communities. all of which contribute not only to the quality of the built environment, but also promote sustainability. We are grateful for the exceptional work of our talented and dedicated associates who represent the diversity of our community and the customers we serve. Stay tuned for more formal ESG reporting to come. You will like what you will see. Given all of this, you should recognize that our team is capitalizing on what it does best, executing and focusing on change centered around each community. Now, I would like to turn it over to Rudy Gobin.
spk07: Thanks, Mitch, and good morning, everyone. Throughout the fourth quarter, and in fact, throughout all of 2021, we saw the underlying strength of our centers in driving leasing and customer traffic. Tenants in most categories were back with an even better appreciation for our well-located and open format centers. And with virtually 100% of our REITs properties having a full line grocery and near 70% including a Walmart super center, a wide variety of tenants were back doing deals such as dollar stores, TJX banners, QSRs, medical uses, grocery stores, distribution and logistics warehouses, personal services, home decor, pet stores, and a wide variety of service retailers, all driving traffic and improving our tenant mix and occupancy. Here are some highlights. Our leased occupancy continued to strengthen throughout the year, approaching pre-pandemic levels with a 97.6% achievement by year end. We completed 3.6 million square feet of renewals, representing 85% of the maturities during the year. Over 925,000 square feet of leases were executed for built space within our portfolio. Our tenants continue to work with us to adapt by expanding their e-commerce, product line, delivery model, pickup, and space utilization all while striving to maintain customer loyalty and sales. And we are there to support them along the way. Compared to the bankruptcies and CCAA filings in 2020, there were virtually none in 2021, reflecting and hopeful that the worst is behind us. From a rent collection perspective, we ended the year at just above 98% and that is climbing. demonstrating the sustainability of the tenant mix and portfolio. Regarding our premium outlets in Toronto and Montreal, both are now open and are at 100% occupancy. With the pent-up demand, accumulated disposable savings, and the reopening of the Canada-US border, Christmas shopping was very strong, and we expect to be back to full sales and rent collections by mid-2022 in these centres. As we've highlighted previously, Walmart Canada plans to spend $3.5 billion 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. 2021 demonstrated what you've heard us say all along. that this portfolio was built for heavy weather. Our high quality tenants are adapting. Customer traffic is improving. Occupancy and cash flow are back to near pre-pandemic levels. And most importantly, all of this is happening concurrently with the extensive mixed use development initiatives already identified or underway in more than half of our centers, translating into significant NAV growth and NAV growth to come. And now I will turn it over to Peter Sweeney. Thanks very much, Rudy, and good morning, everyone. The financial results for the fourth quarter reflect the continued steady improvement in our core business that both Mitch and Rudy have mentioned. For the three months ended December 31st of 2021, FFO per unit increased by 12%, or 6 cents, over the comparable quarter last year. This increase resulted principally from lower ECL provisions, lower overall financing costs, and contributions from our total return swap initiative as compared to the prior year's results. It's important to note also that there were no condominium closings in the fourth quarter of 2021 as compared to the same period in 2020 that included FFO per unit of 9 cents from closings in the Transit City 2 project. In addition, IFRS fair value adjustments in our investment properties portfolio increased by $581 million to $10.7 billion at the end of the quarter. This substantive increase resulted from progress in the zoning and entitlements process associated with several strategic properties together with improved market conditions. It is important to note that as we continue to advance additional properties through similar zoning and entitlements processes, we will be assessing the appropriateness of similar adjustments in the future. And lastly, note that our annual distribution level continues to be maintained at $1.85 per unit, as Mitch has noted, and given the cash generated by the business, our 12-month ACFO payout ratio ended the year at 90.3%. Each of these financial metrics are representative of a common theme of steady and continuous improvement in our core business supported by our growing development pipeline that is now beginning to contribute to both earnings and cash flow. We have also continued our focus on further fortifying the strength of our balance sheet. In this regard, we note the following strong debt metrics for the fourth quarter of 2021 as compared to the same quarter in 2020. Number one, our debt to aggregate assets ratio has now improved to 42.9% as compared to 44.6% in the prior year. Number two, in keeping with our strategy to repay maturing mortgages and to further grow our unencumbered pool of assets, unsecured debt in relation to total debt increased to 71% from 68%. And as Mitch had mentioned, our unencumbered pool of assets continue to grow and now exceeds $6.6 billion, growing by over $800 million over the past 12 months. We continue to employ a strategy to repay most maturing mortgages. And accordingly, we expect these metrics to further improve in the future. This strategy provides us further agility when considering opportunities and alternatives for a portfolio of mixed-use developments. Number three, 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 3.11% as compared to 3.28% for the prior year. While concurrently, our weighted average term of debt was maintained at approximately five years. Excluding construction financing, substantially all of the Trust's current outstanding debt is fixed rate debt. This continued focus on both the weighted average term of our debt and fixing interest rates is deliberate and is yet just another example of the risk mitigation strategy that we have employed to significantly insulate the trust from interest rate volatility in a rising interest rate market. And lastly, number four, our interest coverage ratio net of capitalized interest improved from the prior year level of 3.2 times to 3.4 times. in spite of the impact that COVID-19 has had on our operating results over the last two years, and in addition to reaffirming the foundational strength and stability of our core business, provides us with a substantive advantage from which to fund our pipeline of development activity. 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, consider also that when factoring in our cash on hand together with our new $300 million facility that was established just subsequent to year end to support the $500 million VMC West acquisition, the $150 million new revolving line of credit that was completed last year, and the $250 million accordion feature associated with our existing undrawn $500 million operating line, our current liquidity position of an excess of $1 billion provides appropriate flexibility for the capital funding requirements associated with our development pipeline activity. Recall also that the next series of debentures in our debt ladder does not mature until May of 2023, and notwithstanding the challenges associated with COVID, over the last 24 months, our business has continued to demonstrate its ability to generate sufficient cash flow to fund both our operating needs and our distributions. Accordingly, we anticipate a requirement for additional funding over the next 12 months to be limited to construction financing and any potential acquisition financing requirements that may arise. However, we continue to review opportunities to early redeem debentures and mortgages when appropriate. And with that, now I will turn it back to Mitch.
spk03: Thanks, Peter. As you can tell, the portfolio remains strong with significant NAV growth on its way, with much work to do for us. And with that, I will now turn it over to the operator in addressing your questions. Thank you.
spk11: Hi there. Perfect. Thank you. So, of course, if any participants would like to ask a question, please press star 1. And if you'd like to withdraw your question, you can press star 2. So, again, it's a star 1 to ask a question. And we do have some questions already queued up. So our first question is going to be from Dean Wilkinson from CIBC World Markets. Please go ahead.
spk05: Thanks. Morning, everybody.
spk07: Morning. Good morning.
spk05: Probably for Peter, just one question. The fair value gains that you booked for PUD, which added about $2 per unit, was that... all thresholds or milestones that were met in the quarter or was that an adjustment to methodology that perhaps there was some catch up in that number?
spk07: Yeah, it's a great question. I'm sure others will have similar questions, Dean. I think it's important that all of us understand this was not an adjustment in methodology per se. It really represents and the bump in value represents progress and advancement that's been made on, in this case, several what we described, I think, in our press releases, strategic properties in their zoning and entitlements process. That's principally what's taken place over the course of the last several months. Together with this, I think all of us can appreciate our improved market conditions. Mitch, any further thoughts on your side on that question?
spk03: Yeah, I mean, there is an aspect of that process that relates to, you know, when is the moment that we're satisfied that a project is sort of cleared for takeoff. I mean, there is some, I think, you know, probably some room for discussion For being more or less conservative, we're probably on the conservative side of that spectrum. So, yeah, there were things that happened on several properties that gave us confidence that we're sort of clear for takeoff. Some of it's zoning related, some of it's restrictions that we have negotiated our way through. And that's only on a handful of properties, so we will be continuing to do those make those adjustments on other properties as we are cleared. We feel like we're cleared for takeoff. Got it.
spk05: And the methodology there, Peter, is that based upon just a marker or is that a DCF? And if it is a DCF, is that predicated on locked-in construction costs or just a budget at this point?
spk07: It's principally a function of third-party appraisals. and where our third-party valuation experts are telling us these properties, today at least, are valued based on what is expected to be developed on those sites, net of any costs that might be incurred to get us to, as Mitch said, the take-off point. So at least for now, Dean, that is the approach. And as Mitch had mentioned, we believe that we're on the more conservative side of that approach to valuation.
spk05: Perfect. That's it for me. I'll hand it back to the call. Thanks, guys.
spk11: Thank you. All right. Our next question is going to be from Mario Sarek from Scotiabank.
spk12: Please go ahead. Hi, Mario Sarek.
spk11: Your line may be on mute.
spk02: Hi, good morning, and thank you for taking the questions. Just following up on Dean's line of questioning, the roughly $500 million fair value gain taken, can you confirm whether that – what is the cumulative fair value gains taken on your PUDs or your intensification potential upside today, or is that a relatively new number?
spk07: Yeah, I think, Mario, it's fair to say that the amounts that were reflected in the fourth quarter are intended to represent, at least for now, the initial components associated with, as Mitch described, the fair value takeoff or the expected clearance for takeoff associated with, again, this handful of properties. We do have, as you would expect, many others to come that we will be assessing their status over the coming quarters. But for now, as we got to the end of 2021, we thought it was appropriate, and certainly our appraisers confirmed it to be appropriate that given the status of zoning and entitlements associated with, again, a handful of properties, that it was appropriate to fair value them based on what the market is telling us, again, conservatively, they are worth net of some expected costs that it may take us to get to, again, the takeoff point.
spk02: Okay. So, just to be clear, like, the number is fairly close to the cumulative?
spk07: Yeah. Yeah. I think that's fair. I mean, there may have been some what we'll describe as immaterial amounts that may have been factored in prior years, but, again, they would be immaterial. Okay.
spk02: And then you've mentioned a couple of times kind of several properties that the fair value gain was attributable to. Do you have a percentage of your quoted 40.6 million square feet of intensification upside over time that the roughly 500 million would correspond to?
spk03: I mean, the 500 plus million is that those several properties are certainly their GTA properties and high density. Some of them are on mass transit. I'll try and do that calculation before we hang up. the question period here and try and give you guidance on that before we hang up.
spk02: Okay, thanks, Mitch. I guess we're just trying to figure out whether it's on a price-per-buildable square foot or whatnot. You've got some very good assets.
spk00: Very conservative.
spk03: The numbers that are being used on a per-square-foot basis are really quite conservative. These projects were sold to the market, I think, Just because of the market, if it was today, they would probably achieve maybe, you know, just saying because the market's what it is right now. But this is based on, you know, just a more average, you know, level-headed market. So, yeah, I mean, real estate, it does sound like a big number. But on the other hand, you know, in the scheme of things, I mean, with the city that's expanding like Toronto, it's in the price range. It's actually, yeah, it's only a handful of properties, big densities, but there's a lot of value in going from a single-story, you know, 25% coverage, you know, 12 acres of land, and it's got, you know, 120,000 feet on it, and you go from that to 2 million square feet with mass transit. You know, it's big numbers. It's a real estate development. So I'll try and do the math on that for you, just before I try and state it before we hang up, if I can. Okay.
spk02: Well, thanks so much. Maybe one last question just on the fair value gain. Given the value of some of these properties, does the recognition of the fair value gain make you more or less likely to potentially sell partial stakes in some of these upside projects in the near to medium term, or is it just not correlated?
spk03: No, it's part of our strategy to raise some capital. We want to maintain a conservative balance sheet throughout this process and program. It is very much one of our levers is to bring in partners on some of these projects at market value or sell them, even outright. It's not our our first choice, but if it's the best choice and the easiest choice, we might sell a few of them just because they're so valuable and we've got lots and lots to do. So it's definitely, definitely part of our, and we're actively doing that right now, actively, you know, pursuing that and just having discussions on that right now.
spk02: I remember the last question maybe for, for Peter, is there a, for 22, it looks like the, um,
spk07: development gains will be more weighted to 23 than 22 with that in mind is there a target kind of that's a full per unit growth rate that you're targeting in 22 excluding games yeah mario we prefer i mean i think particularly over the last couple of years given the experience that covid has um has impacted our industry with uh we we took the approach two years ago of not providing that kind of guidance to the market. And I think given that there's still so much uncertainty, notwithstanding that we seem to be coming out of a more problematic period of COVID, there is still, we think at least a lot of uncertainty associated with this pandemic. And so I think it would be our preference for now, at least to not provide guidance again, at least for now on, on the 22 growth trajectory.
spk02: Okay. Thank you Peter.
spk11: Thank you. Perfect, thank you. All right, our next question is going to be from Pammy Beer from RBC Capital Markets. Please go ahead.
spk06: Thanks, and good morning. Just when you look at maybe what you've submitted to date in terms of the mixed-use intensification rezoning application and those that are still in the process where you have not received the entitlements or the zoning, what are your thoughts on what... may actually get approved over the course of, you know, if we think about 2022 or even if you have any visibility on a one to two year basis in terms of square footage.
spk03: You mean more like the amount of sort of approvals or whatnot in 2022 and 2023?
spk06: Yeah, yeah, exactly.
spk03: Thanks, Mitch. I do think it's going to be, again, I don't have the number right in front of me, but As you know, zoning is kind of, you know, the margin there is big. But it's going to be, I think 2022 and 2023 are going to be very big years for us in terms of approvals. So I would rather not just sort of speculate if you give me a chance, I can do that calculation and call you or send it out to everybody who's interested. But we've been doing, the applications for zoning amendments have been in for a long time. And so I think a lot of things are going to come together in 2022, 2023. But I don't want to sort of guess.
spk06: Got it. And I guess, again, you mentioned that today, or I guess what you booked in Q4, sounds like most of that was in the GTA. um is what's in the pipeline the pipeline you know it is quite large and stands over many many markets is um is the bulk of what's maybe coming through in the next one to two years is it predominantly gta ontario or quebec or um anything yeah yeah it is it is um a big uh the bulk of it it would be ontario and quebec i've got quite a bit going on in montreal by the way montreal is
spk03: I guess the market has come around nicely, actually. It's cooperated really very well with our timing because we've been pursuing approvals in Quebec for a number of years. They're coming through and the market's pretty good there. But the bulk of it in terms of right now is Ontario and GTA, mostly GTA, super GTA, and Montreal. Now, there are some, you know, developments just for what it's worth interesting developments we've got going on surplus land in places like alliston where we're approved and we kind of proceed with a rental you know for sort of for rental a development there um so i'm including you know for example alliston when i say that um also you know we're approved in barry barry and barry is also is quite a quite a good market right now. I'm not including that when I say GTA, but it is part of the – when I say Ontario, I mean Barrie is a good – when we're talking density there, we're approved for 20-plus story towers there, including a hotel on the waterfront. So that is also an example of something that's approved. But those types of markets are the bulk of it, yeah.
spk06: Okay. Okay. And then maybe just comparing perhaps your approach to some of your peers among the retail REITs or maybe even outside of the retail REITs. Some have not necessarily taken or booked these gains for what these properties might be worth if they were to be sold in the market after receiving successful entitlements and zoning. So I'm just curious if you could help us think about your approach and how that might differ, I guess, to some of your peers in your decision, I guess, to book these amounts.
spk03: Yeah, I mean, we can't speak to our peers, but I mean, I think it's what we're meant to be doing from what we understand. I mean, we're meant to reflect the value of our properties accurately. It's obviously... you know, as we said a few minutes ago, I mean, zoning approvals and entitlements and other restrictions, you know, there's lots of steps, but, you know, at some point, you know, you need to update your values based on your intentions. You can have value, you can have zoning and entitlements is something you don't plan on doing. So, but we are very much planning to execute. I mean, it's our, It's our core expertise, so we're planning to execute on things that we get our entitlements on. We're pushing very hard to do that. Maybe others are not as much, but I think we're doing what we're supposed to be doing.
spk06: Okay. Thanks, Mitch. Last one for me, and this one's more focused on the actual operations of the business from a retail standpoint. Just on the leasing spreads, a very slight, perhaps, marginal improvement relative to last quarter. Now, some of these sort of muted spreads are really just, I guess, a function of the leasing that was done perhaps during the height of COVID. But how are the spreads trending on leases that you're renewing today? And I guess the effect of those may not be seen for several quarters or so. So I'm just curious how those compare to what we're seeing actually come through in the numbers.
spk03: I'm going to read the answer. The ones that I am involved in and see actually... The ones I've seen actually have been quite decent bumps in the early renewals that I've been involved in, Rudy.
spk08: Yeah, Mitch. We have our essential and non-essential type tendencies and our essential, as you know, make up almost 70% of our tendencies in our major markets. And those tendencies are doing quite well and there are the standard sort of bumps in those.
spk07: And then for the non-essential, the ones that COVID had a bigger impact on, those are still coming together and trying to bring their business back. And those are the ones I would say when you combine them together, it's generating the slightly positive growth you're seeing in our lease renewals. So it's that combination. It's getting better. It's improving every month as we move further out of this pandemic. But that's the, you know, The 70% of the portfolio is doing quite well, and then the smaller ones are coming along.
spk12: Thanks very much, Rudy. I will turn it back. Thanks.
spk11: Thank you. Our next question is going to be from Kyle Stanley from Desjardins Capital Markets. Please go ahead.
spk09: Thanks. Good morning, everyone. I'm just going back to the fair value gains for a minute. Could you comment on it if any of the gains were attributable to the repurchase of the two-thirds interest in SmartVMC West and the potential corresponding revaluation of your interest in SmartVMC?
spk03: The answer is yes. Peter, do you want to expand?
spk07: I think the way to answer the question, Kyle, would be in two parts. From a timing perspective, We announced, as you know, the acquisition of the VMC West property in December. The process to get to the finish line on that acquisition did not happen, as you would probably imagine, overnight. It was a lengthy process that required a tremendous amount of negotiation over time. The fair value increments that we've now spoken about over the last half hour or so I think it's fair to say those increments are really a function of, as we've said now, of the changes and improvements in zoning status that has occurred in, again, a handful of properties, coupled with the movements in the market. And when we say movements in the market, the movements in the market were not predicated on what our experience was on the acquisition of EMC lands. The appraisers that we spoke to and used to give us guidance on this were reflecting and commenting on so, so many other properties in the GTA area, and many of which are in the bond area in particular, that have recently traded or are currently under contract to close shortly at values well in excess of now what we valued some of our properties at. I think it's fair to say that the general market, Kyle, particularly as it applies to the GTA area, has improved considerably over the last several months, as a minimum, and when factoring in those improvements in value and the continuous seemingly unsatiated or non-satiable demand for development land, we thought it was appropriate to again, fair value of these properties as Mitch said, on the basis that they're really now should be reflected at, as opposed to using the historical approach that we've used since the IFRS initiative came in, I think it was 2010 or 11. So what does all that mean? It means that we paid what we thought was a fair price for the VMC Westlands, but to get to how we approached fair value of this other handful of properties, we didn't rely exclusively on the amount that we had paid on the VMC Westlands. In fact, it was probably just the opposite where we were relying heavily on what the appraisers were telling us were other properties that were trading in the marketplace concurrently.
spk09: Okay. Okay. That makes sense. Thanks for that. Just looking in your disclosure, you mentioned that DBRS confirmed the BBB high rating, but changed the trend to negative back in December. And there was some commentary about the trust continuing to work on alternatives with the intent to improve the credit rating. Just wondering if you could elaborate a bit on what those alternatives could be. Sorry, the alternatives of what? You mentioned that you would continue to work on alternatives to improve the credit rating. I'm just wondering what those alternatives could be.
spk03: Well, I mean... I mentioned one before, which is we would sell a portion, bring in a partner on some of our development at market. That would be one. Selling a phase one of a master plan at market would be another. Selling a project entirely at market would be another. Those are Those are some examples. We're not satisfied with their unit price, so that pretty much speaks for itself. Those are examples of some of our levers. Peter, do you want to turn in?
spk07: Yeah, I think, Kyle, Mitch has really referenced what our thinking is, that Given where our unit price is currently trading, we don't see that as, for now at least, an alternative. So we are considering and focusing on other opportunities to sell interest or partial interest in some of the properties that are particularly development focused to some institutional type investors. So that's certainly an opportunity and an alternative that, as Mitch mentioned, we're pursuing. And there's some other sort of related themes to that that we're also considering, again, with the ultimate goal of raising equity that would be used to repay some of the debt that's currently on the balance sheet, again, with the ultimate objective of permitting our credit rating to be restored to what it was prior to December. Does that help?
spk09: Okay. Yes. Very helpful. Thanks for that. And just one last one, this one will be for you, Peter Sweeney, just housekeeping. Could you remind us what the total return swap is for and then just where the offsetting expense is in the P&L? Thanks, I'll turn it back.
spk07: Yeah, so the total return swap we initiated, believe it or not now, a year ago. It was intended as an opportunity for the REIT to overpriced You know, several year period to look at opportunities to deploy some of its liquidity to generate returns on an interim basis that again would help during a period during the period that you know Colvin was was impacting the business. We engaged with a well known Canadian bank that's helped us through the process now for well over a year. And the intent is to allow for that TRS or total return swap to continue, hopefully, to augment the operating results of the REIT. With respect to expenses, there are two potential expenses or two expenses that we would incur. Number one are fees associated with the TRS that are paid to the bank. involved and they are netted obviously through the returns as they're incurred. And then potentially in the event that the unit price were to move in a contrary direction as opposed to where it's been moving over the last 12 months or so, then there would be an impact, Kyle, to FFO that would be an adverse impact as opposed to the positive impact that we experienced in 2021. I think we mentioned this last year. There's some safeguards that we established coming through the process to find a way to mitigate some of those risks and concerns by either modifying the term of the total return swap or reducing the exposure in the total return swap. Again, just to potentially mitigate any concerns over material changes to FFO. But for now, for the first 12 months at least of this of this initiative, we've seen some substantial returns, as you've seen in our public disclosure, on moving this forward. So we're very pleased on how it's done so far.
spk09: Okay, great. Thanks very much. I'll turn it back.
spk11: Thank you. Perfect. Thank you. Our next question is going to be from Tao Wu, from National Bank Financial. Please go ahead, Tao.
spk10: Hi, good morning, everyone. Good morning, Tal. Good morning. I just want to start on the development side. So, in your MD&A, you know, you break out your development pipeline with the sort of projects underway, active projects, and future projects. And if I just focus on the underway section of it, you've got about 59 projects for 9.4 million square feet, roughly $5 billion total cost at your share. That works out to about 532 bucks a square foot, give or take. And then if I look at like Q3, you have 52 projects, 6.7 million square feet, 3.2 billion expected costs. It's about 478 bucks a square foot. So it's about 11% increase in that quarter over quarter. I'm just wondering if you can talk to me about how much of that is attributable just to the project mix. Obviously you added some stuff that might be more expensive. I can understand that. Also, just wondering, too, though, if, you know, you're sort of thinking that, you know, some of the stuff you've got in the pipeline, those costs are going up and how we should think about those numbers going forward.
spk03: Rudy, you want to?
spk08: Yep. Yep. Hi, Tal.
spk07: I saw from one quarter to the next, there were some changes to the product mix, but it was minor.
spk08: And it would also include VMC West, as you can imagine, being added in the quarter. So each quarter when we do this review, we would build it.
spk07: ground up so so to speak so again it's just a measure of each market and how each market is evolving from a development perspective and um and the numbers end up being where they are it's not a it's not a top-down it's a bottom-up build okay and how like how are you feeling i guess is a bigger sort of question just on development like given that you know we're sort of in the middle of a
spk10: shift economically here. And I'm not sure, you know, like you could say that income growth is necessarily looking super robust for individuals in the near term. But, you know, it's clear like construction costs are rising. How are you feeling about greenlighting new stuff and getting underway on new stuff right now? Good.
spk03: I mean, you know, you read about you do, you read about construction cost increases and it's, and it's generally, you know, true. It's not, you know, but each individual project, you know, is, you know, we value engineering project around, you know, around and try to navigate around the material that are rising the most and whatnot. So there's lots of things and, stuff that we can do in the industry or, you know, things we know about how to do in the industry to stay away from the, you know, the highest increases in construction items. But it's sort of overall kind of unavoidable. There are prices going up, but so are sale prices going up. So, in fact, I mean, you know, we'll do better on, you know, on Artwalk, you know, than say on Transit City. And we lock in at pretty low prices on Transit City. And that's just because, you know, we found ways to save money, materials, and we've also, you know, we're getting a lot of demand and we're creating something there. So prices are going up sort of exponentially. So everyone, every time will be assessed, I mean, based on what the market is. And we're acutely aware of and exposed to construction price increases. But, you know, we won't commit a folly. We're not going to build for the sake of building. But remarkably, as much as you hear about prices, construction price going up, still makes sense, especially on our properties where we already own them. We're not buying the properties on markets. That helps a lot.
spk10: Okay. And then both you, Mitch and you, Peter, you know, you've made some references to, you know, expanding partnerships on some of your marquee sites. Can you give us a flavor of what that might look like? Is it a series of individual deals or is it a, you know, a bigger sort of master deal type joint venture with, you know, a solo partner? Like how are you thinking about structuring that kind of transaction?
spk03: Yeah, they're both probably going to, I mean, you know, there's not going to be one master. I don't think there's going to be one master deal where, you know, there's one big institution in on, you know, every deal. But I wouldn't be surprised if, you know, we do a deal with a larger institution or whatnot for a handful of deals. But I don't know. I mean, we find that just doing one at a time is the best way to go. So sometimes it leads to two and three and four. So we're, we're just focused on, on, you know, the, the, um, the bucket of properties we think are, are candidates for, you know, institutional investors or investors in general. And, um, we see ourselves as being the development manager and the, um, you know, construction manager. And if it's a rental, you know, the property manager, um, and that the, um, the entity would buy in say between 25 and 50%. I think for the most part, we wouldn't, we wouldn't take less than 50% of the partnership and you know, and they would buy in initially at market. So that would be the big kind of capital event. And then we just go, let's say it's 50, 50, we go shoulder to shoulder going forward. Now we sometimes have, you know, a feature where, you know, we have a kicker potentially in our favor if we outdo the budget, the returns where we adjust what is really an adjustment to the value of the land that was rolled in at the end of the deal. That's kind of how it would be structure-wise and maybe just in terms of the players on the stage, the type of players on the stage and how it would go. I also wanted you to know, you reminded me, We're also doing something, for example, with a general contractor where we are negotiating a deal with a general contractor to be our kind of partner in a sense. They're not going to be a partner in the land, but that we'll make a master agreement with a general contractor so that they will be with us and beside us from designs. and help us find ways to value engineer our massive program. And, of course, we'll be able to lower price. So they'll be able to set themselves up. There's a certain amount of efficiencies there. They'll have enough of our deals that they'll be able to order certain materials in bulk, and we'll get the benefit of that because it's going to be a construction management contract So, for example, there's lots of things that you can do when you've got a large program, and it is our sweet spot in terms of our expertise. So in terms of partners or even construction and construction costs, there's a number of levers that we're doing. Okay.
spk10: And then just lastly, Peter, the gate on the TRS swap – Is that on the P&L or is that something you bring out of other comprehensive income into your FFO?
spk07: It is included in both the accounting income and our FFO. And so where would it be in the accounting income? I don't have it in front of me, Kel, but let me respond to you offline and I'll tell you exactly where you can find it.
spk10: Perfect.
spk07: Thanks, Peter.
spk12: Appreciate it. All right. All right, thank you.
spk11: We do have two more questions in the queue. Our next question is going to be from Jenny Ma from BMO Capital Markets. Please go ahead.
spk01: Thanks, and good afternoon. I want to turn the focus to the operating portfolio. Just looking at the average term to maturity of your leases, and it's sitting at 4.4 years at year end, but that's been on a pretty consistent downward trend for a number of years now, I think five years ago, kind of sitting at six times. So I'm just wondering, um, you know, particularly lately, is there anything to read into it, uh, in terms of, you know, shifting preferences in terms of, uh, how long tenants want to commit for, you know, is it anchor versus CRU mix? Um, and has there been any change from, you know, tenant behavior post pandemic, like anything we can read into it and, um, you know, where you think that number stabilizes at or if there's an infection point starts moving up again?
spk03: Yeah, that's a good question. There's a lot of factors. Rudy, I'll let you jump in here in one second. You know, I think, you know, the last number of years, we haven't done a lot of new, you know, ground up construction where, you know, the leases are longer. And so, you know, it's been... less of that, although there's some of that going on and that'll kick in soon. Rudy, do you want to weigh in?
spk08: Yep. Yep. And that's mostly it. I mean, when we were building out these shopping centers, most of the deals were 10-year deals with five-year options in them or 15-year deals with five-year options and a few 20-year initial term deals, Jenny, with five-year options. So
spk07: As soon as the 10 years are up and you're into the five-year options, then all of a sudden the math works out that the average term to maturity keeps ratcheting down. It is exactly as Mitch described, a greater proportion of the five-year options that we're now into, and even a few tenants coming in wanting flexibility will do a five-year deal with two or three five-year options versus before they would have done when we were building out lots of these shopping centers, a 10 or 15-year deal. It's just a matter of tenants moving into their optional option periods.
spk01: Okay.
spk03: Also, you know, we, we, in some cases are not as open to longer terms in some places because it may be part of our phase two or three of a, of a development.
spk01: Okay. So, I mean, it reflects to some extent of maturation of the smart centers business, um, When we look forward, like what are tenants asking for? Is it in or around five years? That's where they're comfortable at, which would suggest, I guess your weighted average term probably settles out around, I don't know, call it mid threes to mid fours is kind of where it's going to settle out at.
spk03: I mean, a new deal is five years. I mean, any renewal is usually five years and a new deal is five years. There are scenarios where, You know, we're talking existing buildings where they're 10 years. But we're a little bit, you know, we're reluctant subjects on certain projects for 10 years. But where there's work to be done or it's larger premises, you know, 10 years is also happening. But But most deals on existing space start off with a five-year lease. It's just normal. It's just kind of the industry with options. If you build from scratch, usually 10 years is the minimum. I mean, I don't think we've ever done a New Deal ground-up construction with five years. So 10 years, 15 years, as Rudy said, you know, the Walmarts for 20 years. We're not doing a lot of new Walmarts and not doing a lot of, you know, new food stores. So from that point of view, yeah, those leases are maturing, but they're cheap rents and they have many options and they're renewed at five years at a time and it's going to weigh on that average lease term that you're referring to.
spk01: Okay. That makes sense. I want to turn to talk about inflation sensitivity in the portfolio, not so much on the development side. It looks like the same property NOI X was a bit down and there were some expenses involved. So I'm just wondering, you know, within the leases that you have, is there any sort of linkage to CPI or potential pass-through of costs so that the inflation risk goes to the tenants? Like, how would you characterize the cash flow inflation sensitivity on the portfolio?
spk03: You know, when I... Early days, I used to always get CPI, but... But CPI is very unusual to get. Our portfolio is focused on strength and high occupancy. So, you know, we give up, if you will, things like CPI for, you know, we'd rather have Bank of Montreal as a tenant than, you know, a, you know, souvlaki, you know, restaurant. uh with no covenant or a sub subway not a subway so that's a sub sandwich with no covenant so we would get cpi from the independent restaurant operator but we will not get cpi from bank of montreal um so you know we're proofed for uh we say we're built for heavy weather we collect the rent through good times and bad from from bmo but not necessarily from from the restaurant so the restaurants give you the CEO, that example, the independence will give you the CPI, but the strong, strong nationals will give you CPI. So, um, our hedge against inflation is occupancy and collectability and, you know, you know, conservative, but pay it, but collectible, um, bumps in our rents.
spk01: Okay. So when I look at the same property and a why, um, are the higher costs, uh, you know, somewhat related to inflation. Or is there some lumpy items in there that would result in a sort of slight decline in SPNOI?
spk03: I'm sorry, I don't understand the question.
spk01: So for the same property NOI, when you exclude the recovery and bad debt expense year over year, it was marginally negative. So it looks like there were some miscellaneous expenses and CAM recovery shortfalls that sort of aid into the rent growth that you did have. So I'm just wondering how much of that is inflation-related. And what I'm getting at really is to how we should think about internal growth, given a slightly inflationary environment.
spk03: Yeah, I don't think we're not. I mean, Rudy, you can touch on some of it here, but I would not say that the inflation issue has... weighed in yet, weighed in, and, you know, maybe it will, but weighed in yet in terms of this slight, you know, what you're talking about, this slight, you know, maybe erosion there. But, Maroudi, do you want to weigh in on that as well?
spk08: Certainly. Yeah. I would say most of our, you know, the cost increases we're seeing abroad-based. They're not particular to a market, they're not particular to a type of cost.
spk07: It's pretty broad-based. And recall that our operating costs of our properties are, if not the lowest, amongst the lowest in the industry because it's open format space. So we don't have enclosed space where we're looking after internal cleaning and HVAC and roofs and all of these things. our starting point is a much better point for our tenants in terms of costs and and then the other thing to mention is a year ago we were at slightly higher occupancy and we're building to back to that so you might be seeing a little bit of the slippage to jenny from the 98 plus percent you know 98.99 over the last several years we were at 99 for a long time and So that slippage is now being built back, so that's probably a little bit of what we're seeing given what's happened in the pandemic in 2020 and 2021.
spk01: Okay, okay. And then just lastly, Mitch, you mentioned in the early days you saw more CPI. I'm just wondering, maybe this is a bit of a history lesson. Did the CPI exist for most types of tenants, including high covenant tenants, and then it kind of went away because I guess CPI wasn't really an issue for a very, very long time. And if this inflationary environment persists, do you see CPI sort of returning or creeping back into leasing discussions with tenants?
spk03: Yeah, I mean, CPI used to be normal really early days. I'm talking like when I started in the business in the 80s. And I happen to know that it went into the 70s because I was dealing with businesses that had operated through the 70s and the 80s, and CPI was normal. It used to be that landlords were, you know, the lord part and the landlord was kind of, you know, sort of the hangover from bygone days, and landlords dictated stuff like that. But it changed very quickly in the 90s and late 80s and 90s. And it's been pretty much a tenant's world almost ever since. And CPI went away with value-oriented retail and the demodeling of the world. I mean, you see some CPI here and there, but honestly, I haven't seen it. for like really mainstream, it's just not mainstream. You can stick it in an independent deal and they'll sign it, no problem, but you won't collect it. You know, most people have to. But anyway, look, I don't think, like our leases are all net. We're not really a company that grows, you know, kind of, you know, we're not a rapidly growing company from rental bumps. Okay? we'll have our standard rentals. We want our tenants to make money and stay with us and then we can expand them. Um, you know, first of all, we collect the rent, they make money, they want more space a lot of the times and we do more deals with them and we stay highly occupied. Um, you know, we've benefited from lower interest rates along the way, uh, obviously, uh, but at least we get the bumps and we stay highly occupied. Um, But their net lease and their net leases. I mean, we have the lowest average rent probably. Like our portfolio, when you talk about these fair value adjustments, I mean, our portfolio is valued based on our rents historically. But our rents are based on the lowest coverage ratio. We have 25% or lower coverage of our property. So 75% of our properties are parking lots with no income. And in that 25% coverage are the lowest average rents. And then we value the company. So one thing that they are, though, is fully net. So that helps a lot against certain inflationary factors. And we have our bumps, which generally speaking, they're not geared to CPI, but they do bump probably not that far off from CPI because I'd say that most of our rents, and don't quote me on this and don't throw the book at me on this. I would say that our, our bumps kind of average somewhere in the one to, you know, probably one and a quarter. I don't know, maybe in some cases more per year, but, but on a five year, you know, you know, time frame, um, for, for what it's worth, I'd say, um, you know, over, over a five year period, um, a, you know, like a $20 net rent. No, it should be, be probably go, you know, probably be 10, 10% in the five year above that, that tenant generally, I mean, a national would go from 20 to $22 would be normal. Um, just to give you an example, but we all can look at that and I'm sure it's somewhere in our documents anyway, but, um, but it's not geared to inflation, but it's a fully net lease and it's probably pretty too, probably pretty close to inflation anyway, and probably be much better than inflation for a number of years.
spk01: Okay. That's very helpful. Thank you very much.
spk11: All right, thank you. We do have our last question in the queue. It is from Sam Damiani from TD Securities. Please go ahead, Sam.
spk04: Thanks, and hello, everyone.
spk07: Good afternoon, Sam.
spk04: Yeah, good afternoon. And I certainly don't want to keep people from their lunch, so we'll try and make these last questions quick. And I got on the call a little bit late, and I apologize, but was there a maximum development or PUD as a percentage of total assets under the REITs Declaration of Trust that is a factor with the fair value gains that have been booked and the acquisition, of course, in December?
spk07: Yeah. Sam, it's Peter. We're assessing that, and it may require an amendment to our Declaration of Trust, which we'll think about doing at our next AGM meeting.
spk04: And then just on the fair value gains again, it sort of came out, I think, through some Q&A earlier that the VMC was a part of it, maybe a big part of it. It seems like perhaps the acquisition in December was marked up because that price was negotiated several months or longer ago and then obviously the existing as well. So is it fair to think that perhaps of the total fair value gain in the fourth quarter, perhaps over 50% of it was at the VMC?
spk12: Peter?
spk07: Yeah I think Sam and I think you know and perhaps others on the line know that historically for a variety of appropriate reasons we have not believed that it was appropriate for us to provide values Sam on a per property basis and I think we prefer to maintain this approach to public disclosure of our portfolios values going forward so you know it's not our intent at least for now to to provide specific valuation parameters for each property. And I think for competitive reasons, we think it's appropriate to continue in that realm. And we're not trying to be coy or to deck your question. We just think for the benefit of our unit holders and our ability to generate these developments and progress them through the appropriate channels going forward, it's just not the right idea to publicly disclose how much we think each one of these things is worth.
spk04: Yeah, no, that's fair, and I'm totally not surprised. But I guess, I think, Mitch, your comments earlier, I mean, or maybe it was Peter's, you know, part of the process was, you know, the appraisers and market comps or deals in process. But the unique thing with the VMC, of course, is that this is actually under development. You're actively selling condo units. You've closed on condo units, you know, and all that. So there's a very high visibility there. that you don't have, let's say, for a 1900 Eglinton or a Caledonia Westside. But is it fair to say that the approach in Q4 with these fair valuation bumps was more exacting on the VMC than it would be for another site that perhaps is further away from actually selling condos or renting apartments?
spk03: Each one of the properties ultimately that was valued was an exact amount. They're all exact amounts based on, I guess, the assessment of what the market would pay for them. So, you know, like obviously you talked about, I love the fact that you can just reel off 1900 and Westside. That's great. Those are two excellent projects and they have value, even though we're not going to the ground, but you know, the market would recognize there's value there and many other projects. So yeah, I mean, I think that's about maybe the only way I can, address that question. Peter, do you want to expand at all?
spk07: No, I think that your description, Mitch, is appropriate. Our approach, Sam, is really to, as we did in Q4, was to identify those projects that we think have come through the zoning process and are at a point where And Mitch mentioned this earlier, and I think it really hit the nail on the head by describing these things as being the appropriate way to value them in keeping with what an IFRS expectation would be vis-a-vis fair value. So I think it's, again, we're not at a point where we're at liberty to describe or disclose values on a per property basis, but you should expect in the coming quarters for us to look at each of the other properties in the portfolio as they as well continue to sort of go through the entitlement and zoning processes respectively and to consider whether or not it may be appropriate to enhance their values. Again, keeping in mind whatever may be happening in the market at that time.
spk04: Okay, thanks. That's all very helpful. Just last real quick one. Maybe it was asked.
spk07: Sam, I just, and again, you know, Mitch was talking about history earlier on CPI bumps and inflation. I think it's important that everybody understand that, you know, this whole approach to valuation, and maybe back to your first question, Sam, on our threshold for development that may be in the Declaration of Trust, all of those initiatives predate the advent of IFRS. So they all reflect what any accountant on the line may recall as being cost accounting. And so when original ceilings or thresholds were established, they really sort of took into account what companies like smart centers were paying for actual properties and were restrictive on development as a percentage of total costs of actually amounts incurred. And as we know now for the last 10 or 11 years with the advent of IFRS, and fair value accounting, we now have to look at and include bumps or losses as we experienced in 2020 from COVID that may appear from fair value in these properties. And so I think it's fair to say that those gains and our losses were no doubt not contemplated when most of the at least larger Canadian REITs were first established and what may or may not be included in their declaration of trust. Okay?
spk04: Yeah, that's a very good point. And just a quick last one, $3 million of lease termination fees in the quarter. Anything of note that you would want to share on that?
spk00: Rudy?
spk08: Yep. Nothing of significance. The units that generated those fees are – Interestingly enough, we are in discussions with 75% of that space being released in the first quarter. So the good and bad news is we had some turnover. That's the bad news. The good news is we've got some good solid leasing interest of tenants that want to come in and enhance the mix of uses within our centers for those. So those were just the remnants of going through what we went through in 2020, Sam, and into 2021, and it's wrapped up most of all of our major challenges with tenants.
spk04: That's great. Thanks, Rudy, and thanks, everyone, and everyone can enjoy their lunch now. Thanks, Sam.
spk03: We thought if we did this call during lunch, there would be, you know, Just a few questions and shorter.
spk07: Mitch, I just want to come back to Tal's earlier question maybe before we actually go to lunch. But Tal had asked a question earlier about how we account for our gain on the total return swap and where that might be found. Tal and team, we'll direct you to two places. If in your bedtime reading you get to page 68 of our financial statements, note 26, on fair value adjustments, you'll see it under the financial instrument section in note 26 of the financials. Alternatively, if you don't want to review the financial statements, but you want a quick peek, you can see it on pages 36 and 37 of the quarterly and year-to-date results on how we add back amounts to get to our FFO line. And you'll see the add back for fair value on financial instruments, which is an all-inclusive number, tying again back into note 26. and then the add back from that number of the total return swap into FFOs. So, hopefully you could follow that and if you need any further direction, let us know, please. Okay.
spk12: And Mitch?
spk03: Yeah, okay. I guess that's the operator.
spk11: Hi, sorry. Yeah, exactly. So, that was the last question in the queue, exactly. Okay, great.
spk03: Thank you all for taking the time to participate in our year-end call. And please reach out to any of us for any further questions. Stay safe and have a good rest of your day. Thanks.
spk11: Thank you. And ladies and gentlemen, this concludes the Smart Centre's ReQ for 2021 conference call. Thank you for your participation and have a nice day.
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