SmartCentres Real Estate Investment Trust

Good day, ladies and gentlemen. Welcome to the Smart Center's ReadQ3 2023 conference call. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, press star one. I would like to introduce Mr. Peter Swann. Please go ahead, sir.

Thank you, Operator, and good morning, everyone, and welcome to our third quarter 2023 results call. I'm Peter Slan, Chief Financial Officer. I'm joined on today's call by Mitch Goldhar, SmartCenter's Executive Chair and CEO, and by Rudy Gobin, our Executive Vice President of Portfolio Management and Investments. We will begin today's call with some comments from Mitch. Rudy will then cover some operational items, and I will review our financial results. We would then be pleased to take your questions. Just before I turn the call over to Mitch, I would like to refer you specifically to the cautionary language about forward-looking information, which can be found at the front of our MD&A materials. This also applies to comments any of the speakers make today. Mitch, over to you.

Thank you, Jim. Good morning and welcome, everyone. Apologies for the time. I thought we might want to get an early start to our and your days today. As they say, Time waits for no one, and 2023 continues to move full steam ahead. I made a challenging market with economic headwinds. That being said, one thing you can continue counting on is the stability and cash generation of a portfolio that was built for headwinds and heavy weather. At 100 Walmart strong smart centers, value-oriented, portfolio continues to demonstrate why there is no substitute for well-located dominant centers built in the midst of residential communities. Existing new retailers continue to demand more space, building on the momentum of the first half of this year, with the portfolio achieving 98.5% out of the by the end of the quarter. Extensions, extension rates are up 2.3%. Chained property NOI for the three months ended to quarter higher at near 2% compared to the same period in 2022. Collections remain above 99% as demand from retailers for smart centers is strong with their improved in-store offerings, experience, as well as their omnichannel platforms. And our retailers are well capitalized for modernization and expansion. In fact, we are signing deals for new build retailers, which Rudy will speak to shortly. Toronto and Montreal premium outlets remains fully leased. With 12-month rolling sales continuing to set records, moving 2023 EBITDA to record levels. Well-priced luxury brands continue to be in high demand and in fashion, if you will, with consumers being bussed in from longer distances. Take advantage of the great mix of designer brands. Toronto Premium Outlets is now in the top three best sales performers in Canada, and traffic continues to grow. Built on this stable and growing cash-generating platform, we continue to develop on the significant and varied mixed-use permissions already in place. Currently under construction, we have condos, apartments, industrial, self-storage, townhouses, and retirement in the GTA, Ottawa, and Montreal areas. In the quarter groundbreaking commence, on phase one of our Art Walk project comprising 320 sold-out units right here in the VMC. We also commenced construction of over 300,000 square feet of self-storage and 200,000 square feet of retail with details listed in our MD&A. On land use permissions, this quarter alone, we successfully achieved residential rezonings for 4.5 million square feet in Ontario and Quebec combined, bringing our year-to-date total to over 7.7 million square feet. We will continue to stay focused on obtaining these permissions, which is no small task, while simultaneously getting ready to launch future residential phases when appropriate in the appropriate markets and only with full funding in place. Recall that in 2022, we achieved over 6.1 million square feet of new mixed-use permissions in urban locations with high demand for housing. So 2023 is already exceeding our 2022 permissions, and we have no indication of slowing down. Given that development is our long-term vision and strategy, we are committed on unlocking the tremendous value embedded in the land we already own, which as a reminder, sits in the midst of highly populated communities in nearly every major market in Canada. While you can read the details of many of our developments planned for the portfolio on MDMA, here are a few quick highlights of which are currently underway. Construction of the fourth and five transit city condo towers at SmartVMC, comprise 45 and 50 stories respectively, is wrapping up with 274 units closing in the quarter, generating $6.9 million in profits, which Peter will speak to more in a moment. Two, also within SmartVMC, the Millway, our 36-story apartment building, is nearing completion with 67% available finished units already leased we expect the last remaining bunch match 127 of unfinished units to be completed by year end and demand and demand remains strong given the housing supply and current interest rate environment three our apartments in mascouche suburb of montreal which opened in Q3 2022, continues to show improved leasing and stands at 83% leased. Four, our second tower in the center of Lavelle was completed in Q3 of this year, opened July 1st, and is already 82% occupied, with the first tower at 99% occupancy. Five, construction of our first industrial new build A 229,000 square foot, 40-foot clear building on 16 acres of a 38-acre site on Highway 7 in Pickering was completed in the quarter, with half of the space having been turned over to a tenant, and the leasing interest on the remaining space remains strong. Construction number six, construction of a new senior's residential and apartment building totaling 402 units in Ottawa Laurentian, which was temporary delayed has now resumed with a revised completion expected in early 2025. Having completed earthworks and site servicing last quarter, and with our two partners, construction is moving along quickly on our 174 unit Vaughan Northwest townhouse project with the closings planned for the second half of 2024. Eight, for our self-storage portfolio, we announced last quarter that we achieved a milestone of 1 million square feet built space with our partner, SmartStone. During this quarter, we commenced construction of two additional facilities in Toronto and Stony Creek for a combined 300,000 square feet. Nine, lastly, we are continuing discussions with potential buyers and new partners and selected assets within the portfolio, which will assist in funding development, debt reduction, and diversification. With only a small part of the portfolio, we see this as an ongoing capital recycling program, which will not only strengthen our balance sheet, but de-risk future cash flow streams. You can see this current construction activity is in our expanded disclosure in the MD&A as well as the list of the additional projects scheduled to commence construction in the next two years. Well, I've only just resumed a limited number of projects and delayed a few others, owing to current market conditions. Our efforts in obtaining additional residential land use permissions continues in the normal course, which enhances value in our land. We will, as always, remain diligent in curing any risk hurdles before moving forward with any project, which I will remind you lies within the underutilized lands we already own. On the financial side, Peter will provide a full update in a minute, but let me emphasize a couple of pertinent items. Maintaining a conservative balance sheet remains a significant priority for us, along with maintaining a significant uncumbered pool of assets, which now stands at over $8 billion. Our debt level has reduced slightly to 43%. Liquidity remains in excess of $800 million. And we will continue to enhance this portfolio with the same degree of care and attention to detail, as always, and with the tremendous support we continue to receive from our lenders and partners, who we greatly appreciate. On a final note, many thanks and appreciation to our great team of associates, partners, contractors, and of course our tenants for your commitment and dedication in helping us deliver on this long-term vision. And with that, I will turn the call over to Rudy.

Thanks, Mitch. And good morning, everyone.

The third quarter continues to build momentum with strong interest from some new entrants, as well as from our existing family of retailers, TJX, Canadian Tire Vanners, pharmacies, pet stores, banks, dollar stores, liquor, QSR, and full-line grocery, all remaining very active, wanting to secure vacant space in our high-traffic Walmart-anchored centres. And given our proximity to residential communities, we're getting a number of new discounters, entertainment, gaming, logistics, and light industrial users willing to join in our mix of tenants at full market rents. And I might add, with solid security in place. Demand for new build retail is on the rise again, with some significant grocers, TJX Brands, Michaels, Golftown, and Banks, and not only in major markets. We have signed on your signing deals in Alliston, Bracebridge, Carleton, Lachenais, London, and Orleans. And these all collectively will add an excess of 300,000 square feet of new-build retail. In addition, as inflation begins to subside, consumers have come to learn that they can continue to depend on the quality and pricing of the value-oriented retailers that make up the Smart Centre's families of stores. For Smart Centres, the strategy is clear and our portfolio continues to deliver on plan. With a sector-leading 98.5% occupancy, over 99% collections, as Mitch mentioned, 86% of 2023 renewals already completed by the end of the quarter, near 2% same property NOI growth, and over, as I mentioned, 300,000 square feet of new leasing. With the pandemic hopefully behind us for the most part, retailers have learned some great lessons in selecting high traffic locations for adding stores, considering their sizes of stores, re-merchandising their mix, proximity to complementary retailers, and convenience for their customers. All of which we've been building and saying about smart centers for 30 years. The strongest retailers continue to evolve and reinvest. Walmart, Canadian Tire, Winners, HomeSense, Dollarama, and major grocers are all reinvesting heavily in their store network. and simultaneously growing their footprint. For smart centers, our 10 relationships are vital to us, and so we adapt and serve the changing real estate needs of our retailers. And as a reminder, virtually all of the smart center's locations across the country include a full grocery, easy and accessible at-grade parking, and prices that consumers know they can afford. With that said, a few highlights and emerging trends. Increased demand from services-type retailers are becoming difficult to accommodate when we are 100% leased in so many markets. So we look to add parcels for daycare, pet stores, personal care, beauty supplies, spas, and hair salons. Combined with entertainment such as indoor golf, gaming, bracket sports facilities, you can see a one-stop shop for families who value their time. Our premium in Toronto and Montreal outlets, which are 100% leased, continue to exceed our expectations and dominate their markets with continued improvement in reported sales, which are now exceeding $1,200 per square foot. Growth in QSR concepts continues with demand from U.S. concepts, such as Chick-fil-A, Chipotle, driving higher rents. In many markets, we are simply out of space, but our national platform allows us to fill stores in some markets while we build new stores in other markets, developing bigger relationships quickly. And remember, if you're entering Canada, you want a landlord who can offer scale on a coast-to-coast basis. This platform, 100 Walmart Strong, 60 plus TJX banners, over 70 Canadian Tire banners, 50 plus full line grocers, over $60 Ramblas, 65 plus pet stores, and over 100 banks and financial institutions, and I can go on, provides the confidence that tenants have with us. We deliver what we say, and we do it consistently across this country. All in all, the third quarter's operating results clearly delivered on every metric. Occupancy, NOI growth, cash collections, renewals, and an improving array of tenants serving the daily needs of each community, culminating for us in a stable and growing cash flows. With that, I will turn it over to Peter.

Thanks, Rudy. The financial results for the third quarter once again reflect the strong performance in our core retail business and the continued contribution from our mixed-use development portfolio through the ongoing closings at the Transit City 4 and Transit City 5 condo towers in the Vaughan Metropolitan Center. For the three months ended September 30th, 2023, FFO per fully diluted unit was 55 cents. an increase of 12% from the comparable quarter last year and unchanged from last quarter. These results include $6.9 million, or 4 cents per unit, of profits from the closing of 274 condominium units at Transit City 4 and 5. Higher rental income was driven by increases in base rent, primarily due to contractual rent step-ups, plus further lease-ups, and an increase in percentage rents and rents from self-storage and apartment properties, all partially offset by higher interest expense. Our FFO also includes a non-cash unrealized loss of 3 cents per unit from the total return swap. As a result, FFO with adjustments, which excludes both the condo profits and the TRS loss, was 54 cents per fully diluted unit for the quarter. Net operating income for the quarter increased by $2.9 million, or 2.3%, from the same quarter last year. Including our equity-accounted investments, NOI increased by $12.8 million, or 9.8%, largely due to condo closing profits, higher rental renewal rates, new leasing activity, and continued strong performance at our Montreal and Toronto premium outlet centres. Same property NOI, including equity-accounted investments, increased by $2.6 million, or 1.9%, compared to the same period last year. Leasing activity remains strong during the quarter, which is expected to drive continued modest growth in NOI over the balance of the year. Our occupancy level, including committed leases, with 98.5% at the end of Q3, an increase of 30 basis points from the prior quarter and 40 basis points from a year earlier. In terms of distributions, we maintained our distributions during the quarter at an annualized rate of $1.85 per unit. The payout ratio to AFFO for the three months ended September 30th, 2023 was 96.1%, an improvement from 101.6% for the same period a year earlier. As I mentioned, during the quarter, we closed on the sale of 274 condominium units in our Transit City 4 and 5 developments for gross proceeds at the REIT's 25% share of $36.5 million and net profit of $7.4 million. The remaining 106 units at TC4 and 5 are expected to close in Q4. Year-to-date, we have booked net profits on these two condo towers of $22.7 million on gross revenue of $122.8 million, all at our share, resulting in margin of 18.5%. Adjusted debt to adjusted EBITDA was 9.7 times in Q3, representing continued modest improvement from 10.3 times at year ends and 9.9 times last quarter. The improvement was as a result of both growth in EBITDA and the repayment of approximately $118 million of debt during the quarter, including repayments under equity-accounted investments. Our debt to aggregate assets ratio was 43% at the end of the quarter, a 20 basis point improvement from Q2. We expect to continue to repay debt over the coming quarters, particularly with the profits from condominium and, shortly, townhouse closings. However, as construction proceeds on some of our larger development projects, short-term borrowings will begin to grow. Our unencumbered asset pool increased to $9.1 billion in Q3 from $8.8 billion last quarter. Our unsecured debt of $4.2 billion was virtually unchanged from the prior quarter and represents approximately 82% of our total debt of $5.1 billion. During the quarter, we recognized a fair value gain on our investment properties portfolio of $42.7 million, including properties under development. This adjustment is the net of several factors moving in opposite directions. For certain properties, primarily non-Walmart anchored shopping centers in smaller markets, we increased our cap rate assumptions by 15 basis points. These changes, however, were more than offset by the improvement in valuations driven by rising rental rates and increased leasing activity, particularly at our Toronto premium outlet property. We also increased the fair value of our self-storage projects as a result of third-party appraisals that we received to support a portfolio financing of five such properties that we completed just subsequent to the quarter end. From a liquidity perspective, we are very comfortable with our current liquidity position with more than $550 million of undrawn liquidity as of September 30th, including our share of equity, accounted investments, and cash on hand, but excluding the any accordion features. The weighted average term to maturity of our debts, including debt on equity account investments, is 3.7 years. Our weighted average interest rate was 4.13%, an increase of 10 basis points from the prior quarter. Our debt ladder remains conservatively structured, where the most significant aggregate maturities are in 2025 and 2027. Approximately 82% of our debt is at fixed interest rates. Next, I want to touch briefly on our development projects that are underway. We have updated the new disclosure that we began providing in our MD&A late last year, focusing on those development projects that are either currently under construction or where site works have commenced. As you can see on page 15 of our MD&A, there are currently 13 such projects, up from 10 last quarter. There were four additional projects that commenced this quarter, and one project that came off the list upon completion. The new ones are two self-storage projects, one on Gilbert Avenue in Toronto and the other in Stoney Creek, the Art Walk condominium project in the Vaughan Metropolitan Centre, and the Canadian Tire retail project on Laird Avenue in Toronto. The project that came off the list was the second phase of the purpose-built residential rental project in Laval, comprising 211 units, where construction was completed in July of this year. The REIT's share of the total capital cost of these projects is approximately $790 million, with the estimated cost to complete standing at $386 million. We expect several of them to be completed by the end of this year, including Transit City 4 and 5 and the Millway Rental Apartment Project, and several more to be completed in 2024, such as the self-storage projects and the first phase of the Vaughan Townhouse development. The recently started larger projects will take a little longer, of course, with the Laird project expected to be ready for occupancy in early 2026, and an estimated completion date for Artwalk in the first half of 2027. Lastly, our self-storage joint venture continues to perform well and ahead of our initial expectations. Occupancy is strong at approximately 92.3% for those facilities that have been open for at least one year, with gross rental revenue of approximately $5.1 million year-to-date at the REIT's 50% share. And with that, we would be pleased to take your questions. Mitch will moderate the Q&A, so operator, over to you for the first question on the line, please.

Yes, and just a reminder, if you would like to ask a question, please press stars and the number one on your telephone keypad. Again, that's star one to ask a question. And your first question comes from the line of Sam Damiani from TD Cohen. Your line is open.

Thanks, and good morning, everyone, and congratulations on the great results and the helpful presentation this morning. Just wanted to, I guess, clarify on the new retail deals that you're talking about. Obviously, Laird is now an active construction site, which is great. But I just want to clarify, Rudy, what you said about 300,000 square feet plus of new deals. Is that meant for new construction of retail or is that sort of just new tenants coming in? I just wanted to clarify that.

Both, Sam. We have over 300,000 square feet of new construction that we are going to be building. And in the quarter, if you look at space being leased up in terms of vacant space and churn, we have either nearly 300 or slightly over 300 as well. So it's both.

Okay, coincidence. And does that 300 include the Laird or is that just sort of the other deals that you more recently?

It does not include Laird. Because Laird was signed prior to the quarter. So these are deals that are signed or to be signed shortly.

And so that would be, in theory, added to the active construction table in the coming months or quarters.

Exactly. And we'll add to our total portfolio square footage on completion, yes. Absolutely.

And then I guess any guidance on the yields that you're targeting or expecting on that incremental capital for the new retail, excluding there?

Certainly. As I mentioned, some of the tenants' names that are coming, we are all of them reviewed and approved all the new performance, updated for new construction costs and interest rates and so on. So as you can imagine, all of them are accretive to the REITs. So with big name tenants, as I mentioned, in terms of the TJX centers, grocery stores, Michaels, Skulltowns, and so on. And Solid Covenants, I might add.

Okay, that's helpful and great to see. I mean, it's obviously a very strong retail leasing environment in Canada. But are you seeing any signs of vulnerability or weakness in the industry, in any tenants you're starting to, you know, put together a watch list that might be, you know, like growing or expecting to grow over the next little while.

Yeah, as you know, we do, Sam, as you know, we do have, and Mitch may want to add to this too, we do have a watch list that we monitor. A lot of the tenants that were on that list were unfortunately addressed as part of the pandemic, as you know, for some of these tenants. And they went into CCAA, closed down a lot of locations. The one last one that was remaining was David's Bridal, as you know. And David's Bridal went in and came out of the CCAA process. And their four locations with us all remained open at full rent. So they are back at it, doing well, have restructured. And as of right now, we've dealt with sort of all of the tenants that we had some concern over by either recapitalizing them or creating flexibility in their leases. So as of today, I'm going to find some wood to knock on. We don't have that concern with the portfolio that stands now.

Thank you very much. I'll turn it back. Thanks, Dan.

And again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, if you do have a question, please press star one on your telephone keypad at this time. Thank you. Our next question comes from the line of Pammy Burr from RBC Capital Markets. Your line is open.

Thanks. This is just coming back to the comments around dispositions. You know, you've been talking about this for a few quarters now. Can you just comment maybe on the mix of properties that are in those discussions and at what point, you know, you think you might see some deals move forward? And just curious, you know, if the current environment of our rates is perhaps maybe slowing the process down at all.

Yeah.

It's pretty, well, it was pretty quiet there for a while. I mean, obviously. things were not clear in the market in terms of potential sales and I'll get to which ones are candidates and now there's a little bit of life there I would say and it's primarily in our retail I mean we would be open to you know selling specific assets on the right terms. So there's a little bit of activity going on with respect to that. That's the quickest and cleanest and easiest. Probably some of the profiles of those would be there probably isn't too much future development potential on those. Nevertheless, as you've heard, the occupancy are high, so it would be, you know, a sale of very good, you know, recurring reliable income. But as I said, you know, on the right terms, we would. And then in terms of bringing – is selling pieces of our densities or – well, let's start with that one. That's pretty – that's been pretty quiet. So a condo developer buying one of our zone sites right now. Is not something we're budgeting for bringing in a partner institutional partner for any of those developments is is a little better probability, but but not high probability and then and then bringing in partners for rental. That was what we were most active with a year or so a year and a half ago, but then quiet is there's a there's a little bit of. of that interest and life in that interest back on. And there's some developers in certain parts of the country that are inclined for rental, like in Quebec, where we do have some discussions going on with potential partners for some of our rental buildings, as opposed to the more passive institutional investors that have gotten a little bit quieter.

So that's the summary. Thanks, Mitch.

Just maybe coming back to the organic growth, you know, stability in the business, leasing spreads, you know, picked up a bit. Vacancy is obviously pretty tight in the portfolio and you're putting up some better overall organic growth than you have historically. You know, with that backdrop and all the comments that were made around leasing in the pipeline, you know, does it seem though, you know, at least maybe for the next maybe year or or perhaps longer, that maybe the REIT is in a better position to deliver some, you know, organic growth that is at above, that sort of exceeds long-term levels of, I think, around 1% or so?

Yeah.

No, it is. It feels that way. We're not, you know, some of it is actually a little bit of a surprise. We did anticipate, you know, resurgence in our type of retail, but it's even – you know, a little bit stronger than we had budgeted for. So I would say short answer is yes. I think we're going to see our type of, you know, bread and butter, our type of retail in our centers producing, you know, contributing to higher than historic average internal growth rates. I think part of it really is, I mean, you know, retailers, did sit back for a long time, not just like we made before the pandemic, you know, trying to understand where e-commerce was going to go. And for a whole bunch of reasons, certainly e-commerce is here to stay, but the visibility on it and the split and the cost of you know, is becoming more, um, if retailers are more confident in terms of where they, you know, where that's going to, where that's going and, uh, and how much control they have over it and what they'd like to see. So, um, those are, those are some of the reasons I think for, uh, it's higher than average internal growth rates in the last five years or so.

That's helpful. Thanks. Um, just, um, maybe one last one, just, you know, with all this, um, you know, some of the, I guess, headlines around developers and some financial issues, you know, that have come up through this, you know, this deep move up in rates, et cetera, and development costs. And maybe aside from the group selection issue, you know, on one of your projects, can you just comment on, you know, maybe the health, your confidence in the health of some of your investment partners, development partners, and the security position on any projects that are jointly being developed?

I mean, we don't have a lot of partners. I mean, so, you know, we have a few partnerships. Most of these partnerships are with me, I think, probably, overall. So that's a shaky week coming up right there. But other than that, I think most of them are pretty good. You know, our other partner, obviously, is SmartStop, and I think the majority of SmartStop, I mean, SmartStop, our visibility on SmartStop is on the ones we're with them on, and they do, you know, they have good returns. They're quite a treat for us, and we know for them. So if the rest of what they're doing is you know similar to what they're doing with us i'd say that they're you know they're they're stronger than they were when we started partnering with him and remember they're an operator and you know it's a it's a bit of a machine so that i don't think we have too many concerns about i mean generally out there there's kind of have to be some casualties for sure you know there are naturally always are with respect to these situations, you know, anyone with high levels of debt and weaker tenants, I mean, it's very second sensitive ecosystem. So I think all the years of, you know, trying to plan for, you know, heavy weather and have the strong covenants in the long terms and the, um, you know, the low levels of debt, you know, are, you know, are four times like this. And, um, And those who didn't plan for this, you know, it's kind of too late. So I'm sure there'll be, you know, there'll probably be a couple of, probably a couple of carcasses on the side of the road, you know, before this is over.

That's helpful. Thanks very much. I'll turn it back.

Your next question comes from the line of Dean Wilkinson from CIBC. Your line is open.

Thanks. Morning. Mitch, I think we all wish we could be as shaky a covenant as you. Peter, I just want to clarify, did you say that the margin on those condo completions was 18.5%? Yes, I did. Okay. Maybe a question for Mitch. How does that 18.5% compare to your historical experience with development yields and do you think that there's a little pressure going forward just given the high input costs, construction, labor, all of those components there? For sure.

I mean, that was good. It was a good, big building. I mean, you know, we didn't max out with pricing either. I mean, so for sure, I mean, you're spot on. I mean, returns will not be, you know, rates are higher and returns are going to be lower. I mean, so that's what's going on you know which you know is other than people who get caught I mean you know and other than the underlying need for housing from a disciplinary point of view and reality you know Czech point of view it's probably not a bad thing you'll probably see construction prices down and be more sustainable you'll see sale prices come down and hopefully, you know, land prices will come down. But, you know, those who are, you know, caught, you know, in this, they'll, you know, there'll be some pain for sure. But I think in the interim, as we get there, as these adjustments have to pass through the system, so to speak, I think returns will be squeezed, as you said. Makes sense. I mean, peak out, you know, you can never plan that, especially if you're building a building that takes 36, 39 months to build. You know, you can't plan it, but there's guys who, you know, but the flip side is those same guys are probably some of the guys who are going to get caught now. So, you know, it's kind of all, you know, averages out in the end. That's why, that's why, you know, I like to just, you know, just, you know, play it for more, you know, long term, you know, you know, with everything including our, you know, our tenant mix and such and such. But, 18 plus is a very, you know, very, very, very handsome satisfactory return.

Yeah, even in these rate environments. I guess at the end of it, it's land basis matters more than anything. That's it. I'll hand it back. Thanks, guys. Thank you.

Your next question comes from the line of Lauren Kalmar from Desjardins Capital Markets. Your line is open.

Thanks. Good morning, everybody. Maybe just quickly on the rent growth. Sort of the nine months really jumped versus, I guess, what you guys had in the six months at the end of June 30th. I was just wondering if you'd give a little bit of color because it seems like it was a pretty sizable jump quarter over quarter.

Yeah, we are still – I don't know, but we are still benefiting, if you will, from tenants wanting to leave the enclosed mall. So as you see, our occupancy is up and we have tenants who prior to the pandemic would have left us to go into an enclosed mall. And now some of those same tenants are asking to come back in. And with our low operating costs, what we're finding is the existing tenants here and new tenants are asking for any of the vacant space that's available in our portfolio. So you have two things happening at the same time. You have an increase in demand from existing tenants. You have an increase in the new tenants categories coming in. And then the last part I would think that's making up this surge is the fact that most tenants want to come in In the third quarter, before fourth quarter, Christmas sales, seasonal sales kick in. So they can get a sort of head start in the market. They don't want to come in in the first quarter of the year when everybody has already spent their wallets. So the strength was a little bit surprising, as Mitch mentioned, but very welcome for those reasons that I just mentioned.

I can't imagine you'd be complaining too much about something like that. Is that sort of a good – because I'm just even looking like even after back in 2022 through the nine months, it wasn't as materially higher. Is this sort of a mid-single-digit rent growth range kind of the go-forward expectation for the portfolio?

I'd say that would be a combination of factors. Sorry, Mitch, go ahead.

Oh, sorry. Go ahead, Rudy. I'll comment on that.

Yeah. I was going to say, again, it's a function of a couple of things. One is coming off the sort of pandemic years when we were slower growth in 2020, 2021, 2022. to, if you will, we're leveraging off of a lower base. So a little bit of that will be that on. And obviously, we're hoping that it continues. Those bumps will not continue forever, obviously, but we're coming off a little bit of a lower base and we're coming off a lease up in our portfolio. So as we lease up, we will obviously never exceed 100%. So at some point, we will slow down because we're being careful about covenants and we're being careful about market rents and so on. So maybe a little bit of that is temporary, but I would say for the most part of that, that should continue.

Mitch, sorry.

No, I would just add that, no, I don't think we'll be able to keep that up for, you know, like, for like, you know, if you're thinking, okay, hello, you know what I mean? So I can go on with this for your needs. It's, you know, I think it's kind of a little bit of legs. You know, if you look at what we're negotiating right now, it's really very, very fundamental stuff. But just for, I think for the purposes of your question, I mean, you know, it's going to go on for years.

Fair enough. I guess all good things must come to an end. But I guess it's good to see even in the context of, I guess, kind of the concerns that retailers are still able to absorb these types of rental rates. Like that must be encouraging for you guys.

Absolutely. Yeah, I mean, we don't like it, to be honest, you know.

They can, and for sure, but, you know, we're at this moment, you know, it's just, I don't want to get into it, but you guys get it. It's, you know, the cost of construction is still high, and retailers know it, and, you know, interest rates are high, so it's maybe, you know, a little bit of that. You know, we are a discount company. you know, minded, you know, value oriented, um, network. Um, but, uh, nobody can ignore construction costs and, um, and interest rates. So they do, they do add a little bit to rental rates, um, at the moment deals that are done in this environment. But I will say that, you know, future, even though I don't think we'll keep these rates and we'll keep them up for a while, for sure. I think it's going to be very, I think what we're doing now is we, also redoubling our centers. We didn't get into it here, but the deals we're doing right now, when you see what they will do to existing centers, which are already solid, it's going to be, you know, you're going to see an even stronger smart center in terms of just, you know, overall traffic and, you know, sales onsite. uh, in the next few years in a lot of places. So that begets things like, you know, traffic begets traffic. And so, you know, what that may mean in terms of future growth and what opportunities that may bring, um, you know, I think, uh, it's hard to, uh, it's hard to predict, but, uh, you know, just linear straight line. Yeah. You can't go on forever at these rates.

Okay. And then just last one for me, something to, um, The condo side of things, you guys obviously did pretty well in the first phase of the art walk, but there has been, in terms of news to anybody on the call, news of some issues with the slowing sales of new condos. How has that been impacting your plans at all, and have you seen any of it, or is it a concern for you for the projects that you're looking to bring to market? Yeah.

it's impacting us hugely. We're not going to commence, you know, a condo project that basically, other than Artwalk at the moment, you know, which is sold out of the units that we put on the market, you know, it's, you know, it's priced well, we've got, you know, sizable deposits. I mean, if we were starting right now to construct, you know, considering going to market somewhere, I mean, what we have considered, we've, Delayed them. We're not going to do them even though we are ready to go. We have site plan approval. We have zoning and site plan approval in a few places, meaning we can go in for building permits, go to market, sell, and build. But we're delaying them. You know, it's not a bad thing. The bad thing would be if we had stugged them and, you know, we had, you know, 20 stories up with three levels of underground. But we don't anywhere. and we don't for a reason. So, yeah, it certainly impacts us, and I hope we're not the only ones because it's the way markets cool off and it doesn't help housing in the short term. There's other mechanisms for that, but it certainly is overall good for cooling things off.

Okay, great. Thank you so much for all the color. I'll turn it back.

And your next question comes from the line of Shalabh Garg from Veritas Investment Research. Her line is open.

Shalabh Garg Thank you, and good morning. So my questions are on the fair value gains here today. They seem to be driven by NOI growth and stable cap rates. And in general, the peers have raised their cap rates through this year.

So can you color on what's helping you keep those cap rates stable? Peter, I don't know if you want to.

Sure.

I'll start, and then maybe Rudy will add a bit of color. I think you're absolutely right, Shalab. The biggest driver of the fair value gains was NOI growth. So it's not like we adjusted the cap rates for the vast majority of the portfolio. They remain stable. We chose to do that after consultation with a couple of different third-party appraisers that we use each quarter, plus our own internal valuations group, plus the the valuations team at our auditors and so it's extensively reviewed and so it's mostly driven by the increased leasing activity, the increased occupancy and the higher NOI that you've seen. Rudy?

Yeah, you will note, as Peter mentioned earlier also, that we did increase cap rates. If you look at some of our peers who were selling properties in the market, they're selling in closed malls or weaker properties in weaker markets. Our properties in even smaller markets and secondary markets are walmart anchored and for the vast majority of them they're 100 leased because there's so much demand for space in those centers so when we looked at our properties in these smaller markets that were not walmart anchored that's what peter mentioned earlier where we increased the cap rates by the 15 basis points to reflect what our appraisers our third party appraisers were telling us made more more sense but the growth in our noi and leasing and just appraisals that we did complete during the quarter led to that increase in our IFRS value, yes.

Okay, that's really helpful, especially the color on open-ended bonds. So another question I have is on the tiers and maintenance capex, which is, again, up year over year. So I understand it's related to some roof work and maybe related to some new leasing. So I just want to get a sense of exactly what's driving it and what to expect in 2024?

Yeah, I think that is actually a good run rate for 2024. Our portfolio is probably the youngest in the industry from a design and from a build perspective, and we are certainly built in a way that it is very efficient and very low-cost maintenance, very, I'm going to call it ESG-friendly, low-cost to consumers and our tenants as well. So when you look at how these were built, there isn't a significant amount of money because we don't have enclosed space to maintain and units to maintain. Our tenants maintain their own space. Our tenants maintain their HVAC systems and so on. We look after the lots and the roofs So the run rate you saw for 2023 is probably a good run rate going into future years.

Great, thank you. Thank you.

No, no, I was going to say, and mind you, I don't know what that number is, but it represents probably less than 0.2 of 1% of our value of our portfolio because of how new this portfolio is. So... Just in terms of how we, when we do our evaluations and we build in CapEx into those evaluations, that's what our appraisers are telling us as well.

That's helpful.

Thank you. I'll turn it back to you. You're welcome.

Again, if you would like to ask a question, press star and the number one on your telephone keypad. Thank you. And there are no further questions at this time. I would like to turn the floor back over to Mitch Goldhar. Mitch?

Yeah, thank you so much, and thank you all for participating in our Q3 endless call. Of course, please feel free to reach out to any of us if you have any further questions. In the meantime, have a great day. Thank you.

Thank you, ladies and gentlemen. This concludes the Smart Centers REIT Q3 2023 conference call. Thank you for your participation, and have a nice day.