SmartCentres Real Estate Investment Trust

Good day, ladies and gentlemen. Welcome to the Smart Center's REIT Q3 2024 conference call. I would like to introduce Mr. Peter Slant.

Please go ahead. Thanks very much, operator, and good afternoon, everyone, and welcome to our third quarter 2024 results call. I'm Peter Slant, Chief Financial Officer. And I'm joined on today's call by Mitch Goldhar, Smart Center's CEO and Executive Chair, and by Rudy Gobin, our Executive Vice President, Portfolio Management and Investments. We will begin today's call with some comments from Mitch. Rudy will then provide some operational highlights, and I will review our financial results. We will 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. This also applies to comments that any of the speakers make this afternoon. Mitch, over to you.

Thank you, Peter. Good afternoon and welcome, everyone.

The momentum in retail fundamentals noted in previous quarters continued in Q3. Rental growth, cash collections, and same property NOI continued to drive solid metrics and higher occupancies, which ended at 98.5%, demonstrating the strength of SmartCenter's portfolio. The strategic nature of our locations also drove 187,000 square feet of executed deals on vacant spaces. and 220,000 square feet of deals for new retail construction year-to-date. Our tenant-partner relationships continue to deepen, with same-store expansions in new stores either underway or beginning construction shortly, with names such as Canadian Tire, Winners, HomeSense, LCBO, Sobeys, Loblaws, Dollarama, Golftown, Banks, and more. We are simultaneously enhancing the shopping center experience beyond the everyday essentials with health and beauty, entertainment, fitness, medical, pet stores, daycares, and more. As we work closely with our tenants, every detail matters in providing a welcoming environment for customers, and therefore, it is not surprising we have already extended over 88% of our 5 million square feet of tenant maturities in 2024. Also reflecting a strong quarter is the 6.1% or 8.9% exclusive anchor tenants rental rate lifts achieved on these extensions. Rudy will provide some further details in a minute. But here are a few more operational highlights. Same property NOI excluding anchors for the three months ending September is up 8.2% and including anchors nearly 5%. Our opportunistic industrial development in Pickering on the 407 is now fully leased on long-term leases. Cash collections remain strong at over 99% again, a reflection of the quality of our income and strength of our tenants. And we expect this momentum to carry on through the year and into 2025. Built on this strong and stable cash generating platform, we continue to build and secure significant mixed-use permissions. With over 59 million square feet already zoned, And as you know, on lands we have owned for many years. We of course will be strategic and financially prudent in executing any project. That is when market conditions permit and with appropriate financing in place. Here are some specific highlights. Site works and excavations were completed and construction is advancing for our 36 story art walk project here in the VMC. comprising of 320 sold-out condominium units. To our smart living brand, the Millway, our 458-unit apartment rental project, which was complete late last year, was 93% leased at quarter end, above planned rental rates.

We expect to be above 95% leased by year end.

Construction of our Vaughan Northwest townhomes with our partner is progressing well with 47 closings taking place this quarter and nearly all pre-sold units expected to close on schedule by the end of this year or first quarter next. In Leaside, construction is well underway for a 224,000 square foot retail center, comprising primarily of a pre-leased 200,000 square foot flagship Canadian tire store. Opening is on schedule for early 2026. Our self-storage portfolio comprising 10 operating projects, which now accounts for over 1.3 million square feet at 100%, with four currently under construction.

Completion will bring the total to 1.9 million square feet.

This strategic initiative portfolio continues to overperform, and we intend to carefully expand it. The next such expansion will be in Laval East, adjacent to our operating shopping center, and in Victoria, BC, just off the downtown core. Our development teams continue to work diligently across the country in large and small markets, obtaining strategic residential permissions. Just recently, we were successful in two of our BC projects, achieving 2.7 million square feet of residential zoning in Penticton and Salmon Arm. These and our other 50 million square feet of residential zoning achieved allow us to launch or sell when market conditions align and enhance our shopping centers along the way to complete our vision of evolving our shopping centers into dynamic communities.

We are pleased to announce that our annual environmental, social and governance report has been released, reflecting the significant progress we have made in all areas of our business. As I've said previously, ESG is woven into the fabric of our organization.

It is a part of how we oversee our business, interact with our tenants, and engage with our employees and communities. You can find our report on our website, and please refer to the ESG section of our MD&A for more details. As you can see, we are very active in enhancing value in our retail operations, prudent in our governance and strategic with our significant mixed-use development pipelines. We also take care of maintaining our conservative balance sheet and improving liquidity, which we did previously when increasing our operating line by $250 million to $750 million, increasing our unencumbered asset pool to $9.4 billion and raising $350 million in the quarter, which Peter will speak to in a few moments. Before that, let me pass the call over to Rudy for some operational highlights.

Thanks, Mitch, and good afternoon, everyone. The third quarter was a standout in virtually every meaningful operating metric. Tenant demand for more locations continues, delivering high-quality income across all provinces and to a collective 98.5% occupancy. With the national platform, Smart Centers allows any tenant to easily double or triple down on locations being sought. It starts with one conversation and one lease template, whereby Smart Centers is able to accommodate, over time, 40 LCBOs, more than 50 TJX banners, over 60 Dollarama stores, over 70 Canadian Tire banners, 100 Walmart stores, and over 120 of the five largest banks in the country. It is in these deep-rooted relationships developed over decades that Smart Centers provides the highest quality, high-traffic, value-oriented centers that align landlord, tenants, and their Canadian consumer. The accelerating pace of new tenant demand also adds to the great existing tenant mix, to improving cash collections and even higher occupancy, as you've seen. As Mitch mentioned earlier, in responding to the needs of each community, Smart Centers has been adding uses such as medical, daycare, entertainment, health and beauty, fitness, and pet stores and more, providing that convenient one-stop place to shop. With the strong demand for retail across the country, we have executed nearly 187,000 square feet of deals in the quarter, filling small and large vacancies. Signed 220,000 square feet of deals for new build retail year to date. And we have extended over 80% of our 5 million square feet of lease maturities in 2024 with rental lifts extended. at 8.9%, excluding anchors, 6.1% all in. Our headline grocers, Loblaws, Sobeys, and Metro, with their banners number over 50 in our portfolio, and more new construction is planned for these names. The level of activity not only drives sustainable growth in rents, but enhances our flexibility and improves our overall covenant and cash flow. Our premium outlets continue to excel in driving traffic and improving sales, leading to strong growth in EBITDA and value to the REIT. Tenant Sales has our Toronto premium outlets in the top three highest performers in Canada and remains an outperformer in Simon's portfolio. Our Toronto and Montreal locations remain 100% leased with rental lifts and EBITDA continuing to come in ahead of budget. These affordable luxury centres and world-class brands continue to dominate in their segment. Overall, the REIT is strengthening its covenant and value with strong rental lifts, NOI growth, cash collections, tenant retention, while delivering a broader array of tenants to meet the evolving need of each community. We expect this momentum to continue into Q4 and well into 2025. With that, I'd like to turn it over to Peter.

Peter? Thanks, Rudy. The financial results for the third quarter once again reflect the strong performance of our core retail business with improved occupancy and continued contribution from our mixed-use development portfolio. For the three months ended September 30th, 2024, net operating income increased by $5 million or 3.4% from the same quarter last year, largely due to an increase in base rent, partially offset by a decrease in condo and townhome closings relative to the same quarter last year. FFO per fully diluted unit was 71 cents. compared to 55 cents in the comparable quarter a year earlier. The increase is primarily due to the fair value adjustment on our total return swap resulting from an increase in the unit price as well as from higher rental revenue partially offset by higher interest expense. During Q3, we also delivered and closed on 47 units of our Vaughan Northwest Town Homes project. FFO with adjustments which excludes both the townhome profits and the TRS, was 53 cents per unit for the third quarter compared to 54 cents a year earlier. The decrease of one cent was primarily due to an increase in net interest expense, largely because we are no longer capitalizing interest on our Millway apartment project. 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, 2024 was 75.2% or 90% for the trailing 12 months. Adjusted debt to adjusted EBITDA was 9.8 times for the rolling 12-month period ending in Q3, which is a slight decrease from 9.9 times last quarter, primarily due to the reduction in TRS debt and the repayment of debt from the townhome closings. Our debt to aggregate assets ratio was 43.6% at the end of the quarter, a 10 basis point decrease compared to last quarter. Our unencumbered asset pool increased by approximately $60 million to $9.4 billion in Q3 as compared to last quarter. Unsecured debt, including our share of equity account investments, was $4.4 billion, virtually unchanged from the prior quarter, and represents approximately 82% of our total debt of $5.4 billion. From a liquidity perspective, we remain comfortable with our current liquidity position. As of September 30th, we have approximately $863 million of liquidity, which includes both cash on hand and undrawn credit facilities, but it excludes any accordion features. During the quarter, as we mentioned on the Q2 call, we increased our liquidity through the issuance of $350 million of Series AA Senior Unsecured debentures. The proceeds from this offering were used to repay our Series O debentures upon their maturity and to repay higher interest floating rate debt on our operating lines. The weighted average term to maturity of our debt, including debt on equity accounted investments, is 3.2 years. Our weighted average interest rate was 4.09%, a decrease of 16 basis points from the prior quarter. Our debt ladder remains conservatively structured, where the most significant aggregate maturities are in 2025 and 2027. Approximately 85% of our debt is at fixed interest rates. Just before we open the call up to questions, I want to touch briefly on our development projects that are underway. Once again, we have updated our MD&A disclosure, focusing on those development projects that are currently under construction. As you can see on page 17, there were eight projects under construction at the end of Q3, unchanged from last quarter. The self-storage facility in Stony Creek is now open as of early Q4, with the other three self-storage projects scheduled to open in 2025. So that Stoney Creek project will come off the list next quarter. The REIT's total share of capital costs on these eight development projects is approximately $482 million, with the estimated cost to complete standing at $275 million. Finally, we also entered into a construction facility for the 224,000 square foot retail project anchored by Canadian Tire and Leaside that Mitch described earlier. That construction facility totals $135 million, and it was undrawn at quarter end. And with that, we would be pleased to take your questions. Operator, can we have the first question on the line, please?

Certainly. As a reminder, if you'd like to queue up to ask a question, please dial star 1 on your phone's keypad. The first question is from Michael Markides from BMO Capital Markets. Please go ahead.

Thank you, operator. Good afternoon, everybody. Congrats on a good quarter and the zoning achievement in BC. Maybe just touching on that zoning achievement, Mitch, you made a comment about developing and you've been very disciplined in terms of when market conditions align. Curious as to your thoughts about when conditions may align to ramp up development, whether it be via the putting into production residential development or actually selling some

Yeah, I mean, I think it's better than it was last quarter, and last quarter was a little better than the quarter before, but it's not there yet. I guess the direction is positive. It's hard to predict when the market conditions might warrant considering you know, going ahead with, with any, you know, sizable deal. Uh, certainly, you know, we, we might be a little more conservative than, than a private developer, condo developer might jump in before us. So we might be able to, we might see some potential sales of, of this density, um, sooner than, you know, maybe the, we would, uh, we would commence. Um, but if I had to guess, I mean, second quarter, you know, next year, uh, could see potentially, you know, uh, some, some action or if we're lucky, um, you know, maybe, you know, maybe middle to the end of first quarter next year, hopefully. But, uh, as I say, you know, it was just the new election. There's, There's going to be a lot of things going on that are going to influence the variables in the market. Okay.

So, I mean, tough to predict, obviously, but things are slowly moving in the right direction. Sounds good. Okay. You know, one of the things we've heard, fundamentals and retail are great. It's showing up in your operating stats and your same property and why growth this quarter. Now, I'm just curious on your, you know, the rental spreads that you're getting on the non-anchor space. On this leasing, one of the things we heard about is people pushing maybe for a little bit more in terms of the contractual increases throughout the term of the lease. Is that something that you guys have been executing and successful with?

I'm not sure what you meant by that. And can you say that another way?

Yeah, sorry. I was a little drawn out. question i for sure so i guess just on the the x the non-anchor leasing you're doing um are you able to push for higher um increases throughout the duration of those leases uh just given the strengthening fundamentals i'll start and then really you can weigh in but i mean we we cannot increase rents uh obviously um most of our rents are are fixed um

And we really, you know, we don't negotiate or try to open negotiation on rents that are fixed. When I say fixed, I mean they have built-in bumps, but they're built-in bumps most of the time. But at the end of terms, which we're going to see more and more of because, you know, it just so happens that the age of our our retail, you know, and our leases is such that, you know, we're getting into extension terms more and more, um, of our leases. We'll get into extension terms where, where a lot of them are at market. And so, um, we have historically been kind of the, or tried to be, um, you know, profitable at the lowest possible rent. Um, and, um, And, you know, that's part of the formula of being, you know, aligned with the Canadian consumer. But at the same time, you know, making good returns. But they're actually now somewhat outdated, you know. So a lot of those leases that are coming up, that are being extended, and we do have a high percentage of extensions because our locations are in good locations and they're now infill locations, a lot of them. those rents are outdated and fair market rent is not just what it used to be, you know, a couple of dollars, a couple of dollars. It's more than that now. So interestingly, you're starting to see our portfolio start to turn over and us, you know, reset our rents to the new market, the new market being in many, most all the markets across the country with a few exceptions. Rudy, do you want to add some color to that?

Yeah, not sure, Mitch, how I could add more to that than you just said. But the only thing that's different is, you know, there's not a lot of new retail centers being built in the country. And therefore, the tenants that are demanding more space want to be in Walmart anchored centers because Walmart is such a great driver of traffic and they're doing so well that it makes the demand for our space and you see it in the occupancy so much better. And like Mitch said, We started off years and years ago in this value-oriented space, not trying to get the highest rent we can. It's still not the highest rent we're always seeking. We're trying to be reasonable, but the lifts are looking good because of the solid demand and the improvement in what people view as what a great location and a great mix of tenants we have already. So the infill nature of it. Yep.

For sure. Okay. And if I, if I understand you correctly, then I mean, I think we're all familiar with the, you know, the, the nature of the Walmart leases, but it sounds like you're alluding to, there's maybe a non anchor, what you don't consider to be necessarily anchor space that had fixed rate renewal options for, you know, maybe several renewal terms and those are starting to burn off. Is that fair?

Yeah. Yeah. I mean, it depends, but lots of those anchor tenant deals are going, anchor tenant deals go to market as well at some point. And, They do move the needle, and we've got more and more of those coming up.

Okay, great. Last one for me before I turn it back. Just, Peter, on the Millway, you noted the dilution from the Millway loan longer being capitalized. Can you just remind us what type of debt is on that asset now that it's stabilized? Is there a takeout opportunity that could be accretive for you going forward?

Yeah. Absolutely. So, you know, we're working through some CMHD financing to take out the construction financing. That'll be, I would expect that'll be a Q1 2025 item. That's great. Thanks so much.

I'll carry it back.

All right. Thank you. I'll add to that as well that we're anticipating that to be a positive, you know, accretive refinancing.

Thank you.

The next question is from Lorne Calmar from Desjardins Capital Markets. Please go ahead.

Thanks for having everybody. I just want to circle back to something I believe Rudy mentioned talking about building space for grocers. I was wondering if you give us a little bit more color on that program and if it hinges on the potential removal of exclusivity clauses from tenant leases or not.

Um, I'll cover that one. In terms of, um, uh, the grocery, you know, the shop, um, this food store, uh, program, it, it does have, uh, some, um, you know, it's, it's got momentum with us. We're doing a number of, uh, food store deals. That'll be built from, you know, build from scratch, ground up construction. And I'd say, um, Uh, some of them have the situation that you're referring to where, you know, somebody could potentially, uh, somebody's approval might be required. Um, somebody who might have a restriction. So, um, I'll just answer that by saying, uh, It does appear to, I mean, you know, there's movement both on the food store side and on the policy governmental side to change food restrictions. Mostly it's driven by food. There are restrictions with other types of users. So I would say sometime in the next year or two, there's going to be more competition in food. And you'll see that on our sites for sure. And I just go back to the first program. For us, it's going to move the needle, the number of food store deals that we've got in negotiation right now.

Okay. And then would these be at like, would these be at centers that already have a Walmart with food or they would be not anchored?

Both. I mean, you know, there's negotiations going on, let's just say in Orleans, you know, we don't have a food store there. We have a shopping center across the road from this center with food, but not on this property, you know. We have negotiations going on in some markets where, yeah, there's Walmart, but we're anticipating some of the changes that you mentioned. But there's just a couple of those, and we'll see how that goes. So I would say the majority of them actually don't have the restriction issue, but some do.

Okay. And then just quickly on the closings, look like you guys did pretty well this quarter. Obviously there's been concerns around the closing side of things, rightly or wrongly. I'm just wondering if, you know, through the process so far, if you've seen an elevated rate of buyers not closing versus historical, or if it's kind of normal course.

It's not normal course, I would say. There's no such normal course. There's no history. of no closings in the last 10 years. And there used to be. I don't know how old you are, but I can assure you there was a period where it was not unusual for buyers not to close. I think we are entering an era or whatnot, a period where you'll see buyers not closing. It just kind of depends. whereas we have not seen that for a long time. Okay.

And then maybe just one really quick one for Peter. Is there anything one time in nature expected in NOI for 4Q, or we've got a pretty good run right here on a year-to-date basis?

On a year-to-date basis, it's a pretty good run, right, we think.

Perfect. Thank you so much. All right. Thank you. The next question is from Dean Wilkinson from CIBC World Markets. Please go ahead, Dean.

Thanks. Afternoon, guys. Hi. First one for Peter, maybe. On the $1.7 billion of assets classified as PUD, how much debt would be against that number?

Well, so we don't break out exactly what's... what's on the PUD versus what's on the income-producing portfolio, Dean. And as you know, most of our debt is unsecured, and so it really looks to the entire portfolio across both IPP and PUD. When we acquired the VMC Westlands, we did incur some debt specifically on that, as you may recall. That was back in 2021. but most of it is part of the unsecured portfolio.

Got it. So where I'm going with it is, you know, I look at the stock price, I look at the balance sheet, and at $25 and a six cap, it's effectively zeroing out the PUD. So not only are you not getting credit for, you know, the zoning and the upside, you're probably not getting credit for, you know, work that you've already done. One, do you think that it's just completing these projects and then having them flip over to IPP that we'll see the realization of the value? And then two, if that's the case, would it have you maybe rethink how much of the balance sheet you're willing to put into that bucket if the market's not going to reflect that value?

I'm going to defer to Mitch on that.

I mean, hello. Yeah, Jesus.

Where do we begin? This is, I mean, it's almost like if you hadn't said that in the form of a question, that would be just its own standalone statement. So, yeah, I mean, there's a lot of value in the company. That's the bottom line. We've been saying it for a long time. You know, it will eventually come out in the wash, but whether you look at it like you did, which is one right way to look at it, or you look at it other ways. There's a lot of value, and real estate people would recognize it if you looked at the permissions, like you said, and you look at the PUD, and you look at our stock price, and you look at the cap rate. I mean, it's like zero for... you know, for our density and for most of our PUD. So we know what to do with all that. We know what to do with the density. We know what to do with PUD. So we're going to do it, and it'll come out in the wash.

Yeah, I agree. That's why you're there, and I'm here. Thanks, guys. I'll hand it back.

All right. Thank you. The next question is from Gaurav Mathur from Green Street. Please go ahead.

Thank you, and good afternoon, everyone. Just given the debt maturities that are coming due in 2025, could you shed some light on where secured versus unsecured financing rates would be?

Peter?

Yeah, so we have two debentures, two unsecured debentures that mature in 2025, Gaurav. The first one is at the beginning of the year. It's relatively small. It's 160 million, if I recall correctly. And the second one is at the back end of the year, very late in the year, December, so over a year from now. Spreads have been tightening. We've seen three rate cuts over the last three or four months, and so rates have been improving. We certainly haven't made a decision today about whether we would refinance those you know, at what term, if it's three, five, seven, 10 year terms, that's something that we look at kind of opportunistically based on the rates at the time of those maturities and, you know, what fits in well with our existing debt ladder. But rates have continued to improve and, I think most of the bank economists that we follow would suggest that there are future rate cuts to come between now and those upcoming maturities. And so we'd expect them to continue to improve, but I can't tell you today what the rates are likely to be when those maturities actually happen. On the secured side, we have seen very strong demand from all of our lenders on retail product. There, we tend to go a little bit longer. We tend to go in the in the seven to 10 year terms. And, you know, we always, as you know, most of our portfolio is unsecured, but we always have, you know, small centers, particularly those where we have partners, where we continue to access the secure debt market. And, you know, as I say, there's been strong lender appetite for those. And so we would expect attractive rates, but again, it'll be a determination at the time of those maturities as to where we are in the market and what rates look like at the time.

Okay, perfect. And I guess just switching gears here towards dispositions, we've talked about it in the past where you've talked about disposing land with permission. Just wondering, as the rate environment goes lower, Has that improved market conditions in any manner?

Yeah, yes, it has. But yeah, it's still not there. We're not sellers at prices that we think are just, you know, not justified. You know, there's an overcorrection, if you will, on prices. pricing right now for buying, but at least there's a market now. So it's improving. Hopefully we'll get there. We're not going to hold out for anything like the peak. We certainly don't see that in the foreseeable future, but we're not there yet. yet pricing wise for us to sell this density. So, um, but it'll come and when it does, you know, the, um, the difference between now and six months or 12 months or whatever, maybe, um, you know, we'll, you know, it justifies waiting in my opinion.

Okay. And then just as a follow up, um, you know, in that time period, Is there any part of the portfolio that, you know, is attractive from a non-core perspective and could be potentially disposed of?

Look, we have a network of shopping centers. Like, they don't operate... Like, you drive by one and two and you sort of, you know, maybe... But, you know, there is a... there is a world like that, you know, food and general merchandise and, you know, weekly needs and other basics that is intricately weaved together that our network, you know, creates additional, you know, value as a result of our network. So, you know, we don't just look at selling a single asset as, you know, selling a single asset. It's part of the ecosystem that is our positioning in our space in this country. So that is also not, of course, reflected in our unit price. So it would have to be very compelling for us to sell one of our centers, but it could happen. It does happen sometimes. And, you know, I'm being conservative in my reflection of the timing of selling off density. But that's real estate. I mean, real estate, you know, is a long-term game. And so, you know, moving real estate isn't something... Well, let's put it this way. If you want to move real estate quickly, you are going to be doing it at a severe discount. So... I do see, and we do see, um, you know, capital raising happening. You know, we see it, you know, we see the light now or say a year ago, there wasn't really much light. We just don't know what form it's going to take, but we're open to it. We're considering things all the time, but we're not worried because in the meantime, we have very strong tenants, very strong IPP. And, um, you know, interest rates are moving in our direction, and there's a few things finally moving in our direction. To say nothing of rental rates, et cetera, et cetera. So there's no, you know, we're going to do this in a measured and proper way, but we will get there.

Well, thank you for the call, gentlemen. I'll turn it back to the operator.

Thank you. The next question is from Mario Sarek from Scotia Capital. Please go ahead, Mario.

Hi, good afternoon. Maybe just summarizing the disposition discussion so far. I think last quarter I highlighted the disposition target of $250 to $350 million. Timing-wise, more likely in 2025 and 2024. It sounds to me like that's still a fair assessment of your plans in terms of quantum and timing, and most of it would be residential land. Is that fair?

Yep. I mean, it's going to be landed both because probably be landed both. the permissions on the retail lands that we have. That's some of our most attractive, um, residential land is actually within our shopping centers. But, um, I would say that timing is still look when it happens, when it moves, it moves across the board. So, you know, we'll be able to execute on hopefully that kind of, um, order of magnitude. So it could go from zero to a lot, you know, that's, that's real estate. So hopefully we'll be in, 2025-ish, 2025, 2026, they will be able to move some land to the extent of those $250,000, $350,000 sort of thing.

And what would you say the governor, in terms of the quantum, presumably pricing would be one, but what would incentivize you to, instead of $250 million to $350 million, go up much higher than that if pricing is pretty strong.

I tell you, I'm just being conservative. You know, you guys, I mean, if the market was an appetite and we could do more, you know, we're not, we don't have to build all our residential. I mean, we've got, in a sense, kind of an infinite amount of density, right? I mean, if you think about it, if we sold 5 million square feet, we'd still have 45,000 even 50 million square feet um and we're good at you know that's our thing we're we're you know we're comfortable in the land use world so we can generally speaking over time create more our locations continue to get better so you know it's a bit of a renewable resource um for us um so we're not going to hold back it's not like wow you know got nothing for ourselves to develop. We do want to end up with rental residential. We want that to be part of our shopping centers. It's good for our shopping centers. It renews our shopping centers. It renews our shopping center. It slowly but surely, you know, creates a community within your shopping center. It's part of how we see the future. So it's good for the retail and vice versa. So we want to end up with that. And we get some of that when we sell and someone builds a condo. But I would say, you know, we're not going to be shy if the market's big. I mean, not because, you know, of our debt metrics and our debt necessarily. We want to bring that down and we're very focused on it. But we may just do it because it's, you know, it's going to make doing our rental residential program that much more accretive and attractive. So it could be bigger. But I think the minimum, you know, that would sort of make a difference is With us, it would be $250,000, ideally $350,000, but it could be more, for sure.

To your point on the residential, I personally see that firsthand at Trafalgar and Dundas almost every day, so I can appreciate the relevance of it to the retail, for sure. Multiply that by 100 locations, and that's why we're...

behooves us our unit price, but it is what it is.

Fair enough. So just on the residential, Mitch, you've been in retail for a very long time, and one topic of conversation, not just for residential, but I'd say for retail in the past month that's come up has just been the federal government's potential immigration policy change, which is aimed to effectively kill population growth in the country for the next two years. I'd be curious to hear what your thoughts are on the matter. Like if the government does go through with it, is there an impact of smart centers portfolio or the broader retail landscape in general? And coming back to the residential land market or residential in general, are there implications in terms of land values? If population growth after a period of some pretty strong growth. No, I think, you know,

land values were unjustified, uh, land values, meaning density values were unjustified. And, uh, they, no, I don't think they'll come back and I, I hope they don't come back and we should all hope they don't come back. Um, so, um, I do think, you know, we're going to see trades at more, yeah, lower prices, which is fine. In our case, we're getting zero for it right now. Um, And it doesn't cost us that much to do. We're not buying land. It's mostly consulting fees and intellectual capital. So it's quite accretive to us. In terms of demand, I also think there's going to be, in a sense, more supply than demand across the country, crudely. Um, but, um, I think if you've got, you know, and always, I think has been true, good locations, mass transit, you know, amenities, um, you know, changing demographics for whatever that may mean. People just moving around here in prosperous parts of, you know, the country. Um, I think there'll be demand enough demand, um, to absorb, um, you know, whatever percentage of our density. If you've got 50 million feet and we built, you know, easy math, if we built on average a million square feet a year, that's 50 years. I mean, it's a concept like, you know, we can't think in terms of 50 years from now. But it would move the needle. I think at Transit City, we built our share, a million and a half square feet, and you saw what it did. And I think we will build on average more than a million square feet a year of residential on average when it kicks in, just because our locations are good. We're on mass transit. We're in evolving areas, prosperous areas. We've got amenities. So If we build, on average, over the next 20 years, a million to two million square feet a year of residential, and there might be some maybe mixing in there, some selling of that density, I think that wouldn't be a bad thing, just in terms of growth and earnings and whatnot for the company. Say nothing of evolving our shopping centers.

Got it. And just maybe on the retail side, retail GLA per capita has been coming down quite a bit because of the population growth and virtually no new supply. Do you see, again, if the population growth is dull, do you see any impact to your retail occupancy, or is it simply that because there's no new supply coming in, you expect your retail occupancy to be stable despite a slower population growth?

Okay. We were... You know, we were... high occupancy. We were probably 99% occupancy for 10 years going back 10 years ago, long before we opened, you know, long before immigration policies changed, you know, to increase population size. And, you know, obviously because people don't shop, you know, they shop where they shop for all kinds of reasons. And when you're strategically located, you've got certain tenants that, you know, um, our destinations, you know, uh, that is a huge part of when you're, you know, your occupancy levels. But, um, I see notwithstanding the growth in retail right now, I think retail square footage per capita will actually, I mean, uh, I think it could go down even further. It may go down even further. Um, it's going to be interesting to see. I, I don't think it's really going to go up and, um, and it's way down retail per capita from where it was 10, 15 years ago. Nobody built retail in the last 10, 15 years for all intents and purposes. And anyone who owned any decently located land that could potentially be retail built residential. And, um, And a lot of it, well, some of it was built on retail lands. And, of course, the retailers weren't growing. They were worried about e-commerce and then the pandemic, and the countries kept growing. We are way down in terms of retail per square foot. Now, my big asterisk is how much retail gets built on the ground floor of high-rise, which I don't know how much of that we can count. But even if you count that, I don't know. I think retail per capita is going to stay the same or go down, and it's way down, which is good. And I think that who controls how much of that are very sound retailers because we're driven by, you know, retail demand. And so I think the Walmarts and the Loblaws and the Costco's of the world are very sober about, you know, how much square footage they want. And of course their data is, you know, daily and, you know, they're watching population growth and whatnot. So I think we're in pretty good shape. I don't want to be, uh, naive or too optimistic, but I think from a retail landlord perspective, I think we're in good shape, all of us, and I think we're particularly, because I think we're very well positioned for the economic reality of Canadians. So I don't want to be too optimistic, but I'm kind of cautiously optimistic.

It's a good point on the high occupancy pre the recent population surge. So thank you for that.

All right. Thank you. The next question is from Matt Kornack from National Bank Financial. Please go ahead, Matt.

Good afternoon, guys. Just quickly on the blended leasing spreads and spreads X anchor. You tend to report the bulk of it in Q1, and I guess we've kind of seen it hang in that 6% and 8% respectively range for this year. Can you give us a sense as to what 2025 looks like? Are you expecting to see an acceleration kind of on both of those metrics and on the blend generally?

Rudy?

Yeah, Matt. I do think that this momentum that has started in the demand we're seeing for not only filling space and you'll see our occupancy, I think, continuing to grow. As Mitch mentioned, we were at 99% for over a decade plus. I think you'll see that. Those are driving rates up. I think that is impacting certainly the lease extensions with tenants increasing. realizing what's happening in the market. And, you know, a full center continues to want to be full with tenants standing in line waiting to come in when there's space to come in or upgrading the quality of that income in our case where we can because there may be tenants who, you know, aren't doing as well. So, yeah, I see 2025 as building on what we're looking at now in Q3 and Q4, certainly.

I appreciate that. And then maybe quickly, Mitch, we're coming off a pretty historic condo development boom and a lot of that capital, notwithstanding, obviously, your comment on whether all of it closes, but presumably most of it will close. A lot of that capital is coming back to developers. When you discuss with kind of your peers on the development front, have they given you a sense as to what they're going to do with all of that capital when it comes back to them? And is there a position to kind of rebuild land banks and, and expand?

Um, I would say, you know, you, you know, private developers, I used to be one, I mean, uh, um, and, and early in my career, uh, I, I did get, um, you know, uh, I did, you know, uh, go through some, some difficult years, uh, because, you know, inevitably sort of almost have to, by definition, extend yourself. Um, so I, I have a feeling a lot of the capital that's still coming to developers is, is going to go towards, you know, commitments they've already made, uh, elsewhere, other debt, um, which is, which is fine. Um, and then of course, at some point they'll start buying again, um, I don't think there's too many private developers sitting there with no properties that they bought at the peak or near the peak and just waiting for it all to roll in. Generally speaking, the successful developers go on and buy another and buy another. I guess they're going to have some cash at the end of the day and then of course they'll start to buy again. and buy it, you know, maybe a little bit more cautiously. My feeling is they're just not, from people that I know, they're just not quite in the mood. To sell to them right now, you'd have to sell it at a very low price and probably give them terms. But it might not be long before, you know, any six months, you know, they'll be back to buying it at something more reasonable. But they'll be back, you know.

No, that's fair. Appreciate the context.

All right. Thank you. The next question is from Pammy Burr from RBC Capital Markets. Please go ahead.

Thanks. Just hopefully a couple of quick ones for me. Just on the, you know, maybe building on the question around for 2025, look, I mean, you're obviously very well occupied. The renewal spreads have been moving in the right direction. You know, is it reasonable to perhaps think that, you know, for next year, the organic growth trajectory could be in that 3% range? Or is that maybe a bit optimistic, just given where occupancy already is?

I don't know, Peter, do you want to take a shot at that?

Yeah, Pammy, you're asking about same property, right? Correct, yeah. Yeah, I mean, I think the run rate is looking, like we're looking at a run rate that should be in the 3% to 5% range. Obviously, the NOI has a lot of stuff built into it, including, you know, recoveries, step-ups that Mitch mentioned earlier, where there's natural steps in the leasing, this tenant demand, you know, percentage rent, all kinds of things. Recoveries are built into the NOI. So I think the 3% to 5% range is probably a good run rate for us.

Okay. Well, certainly higher than what the company's put up over the long term, so that's encouraging. In terms of just coming back to Q3, if I think back to last quarter, I think there was maybe a bit of a drag from the timing of retirees. Was Q3 at all, I guess, close to 5% that you put up on same property NOI this quarter? Was there any sort of catch-up in recoveries? Maybe it just came through in Q3, and then maybe that drops off, or you don't see that catch-up, or maybe it drops off a little bit in Q4, or was Q3 a pretty clean quarter?

I'd say yes, yes, and yes to everything you just said. We are running everything with recoveries based on actuals, and so you might see a tiny bit of variability, but the run rate really looks good in terms of what you should be using. So if you're using that run rate, I think you're fine. But, yeah, there's going to be a little bit of seasonality to it because we are using actual costs to do our recoveries. So the tiny bit of seasonality is there, but for the year, I think you're fine with our run rate.

Okay. Last one. I promise. Um, just coming back to the comments around, um, you know, how you structure leases with, um, uh, from a renewal standpoint, uh, aside from Walmart, which, which is flat, uh, are you doing any deals where the renewal where the tenant has a renewal option at a fixed rate or a flat rate?

Yes. Yes, absolutely. Yeah. We have lots of them, but they're bumps. Um, mean it's normal. But we have lots that don't. We deal with these. We're focused on certain type of tenants.

We give them fixed renewal. We give them extensions at fixed rates, which are bumps. But at some point, we can't get comfortable after a certain number of extensions. So we go to market. We say fair market value. We have a lot of those coming up. But we have a lot of ones that are at fixed rates. And we have some where the lease is actually up. It's over. They have no extension. So obviously it goes to market. So we've got more and more of those because of just the way it is. Like our bread and butter non-anchor tenant deal is probably 10 years with, you know, one or two five-year options. So if you think about it, any deal we did like 20 years ago or something, you know, is like out of terms. And then we have some larger anchors that were maybe, you know, they were 10 or 15 years with two or three five-year options. So some of those are 30 years or even 35 years are coming up. And so that's, and the locations have changed exponentially. It's not just normal bumps. So we've got a long run of that going, I think, for the foreseeable future together with a lot of our locations are are being, are getting better, not just because, you know, of us and what we're doing, but because of what everybody's doing around us. So I think we're going to see some of that. And that's when real estate really starts to work, you know, kind of for you, um, instead of, you know, you working for it. And, um, we've got more and more of that coming up, uh, up the road, but they're all over the map. Sorry. Just giving you a little bit more color.

Nope. That's, um, that's very helpful. Thanks very much. I'll turn it back.

All right, thank you. The final question is from Sam Damiani from TD Securities. Please go ahead, Sam.

Thank you, and good afternoon, everyone. I'll try and make this quick, given that we're past the hour mark. I just want to drill in a little bit deeper on the property NOI growth coming in at 5% this quarter, which I think, as someone else noted, was kind of a high watermark outside the pandemic for smart centers. Does that stat for the REIT include expansions or intensifications, or is that the same same store, same space metric.

Yeah, the latter, Sam. No intensification, nothing in there other than same property, same store. So right out of there, I think as you've seen the momentum that was building and it hit mostly in the quarter, obviously, and it may hit again next quarter is that the strong, strong demand coming from food and coming from new bills, you know, asking us to build more into the site. The rents that that's driving is driving the rents on the market for the NOI. So it's not construction that's driving it, but the higher demand is driving higher rents on our negotiation. And you've seen with the extensions, you know, it's near double digit without anchors. So that's coming out in what we're seeing. And of course, it also, we are in the third quarter, it'll pick up things that are all the other parts, which is, you know, better recoveries, you know, step-ups like Mitch talked about earlier and so on. So percentage rent and all of that factoring into the same property.

That's helpful. Thank you. And Rudy, your comments earlier were also helpful. And I think one of the sort of factors you mentioned was recoveries, which for this quarter were a little bit higher than I think last quarter on a ratio basis. Yeah. So again, just trying to, I guess, reconcile the sort of mid to upper single digit leasing spreads, the amount of space that you roll every year, occupancies basically peaking and You'll have easier comps, I guess, early next year. But it's just hard to mathematically back into a 5% or a 3% to 5% just given the operating metrics that we see. So the question is, what else is at play? You mentioned recoveries. Is it new leasing? I don't think that's a metric that you guys disclose. Like if a space... went vacant that was getting $12 maybe a year ago and you re-let it for $18? Does that get into your operating metrics? I don't think it does. Or was there COVID relief that's now coming off for the first time and that's a big tailwind for a couple of years kind of thing? What other factors might be at play?

Yeah, it's certainly not new construction, but a little bit of the latter part of the COVID release may be coming in. But what's happened is, as you know, when we're intensifying our sites, like we've leased near 300,000 square feet of space that's going to add to the base of our portfolio. And again, that's driving other tenants to see what the rents are coming in for new build construction, which is very good market rents. And like Mitch mentioned also earlier, We aren't a hard-driving, trying to get the maximum rent out of tenants. We're a value-oriented space, and we want value in our rents too. But when tenants are driving demand and competition for the same space, when there is no vacancy or a very limited vacancy and they want to be in certain spaces, what it forces us to do is look at how we can improve the quality of that income where we can move some things around. So there may be a little bit of shuffling around the decks in the portfolio. So I think you will see a little bit of that same property NOI growth continuing for a bit, um, as this, as this momentum keeps building. So I don't think it'll be unusual at all to see us in that range.

I guess just to, just to, I guess, wrap it up and you, you sort of said three to 5% is, is, uh, possible or sustainable through 2025. Like what would, what would change that, um, and beyond 2025? Is there some kind of one-time or temporary tailwind that's helping 2025 that might not repeat itself in future years, or is a 3% to 5% a long-term sustainable pace, assuming a steady-state situation?

I want to make sure I have the same answer as Mitch on that one, but my answer to that would be, and Mitch may want to chime in as well on this one, You know, we have a lot of land still remaining in our existing shopping centers and land that we can still build retail on, land we can build with intensification. So I think as we're not out buying new shopping centers, and the market generally isn't doing that, so you can see that the rise in the quality of our income is really driving a lot of that. And I think that is only going to beget more of the same as they push to higher quality tenants in terms of near 90% of our tenants are national or regional already. So we're trying to push that up and keep the tenant covenant quality as high as possible. That will continue. I mean, nothing will continue forever, but I think that will continue for a bit. So, you know, as far as we can see, based on the current demand we're seeing and the demand for new space, meaning new bill space within a shopping center, continuing and improving the mix, all of that, when you add it together, still looks very positive. Yeah. Thank you very much. That's helpful. No problem, Zain.

All right. Thank you. There are no further questions in the queue.

Okay. Well, thank you for participating in our Q3 analyst call. Please feel free, of course, to reach out to any of us if you have any further questions. And have a great rest of your day. Thank you.

Thank you. Ladies and gentlemen, this concludes the Smart Centre's RE8 REIT Q3 2024 conference call. Thank you for your participation and have a nice day. Thank you.