Choice Properties Real Estate Investment Trust

TSX:CHP.UN

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Choice Properties Real Estate Investment Trust First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Thank you. And I would now like to turn the conference over to Erin Johnston, Senior Vice President of Finance. You may begin.

[Erin Johnston, executive]

Thank you. Good morning, and welcome to the Choice Properties Q1 2024 Conference Call. I'm joined here this morning by Rael Diamond, President and Chief Executive Officer; Mario Barrafato, Chief Financial Officer; and Niall Collins, Chief Operating Officer. Rael will start the call today by providing a brief recap of our first quarter performance and provide an update on our transaction and development activity in the quarter. Now we'll discuss our operational results, followed by Mario, who will conclude the call with a review of our financial results before we open the lines for Q&A. Before we begin today's call, I would like to remind you that by discussing our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements regarding Choice Properties' objectives, shattered strategy to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates, intentions, outlook and similar statements concerning anticipated future events, results, circumstances, performance or exceptions that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions in these forward-looking statements. Additional information on the material risks that can impact our financial results and estimates and the assumptions that were made in applying in making these statements can be found in the recently filed Q1 2024 financial statements and management discussion and analysis, which are available on our website and on SEDAR. And with that, I will turn the call over to Rael.

[Rael Diamond, executive]

Thank you, Erin, and good morning, everyone, and thank you for joining us today. Overall, we had a very positive start to the year. Our portfolio maintained near full occupancy at 97.9%. We achieved solid same-asset cash NOI growth of 2.4%, impressive renewal spreads of 22.9% and strong FFO growth of 6.1%. Last quarter, we discussed the need for a strong balance sheet as we continue to face significantly high borrowing costs and overall uncertainty due to market volatility and recession appears -- while there are a lot of market participants that are hoping that interest rates will abate, this has not come to fruition. The 10-year bond is 18 basis points higher than it was when we released results in February and 65 basis points higher than the start of 2024. We remain committed to our prudent approach to financial management and believe that our industry-leading balance sheet, combined with the strong underlying fundamentals in each of our asset classes will continue to be a real differentiator in this environment. We will weather this volatility better than most. This past quarter, our business once again demonstrated resilience, and our team remained focused on executing our strategic framework. Despite continued interest rate pressures, the investment market is still active on a local level for quality assets with strong fundamentals. During the first quarter, we completed approximately $61 million in total real estate transactions, including approximately $38 million of acquisitions and $23 million of dispositions. We continued to buy high-quality assets from Loblaw. And during the quarter, we acquired a retail property located at Bates in Sinclair Toronto for a purchase price of approximately $38 million with a lease term of 15 years and annual rent increases of 2.25%. This property is a high-performing Loblaw store totaling approximately 75,000 feet and is a great addition to our portfolio. The asset is exceptionally well located in the heart of Midtown Toronto and benefits from current and future densification in the surrounding node as well as direct access to public transit. This transaction is another example of the benefit of our relationship with Loblaw as retail assets of this quality really come to market. In terms of dispositions, we sold an industrial property located at 379 a render road in Branson for approximately $16 million and a retail property located in Edmonton for approximately $7 million. We advanced our development pipeline in Q1, completing approximately $75 million of development projects at a weighted average yield of 5.1%. In addition to a retail development in Georgetown, Ontario, which consisted of an expansion of an existing lease to a national retailer with a cost of 8% and a yield of 8%, we also transferred a residential development in [indiscernible] Branson in Ontario in which we own a 50% interest. This development offers a unique rental community in the heart of Branson consisting of 302 residential units. The building is currently 58% leased and is expected to stabilize over the next 12 months. In addition to developing the rental building to a stabilized yield of 4.7%, we have developed 142 condominium meters, which are expected to generate $7 million at share of total condominium profits, of which $6.6 million have been recognized to date. We are only 12 units remaining, which are expected to close in the second quarter. As we look at our development activity for the remainder of 2024, our teams are on track to complete the first phase of our industrial development in Caledon, Ontario in addition to delivering an additional 120,000 square feet of retail space. Before I hand it over to Niall, I want to take a minute to acknowledge the release of our 2023 environmental, social and governance report. This year's report summarizes many of Choice's successes over the last year and truly showcases our commitment to ESG and the great work being done by our teams across the business. The report can be found in the Sustainability section of our website, and I encourage you to take a read. With that, I'll pass it over to Niall to provide more color on our operational results. As you all hear, our operating performance was strong. And across our portfolio, we observed strong tenant demand from a necessity-based properties. Additionally, our industrial portfolio experienced significant rental-rate increases on lease renewals. Niall?

[Niall Collins, executive]

Thank you, Rael, and good morning, everyone. As Roel mentioned, we delivered strong operational results for the quarter. We continue to see strong demand across our 3 asset classes and remain at near full occupancy, ending the quarter at 97.9%, a slight decrease of 10 basis points compared to the last quarter. Overall, during the quarter, we had approximately 700,000 square feet of lease expiries with 71% retention and renewals of 0.5 million square feet at average rent spreads of 22.9% and 130,000 square feet of new leasing that commenced in the quarter. This activity resulted in negative absorption of 71,000 square feet, which was mainly driven by 2 industrial property vacancies in part material. Occupancy in our necessity-based retail portfolio remained stable at 97.7%, with retention of 84%. During the quarter, we had 399,000 square feet of expiries and completed 335,000 square feet of lease renewals with rent spreads of 10.1% above expiring. Our Q1 renewals concluded strong rental growth in certain categories such as fashion, large pharma fitness, value retailers in certain liver locations. In the quarter, we also completed 31,000 square feet of new retail easing. Vacancies in the quarter from underperforming tenants have been replaced with stronger carbonate tenants focusing on grocery, pharmacy, banks and stronger restaurant brands. Retail demand for our space continues to be strong. For example, tenants are seeking of forward-looking deals to get ahead of the market are quickly taking space from break having tenants. With this context, available retail space is becoming increasingly hard to find and reinforces our competitive advantage. That choices retail is very well located, while anchored has desirable co-tenancies and is of superior quality. While demand is strong, the current economic environment is putting pressure on certain tenant categories, these at-risk tenants represent a very small part of our portfolio, and we do not anticipate a significant impact on our '24 performance. For the remainder of 2024, we are confident in our lease renewal pipeline and expect to see the rent renewals out in line with our Q1 results. In addition to our leasing activity in Q1, we generated $2.5 million in lease surrender revenue related to a partial surrender of the Loral grocery store and market material. The grocery store underwent the size optimization and surrendered space was backfilled by a new tenant at higher rental rates. This is our second store optimization with Lobos and another example of how our team continues to optimize the portfolio of abort Loblaw.Industrial portfolio occupancy decreased slightly by 20 bps to 98.8%. We had 295,000 square feet of lease expires in the quarter and renewed 158,000 square feet with strong rent renewal spreads averaging 67% above expiry and tenant retention of 53.6%. The lower tenant retention was primarily driven by known vacancies, including an industrial warehouse property in Ontario and distribution properties in Alberta. We also completed 89,000 square sheets of new leasing with 41,000 square feet in Ontario and 48,000 square feet in the Western portfolio. Looking at the industrial asset class, our teams are seeing an overall leveling off in the market with different impacts across regions and ace types, mainly in large assets. Rents continue to trend upwards on small and medium base sizes. In terms of our portfolio, we still have a significant embedded rental growth with an average in-place rental rate of $9.16. We expect industrial occupancy to remain stable for the remainder of 2024, need to achieve strong rental rate growth on our renewals, particularly in Ontario and the Atlantic regions. I'll now pass it over to Mario to discuss our financial performance.

[Mario Barrafato, executive]

Thank you, Niall, and good morning, everyone. We're pleased with our financial performance in the first quarter of 2024. Our business remains strong operationally, and we continue to deliver high occupancy and strong same-asset NOI and FFO growth. Our reported funds from operations for the first quarter was $187.2 million or $0.59 per unit. In the quarter, we had net onetime items of $4.5 million, including $2.5 million of lease termination income related to the rightsizing of the Loblaw store in Marcum that Niall mentioned, an income of $2 million related to our [indiscernible] development, where we sold our ownership interest in 36 condominium units. On a per unit diluted basis, our FFO for the first quarter was $0.259, an increase of approximately 6.1% from the first quarter of 2023. This was driven by strong same-asset NOI growth, high lease surrender revenue, condo gains and higher interest income, partially offset by higher interest expense. Leasing activity contributed to overall same-asset cash NOI growth of $5.6 million or 2.4% compared to the first quarter of 2023. The Retail same asset cash NOI increased by $4.6 million or 2.5%. The increase was primarily driven by higher base rent on renewals, new leasing and contractual rent steps and higher capital and operating recoveries. Industrial same asset cash NOI increased by approximately $1.1 million or 2.8%. This increase was primarily due to higher rental rates and higher capital recoveries. The year-over-year growth was muted this quarter due to lower volume and rent-free fixed ring period. For the remainder of the year, we should see industrial same asset cash NOI revert back to the high single-digit growth it experienced last year. Now turning to our balance sheet. Our IFRS NAV for the quarter was $13.69 per unit, an increase of $14.4 million over the last quarter.Our NAS growth was driven by a contribution of $45.7 million from operations, which was partially offset by fair value losses of $3.6 million on our investment properties and $29.6 million in our investment in Allied Properties where we acquired under IFRS to mark-to-market this investment to its trading price at each period end. Our fair value loss on investment properties in the quarter is largely driven by a 20 basis point cap rate expansion within our industrial portfolio, resulting in overall portfolio cap rate expansion of 4 basis points. In our retail portfolio, we reported a fair value gain related to cash flow growth and cap rate adjustments. In our industrial portfolio, we recorded a fair value loss primarily due to cap rate expansion on certain properties with longer-term leases. This was partially offset by gains from cash flow growth as leases roll over to market levels. In our mixed-use and residential portfolio, we recorded a gain in the quarter, driven by cash flow growth on our recently completed Element residential property that continues to lease up as well as rental rate growth within the remainder of our residential portfolio. Now turning to our financing activities. Once again, we ended the quarter in solid financial position with strong debt metrics and ample liquidity. We repaid our $200 million Series debenture at 4.23% upon maturity with funds from the repayment of the [indiscernible] promissory note during the fourth quarter of 2023. We further lowered our long-term debt balance by repaying $50 million of mortgages upon maturity in the first quarter. Our debt-to-EBITDA ratio net of cash was 6.9x, and we have $1.5 billion available on our facility. This is further supported by approximately $12.9 billion of unencumbered properties. So overall, our business is strong. With the strength of our balance sheet and the stability of our portfolio, we are well positioned to deliver on our 2024 outlook. And with that, Rael, Erin and I will be glad to answer your questions.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions]. And we will take our first question from Mark Rothchild with Canaccord.

[Mark Rothschild, analyst]

Rael, you started off talking about how rates don't appear to come down or haven't come down like some expected. Are you seeing this impact at all properties being offered for sale in the market transactions and maybe the values as well. How does this lead to the way people were looking at cap rates or yields on properties?

[Rael Diamond, executive]

Look, I think Matt [indiscernible], I think what we've been seeing over the last, call it, 18 months is more and more groups are -- if we go back 18 months ago, groups are saying, well, I'm quite comfortable with negative leverage because this is all going to reverse itself. Today, people need to see either positive leverage or the ability to see positive leverage in a very, very short period of time. So, they're not going to wait, call it, 3 to 5 years with a negative carry. And the asset classes that are getting impacted would be, call it, the lower cap rate assets, obviously, first. And then the second thing is financing availability. So, groups are definitely more cautious as they are looking at investments to make sure that they have the capital available and can get down financing. So, you've seen it clearly a slowdown in the volume of transactions -- so we think it has impacted, and we've adjusted our cap rate quarter over the last 18 months accordingly as we've seen market transactions.

[Mark Rothschild, analyst]

Okay. Great. Maybe just connected on that point, you have a large bank of development projects, some that are longer term, very large projects. Does this maybe push some of them out even further or just take more off the table for what you would start in the near term?

[Rael Diamond, executive]

Yes. Look, so right now, we focus very much so on commercial, and we're trying to hopefully get residential commenced. Our real focus at the moment on development is more on the industrial side. So, for us, we don't believe there is a change. But look, we're going to have to monitor where the markets are before we commence any new construction.

[Mark Rothschild, analyst]

Okay. Great. Maybe just one last question. Regarding guidance, is there any expectation for the industrial space that was vacant to be leased during the year in getting to your guidance? Or is it more just based on rent growth that you expect to see?

[Rael Diamond, executive]

It's a combination of both, Mark. Yes, we do expect there to be strong rental rate growth, and we do expect the vacancy in Q1 to be leased up later in the year.

[Niall Collins, executive]

That's correct.

[Operator]

And we will take our next question from Mike Markidis with BMO Capital Markets.

[Michael Markidis, analyst]

Rael, you talked about just the dynamics you're seeing in the market on the back of Mark Rothschild's question. I think last quarter, you had talked about maybe being optimistic. I don't know if you had actually seen evidence of this, but optimistic that perhaps industrial land that was transacted at a peak pricing back in '21 or maybe early 2022, that maybe just given the slowdown in the market, particularly on the big box side, that there might be some opportunities to shake something loose there. Is that still the case? Or have you -- would that be a sufficient comment in terms of reasons for optimism on that side for your industrial portfolio?

[Rael Diamond, executive]

Yes. Look, I think we're optimistic on two fronts. So firstly, groups that are well capitalized should be able to hopefully pick up great quality assets that otherwise may not trade if groups with weaker balance sheets can't hold on to those assets. And you clearly are seeing, -- I don't call it distressed, we clearly are seeing cracks on residential land and definitely on the industrial land. The second reason we are optimistic is because we have a very low land cost -- and we never underwrote with significant rental rate increases continuing. So, we -- so for us, as you could say in the last quarter, I think we announced 2 quarters ago, we announced another building on our Calton project. And if rents are at that level, even slightly below that level, we can continue to go, whereas those groups who bought land at $3 million an acre that was unserviced -- they need low $20 rents to make the economics pencil out. So, I think from our point of view, we just think we're well positioned, a, we can be opportunistic if the great product to buy; and b, we can continue to build out our development pipeline just given our land cost base.And we think other groups are going to be stuck. So, there's lots of -- and now maybe no can comment. There's lots of pending supply coming on the industrial side. We just don't think all of it is going to come to fruition just given some of the group's land cost.

[Mario Barrafato, executive]

So, we're seeing a lot of asking rents they're north of 20, as he mentioned, and construction costs haven't come down quick enough, so their pro formas are lining up. So, we're in a very good position.

[Michael Markidis, analyst]

Got it. Thanks for the color. Small and you're a little granular, but I did catch my eye just on the sale of the property, the industrial property on Orlanda, -- it looks like the basis is pretty low relative to what we've seen on different comps. So, was there anything specific to that asset that would -- that we deal the -- I think it was $1.46 per square foot on the sale price?

[Rael Diamond, executive]

Yes. Look, it's a low price per port. But what -- the color is that essentially the existing tenant has very low rents for another 20 years. So, you couldn't really capture that at market rent growth. And then also the building configuration is not -- it used to be an old Western Foods bakery. So, it's not a typical industrial building. So, from our point of view, very low growth, very tight cap rate and we can redeploy that capital elsewhere.

[Michael Markidis, analyst]

Got it. Okay. And this is a bit of a hail Mary from my side, but I'll give it a shot anyway. I guess, recently, there's been a little bit of excitement about the potential or at least the government's desire to get a new international grocery into the pool here in Canada. Just curious on your thoughts on that, a, given the retail real estate situation in Canada, that's even possible? And if it was, would that be a good or bad thing for [indiscernible].

[Rael Diamond, executive]

Look, I think we can't comment on other grocers coming to the country, obviously. But we are open to lease space to groups that are willing to lease space from us.

[Operator]

And we will take our next question from Lorne Kalmar with Desjardin.

[Lorne Kalmar, analyst]

Just on the Loblaw side, with the recent announcements to the immigration policy, based on your communication with them, has that impacted their expansion plans? Or were they never kind of assuming a 3% population growth in perpetuity?

[Rael Diamond, executive]

Look, we recently announced a desire to keep expanding their footprint. And based on conversations with them, we continue to see them needing more space and intel space.

[Lorne Kalmar, analyst]

Okay. And then on the acquisition you guys did at Bateson, St. Clair. I was just wondering if you could at least give us maybe an idea of the cap rate just to get sort of a range on where these types of assets are trading in this current market?

[Rael Diamond, executive]

Look, it's a unique transaction given obviously, it's a unique transaction given the asset both has income-producing component and then long-term development potential, particularly where the Joe Fresh is. It's approximately a 6 cap, but we do share in the development upside with Loblaw when and if it's intensified. So, it's a slightly unique transaction from that point of view.

[Lorne Kalmar, analyst]

Okay. And then just kind of a Ticky-Tacky one. I think it was on building a [indiscernible], I think the leased area came down a little bit. It was 100% last quarter and now down to about 64%, 65%. Can you give me any color on what happened there?

[Rael Diamond, executive]

Yes. It's essentially -- I'm going to may get the numbers slightly wrong, but all of the buildings 900,000 feet in total, the tenant initially taking 600,000 feet with an option to expand to the 900,000 feet. We're only building the 600,000 feet initially. So the path that we're building is 100% leased. But if you look at the entire footprint of the building, that's that lease percentage. When they exercise the expansion right would build the remaining footage.

[Lorne Kalmar, analyst]

Okay, I got it. So, you're still affect

[Rael Diamond, executive]

I think last quarter, they included the auction and this quarter, we excluded the option.

[Lorne Kalmar, analyst]

Okay. Got it. And then just last one for me. Just wondering if you guys have any updated thoughts on what you're going to do with the Allied Properties units.

[Rael Diamond, executive]

Look, our view hasn't changed. We'll continue to be patient and monitor the investments and then monetize it when we need the capital.

[Operator]

And we will take our next question from Himanshu Gupta with Scotiabank.

[Himanshu Gupta, analyst]

So just on the same-store NOI Industrial, a bit light in Q1, but you expect to get back to high single digit for the rest of the year. Are you assuming any further occupancy slippage for the rest of the year? And maybe can you elaborate on the industrial leasing environment in Germany?

[Mario Barrafato, executive]

So, Himanshu, yes, so I mean, Q1 clearly was just based on low volumes and some big stream periods. So yes, right now, we aren't expecting any slippage. We have some leases that are coming due later in the year. So, you will see it get back to a normal run rate and has now said the spreads are still strong and activity is still strong.

[Niall Collins, executive]

And just on the pipeline, we have about 0.5 million square feet to do for the balance of the year and 2 transactions represent about 50% of that, but are well underway and under negotiation, and we feel good about them.

[Himanshu Gupta, analyst]

Got it. And maybe like if I look at the broker reports, absorption was a lot weaker in Q1, I mean, across Canada. Are you also seeing that when you speak to the tenants? And are you seeing any subleasing activity as well in the industrial land now?

[Rael Diamond, executive]

Look, vacancies are still over a 10-year time line, still very low and there's still a lot of demand driving like for good assets in good locations. So, we're not seeing any fall off. Our rent spreads are actually -- we're hoping to do even a little better than Q1. So, for our assets, we feel confident that we're going to be able to maintain those spreads and the demand for those assets is strong.

[Niall Collins, executive]

And mentioned, we don't have any significant sublease activity in our portfolio.

[Himanshu Gupta, analyst]

Okay. Okay. And maybe just on the balance sheet, Mario, I think $550 million unsecured debenture coming due in September, I think. So, any thoughts where the financing rate today? I know [indiscernible] Bonsa have been quite volatile, volatile here.

[Mario Barrafato, executive]

Yes. So yes, it comes due September. The rates have been volatile. What we've been focused on lately is just a source of the capital. And so right now, our spread or unsecured relative to others is pretty low. It's about 190 basis points. And we've been doing other financing on the mortgage side, the commercial mortgage side. We've actually been able to get financing at spreads that are either as good as yes occurred or even tighter. And so that's been our focus now finding patches of financing that are better than the current benchmark for the unsecured. As far as the $550 million goes, again, we have time and we'll go to market later in the year when the time is right. But right now, there's a bit too much volatility. So it's not our first priority.

[Himanshu Gupta, analyst]

Got it. And is the unsecured rate still tighter than the secured rate? Just clarifying that.

[Mario Barrafato, executive]

It depends. It depends. I mean the unsecured rate, again, with our credit rating, our pricing, it's pretty -- it's tighter relative to others. -- different lenders have different spreads. So. we're just finding pockets where we can take advantage of it, but it just depends on the lender.

[Himanshu Gupta, analyst]

Okay. Last question is on the retail leasing environment. I mean, last time you spoke it was very, very strong. Is it still the same or any cracks or any changes in any major categories.

[Mario Barrafato, executive]

Overall, our retail, our necessity-based retail is very strong. I think it's the discretionary goods where we're seeing weakness. But overall, our tenants are eager. We're not seeing any challenges. And we don't hear any worrisome canopy. Nothing material.

[Himanshu Gupta, analyst]

And anything on the watch list, any tenants you are watching or nothing in particular?

[Mario Barrafato, executive]

It's a very, very small proportion of our portfolio.

[Himanshu Gupta, analyst]

Okay. Fair enough.

[Operator]

We will take our next question from Pammi Bir with RBC Capital Markets.

[Pammi Bir, analyst]

Just coming back to the St. Clair retail acquisition, I think you mentioned a 2.25% rent step in that lease term. Was that unique again to that specific site? Or is this maybe something we may see more of on some of the Loblaw leases?

[Rael Diamond, executive]

Yes. Over the last year, we've generally been getting more than 1.5%. But Home, we just -- at the end we work with Loblaw to figure out what's the best starting rent, what value makes sense, what's the right growth rate. So, I would say it's a little more bespoke on each transaction. But generally, we'll be getting more than 1.5% on vended over the last, call it, 12 months or so.

[Pammi Bir, analyst]

Got it. Coming back to that Marcum store rightsizing again, can you maybe just talk about how much space was given up there and that you released? And then are -- there other parts of the portfolio that -- where we might see some more of this?

[Rael Diamond, executive]

Yes. So firstly, from a macro point of view, we've been working with Loblaw, where our leasing team has strong tenant demand for a site and Loblaws in the process of potentially investing capital to refresh their store, and it's a win-win. They can refresh the store and we can find an adjacent tenant, which is complementary to Loblaw and pays us higher rents. In the market one in particular, it was about 35,000 feet and the rents were about 7% higher than what Loblaw was paying. And it's a fitness user, good fitness use that.

[Pammi Bir, analyst]

Got it. And then -- maybe just from a -- I want to actually just come back to the industrial commentary. And maybe just thinking again about the development pipeline in Caledon East Glengarry Can you maybe just talk about the appetite for additional development there? What are you seeing any inbounds, -- any change?

[Niall Collins, executive]

We are feeling inquiries and continuing to respond to RFPs. So there is activity given the location, the size varies and their strong user group. So yes, we're getting inquiries.

[Mario Barrafato, executive]

But I think it's fair to say, Babies in Caledon, East Glengarry , we're currently using the land to complete some of the work for Loblaw. So. it's not really available yet to lease will be to start to market it shortly.

[Pammi Bir, analyst]

And then just in terms of the broader economic picture and I guess, the expectation at some point, we may see some rate cuts. Is that influencing some of the tenant decision-making any time lines in industrial in terms of leasing? Just curious if there's any changes on that side?

[Niall Collins, executive]

Look, I think deals are taking a little bit longer. People are pausing and looking at the economy overall. But at the same time, a lot of the RFPs we're seeing are consolidations from older space, looking for newer space with different efficiencies and objectives around that. So, it's taking a little longer, but the confluent goals I feel are still the same for these users.

[Pammi Bir, analyst]

Okay. Last one for me. Just from a transaction standpoint, can you maybe talk about what's in the pipeline for acquisitions at this stage? And then from a disposition standpoint as well?

[Rael Diamond, executive]

Yes. So, from an acquisition point of view, but again, going back about a year ago, Loblaw announced their plan to disclose of assets over, call it, a 3- to 5-year period. So, there are some vending assets that we continue to look at that are very high quality, a similar quality to what we just purchased this that quarter. And from a dispositions point of view, we always sell -- we've always been active on the capital recycling point of view, I think over the last 5 years or so, 6 years or so, we've done about $4.5 billion of transactions, both buying and selling. And we're just selling a few smaller assets generally, call it, more power center type assets. But we would transact in our minds at a slight premium to our book value. And they're not bad assets. They're good assets. They just have a lower growth profile than the rest of our portfolio.

[Pammi Bir, analyst]

And these are major market assets or in terms of the dispositions or kind of scattered.

[Rael Diamond, executive]

A few of the more major markets, but the rest is gathered.

[Operator]

And we will take our next question from Sam Damiani with TD Securities.

[Sam Damiani, analyst]

I think most of my questions have been answered. But just going back to the same property NOI growth on the retail portfolio, the fees did tick down a little bit in Q1. I'm just wondering if that is indicative of a trend you're expecting for the rest of 2024. And just on that point, you kept your guidance intact, but are you biased to a little bit sort of lower point within that guidance range given the Q1 print?

[Niall Collins, executive]

Yes. So, Sam, for the retail, I mean, it still performs as well. It's just coming off a high base, and that's why just percentage-wise, it's lower than we've seen in the last year, but it's still pretty strong. And remember, our target has always been 1.5% to 2% for retail. So, it is performing well. The core business right now, if you look at the results in Q1, it takes us to the lower end of our range. So, we think that's why the outlook is intact. And then as we go through the rest of the year, as we see potentially upside, we can get to the higher range. But right now, the core business is set up to hit the low range with a flood risk.

[Sam Damiani, analyst]

Okay. That's helpful. And then just on the industrial, been talked about a bit, but like is choice more hesitant to start the next project on spec maybe a little bit more interested in waiting for pre-leasing before starting construction. How are you thinking about that? And is there a view to expanding the industrial development strategy into other markets across Canada?

[Rael Diamond, executive]

Yes. Look, firstly, from a market point of view, we've actually been building in Alberta. We bought in Vancouver last year and in the GTA. So, we will continue to build in each of the markets we are active in. There's actually a lot of work. The main side is [Operator Instructions] there's a lot of work going on, which is finishing the oral deliverables, building the building for that national tenant, which we spoke about earlier and then all the site work and the internal road work. So, there's a lot of work going on. The earliest we could actually start vertical construction on a spec building would be, call it, late Q1 or Q2 next year. And we'll have to assess where things stand. But right now, we -- as we spoke about earlier, we just feel we're in a very good competitive point relative to the other options in the market. And we expect to continue to build so we can attract tenants on our side.

[Sam Damiani, analyst]

Okay. That's helpful. And just back to Lauren's question about the, I guess, the [indiscernible] with that has an option for an extra 300,000 square feet. Was the change in disclosure in any way linked to, I guess, a little less probability in your mind that the option would be exercised?

[Rael Diamond, executive]

No. We do believe the offering will be exercised, but the reality is that it's not leased right now. And we just clarifying the action.

[Operator]

We will take our next question from Sumayya Syed with CIBC.

[Sumayya Hussain, analyst]

So, staying with the industrial theme, it sounds like things are going well and holding in. In the disclosures, there was a bit of commentary around turnover and some free rent. Was that specific to a lease? And has there been a change in the average free rent period associated with your industrial leasing?

[Niall Collins, executive]

I wouldn't say it's anything out of the ordinary. It's typical for the markets we are operating in, but it's more just timing.

[Sumayya Hussain, analyst]

Okay. Great. And then on the [indiscernible] Sinclair acquisition, just wondering where that falls on your development letter and if there's near-term plans for rezoning and any expectations of density at the site you would have at this point in time?

[Niall Collins, executive]

At the moment, we've no plans to push ahead with the development density. There is some activity locally, and we're going to keep an eye on it and see how the market performs. But it's not an immediate term development project.

[Sumayya Hussain, analyst]

Okay. And lastly, just a modeling question, looking at the capitalized interest came down a bit. Is it fair enough to use the Q1 number as a run rate going forward?

[Erin Johnston, executive]

Yes. You can use it Sumayya, but I would increase it a bit. I can follow up with you offline. It came down because of projects coming online late last year and in Q1. But as we continue to service Caledon, and we'll come back up a little bit.

[Operator]

As a reminder, if you would like to ask a question for Stan. And there are no further questions at this time. So, I will now turn the conference back over to Mr. Rael Diamond for closing remarks.

[Rael Diamond, executive]

Thank you, Abby, and thank you, everyone, for joining us this morning. Our Annual General Meeting will follow at 11:00 this morning, and we hope you can join us. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.