Choice Properties Real Estate Investment Trust

TSX:CHP.UN

Earnings Call Transcript 2018-Q3

[Operator]

Good morning. My name is Kelly, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Choice Properties Real Estate Investment Trust Third Quarter Results Conference Call. [Operator Instructions] Thank you. Archna Sharma, you may begin your conference.

[Archna Sharma]

Thank you, Kelly, and good morning, everyone. Welcome to the Choice Properties REIT Third Quarter 2018 Conference Call. This call is also being webcast simultaneously on our website at www.choicereit.ca. Before we begin, we would like to advise you that some of the statements made this morning may contain forward-looking information, including statements concerning Choice Properties' objectives, strategies to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates, intentions, outlooks and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ. We refer you to the cautionary statements contained in our financial records, including the MD&A for the quarter ending September 30, 2018, and other public documents for the full details. These forward-looking statements are made as of today's date, and Choice Properties REIT assumes no obligation to update or revise them to reflect new events or circumstances except as required by law. On today's call, we have our Chief Executive Officer, Stephen Johnson; our Chief Operating Officer, Rael Diamond; and our Chief Financial Officer, Mario Barrafato. I'll now turn it over to Stephen.

[Stephen E. Johnson, President, CEO & Trustee]

Thank you, Kelly, and thank you, Archna. Good morning, everyone. Thank you to all of you for taking the time to attend our Q3 conference call. So the first -- the 3-month period ending September 30 marks the first fiscal quarter for the merged entity of CREIT and Choice, and I'm very pleased to report that our financial results for the quarter matched our expectations. The combination of CREIT and Choice was a transformational transaction. The result was the creation of Canada's largest and preeminent real estate investment trust. CREIT now has an enterprise value of just under $16 billion. Our business has, for the most part, now evolved into 2 functional areas: our income-producing property portfolio or our IPP portfolio and our development business. Our IPP portfolio generates a high-quality rental revenue stream. Net operating income on an annualized basis is just over $900 million, and there are contractual rent escalations in a significant part of our IPP portfolio. We expect our IPP portfolio to provide income stability and net operating income growth over the next number of years.Our development business is divided into 5 categories, including retail intensification, redevelopment, greenfield, major mixed-use and residential projects.In our current development program, we anticipate investing approximately $1.2 billion, of which $470 million is already invested in PUD or property under development. The bulk of the balance of the $1.2 billion will be invested to complete our high-quality residential projects now at various stages of development within the Greater Toronto area.It is also significant to note that beyond the current development program of approximately $1.2 billion, we have a pipeline of additional development opportunities on sites already owned. It's too early to credibly quantify the total extent of this opportunity, but we expect it to be meaningful over the long term.Our development business is a very exciting part of our REIT. It will add high-quality assets to our portfolio, and we anticipate it'll contribute to growth in our net asset value.I would also like to mention that on November 1, Loblaw and George Weston Limited completed a reorganization, under which Loblaw spun out its 61.6% interest in Choice Properties to its majority shareholder George Weston Limited or GWL. This transaction results in our major shareholder becoming GWL with the direct ownership of 65.4% in Choice. Although no approval was required from the Choice board of trustees or the Choice unitholders for the spinout, the board and management of Choice were supportive of the transaction. This reorganization improves clarity for all Choice investors as we continue to reposition and grow our business as a major property owner and developer. To its direct ownership in Choice Properties, GWL is committed to support our growth as a long-term owner, manager and developer of a high-quality diversified real estate portfolio. This transaction will have no impact on our ongoing relationship with Loblaw. All current agreements with Loblaw including the strategic alliance agreement and leases will remain in place, and Loblaw will continue to be our largest tenant, and the Loblaw relationship will continue to create ongoing opportunities for our REIT.Since closing the CREIT, Choice transaction on May 4, our management team has spend a considerable amount of time working on the integration of the Choice and the CREIT businesses. This involves and continues to involve many important steps, each of which must be completed in the context of a long-term business model and strategy for the combined entity.In addition to combining our real estate portfolios, the merger also included the joining together of 2 of Canada's leading real estate teams. Our focus has been on aligning the organizational structure to further enhance our operating platform, and we have organized and reorganized our groups to foster collaboration and teamwork and to strive for excellence. We're pleased right now with the progress made on the integration to date.One additional point of interest is that we have initiated some capital recycling. This is an important step as we position our business for the long term, and Rael will provide some details in a few minutes. In summary, and from a very macro perspective, we're building our business for stability and growth. Our focus will be to position both our IPP portfolio and our development business to grow net operating income, to grow cash flow and to grow net asset value over a long-term horizon. Mario will now provide an overview of our financial results for Q3, and then Rael will provide an overview of some of the operational and investment highlights. Mario?

[Mario Barrafato, Chief Financial Officer]

Thank you, Stephen, and good morning, everyone. I'll begin with a brief overview of our results and then comment on our balance sheet. As Stephen mentioned, this quarter represents the first 3-month reporting period for the combined operations of Choice Properties and the former CREIT business. Overall, our third quarter results were in line with our expectations and reflect stability that is inherent in our portfolio. Our reported funds from operations for the third quarter was $169.7 million or $0.253 per unit. With the exception of $267,000 in lease termination fees during the quarter, there were no other unusual items. On a comparative basis, FFO per unit is consistent with last quarter after adjusting for an additional month of contribution from the CREIT operations and nonrecurring items we noted last quarter. On a year-over-year basis, FFO per unit declined $0.01 per unit compared with third quarter of last year, primarily due to the change in capital structure resulting from the CREIT acquisition. Looking at adjusted funds from operations for the third quarter, we reported $137.5 million or $0.205 per unit diluted. The AFFO payout ratio for the quarter was approximately 90%. This payout ratio is consistent with what would be our annual expectation. However, in this year of transition, we expect an increase amount of capital spending to be skewed to the fourth quarter, which results in a corresponding decline in AFFO when compared to the third quarter of 2018.Included in our results was a stable quarter-over-quarter growth in our same property cash NOI, with a quarter same property cash NOI, excluding development activities increased by 1.6% to $146.2 million from $144 million in the third quarter 2017. Furthermore, our overall period occupancy was 97.7%, up 10 basis points over the second quarter of 2018. This is primarily due to positive absorption in the industrial and office portfolios. At period end, retail occupancy was 98%, industrial occupancy was 97.8% and office was 92.9%. Overall very solid operating results.Now turning to our balance sheet. Our book net asset value was effectively flat quarter-over-quarter as our net earnings for the quarter were offset by cash distributions and adjustments to the fair value of our investment properties. The adjustment to our fair value properties was a loss of $38 million and was attributable to slight changes in properties, specific leasing assumptions and alignment of cap rates within the portfolio. During the quarter, we closed on the sale of a portfolio of older generation industrial properties in Halifax for $17 million. Subsequent to quarter-end, we entered into agreements to acquire 5 income-producing properties for approximately $105 million and to disclose about 50% interest in an office property for approximately $100 million. Rael will provide more color on these transactions. We continue to be active on the development front with ongoing investment through additional spending of $75 million in the quarter and the transfer of $96 million of [ dormant ] properties to income-producing status. From a financing perspective, we completed approximately $40 million in new mortgages with a weighted average interest rate of 3.8% and a term of 14 years. As well, we did $8 million in new construction loans. We also had a $125 million senior unsecured debenture mature during the quarter, which was repaid with funds drawn on our credit facility. Overall, our financial metrics remain solid. Using amounts from our proportionate balance sheet, our debt-to-gross book value is approximately 47% and normalized leverage and interest coverage ratios are 8 and 3.1x, respectively. These metrics are further backed by $1.2 billion liquidity on our credit facility and $11.8 billion pool of unencumbered assets. So once again we're very pleased with the first full quarter reporting of the combined entity. I'll now turn the call over to Rael.

[Rael Lee Diamond, Chief Operating officer]

Thank you, Mario, and good morning, everyone. As Stephen mentioned, I'll provide a brief overview of our portfolio and an update on transaction activities. Our consolidated portfolio includes 751 properties, comprising 67 million square feet of GLA. The portfolio is located across Canada with a concentration in Canada's largest markets. Our retail portfolio is primarily focused on necessity-based retail tenants. This portion of our portfolio is the foundation of our reliable cash flow. One of our key competitive advantages is our strategic relationship with Loblaw, Canada's largest retailer. This relationship provides Choice with an exceptionally strong anchor tenant at many of its retail sites with long-term leases that provide us with stable, secure and growing cash flows. We continue to add to our retail portfolio through development, including a mix of a greenfield development, redevelopment and intensifications. In Q3, we completed and transferred a total of 290,000 square feet of retail development at a total cost of $84 million. This includes 108,000 square feet of intensification projects, which are focused on adding at-grade retail density to our existing portfolio of retail assets at a cost of $31 million. In addition, it includes 82,000 square feet of redevelopment projects, which are focused on repositioning older assets in key markets at a cost of $23 million. And finally, it includes 100,000 square feet of greenfield development at a cost of $30 million, including our Overlea project, which is a recently completed standalone Costco site in Toronto on a long-term land lease.Our industrial portfolio includes 112 properties and approximately 16.3 million square feet of GLA. The portfolio includes Loblaw distribution facilities on long-term leases and high-quality distribution and warehouse facilities in key industrial markets across Canada that readily accommodates a broad range of tenants.In terms of industrial development, Choice owns 85% of a recently constructed 665,000 square-foot modern distribution facility on Peddie Road in Milton, Ontario. We finalized a long-term lease for approximately 515,000 square feet with Kimberly-Clark, a multinational consumer products company.The lease will be income-producing in January 2019 at rents that are higher than our original pro forma. We're speaking with multiple prospective tenants on the balance of the pace. This asset will be a great addition to our industrial portfolio as it is in the GTA West submarket of Milton, one of the strongest industrial markets in the country.Our residential platform inclusive will provide an opportunity to further diversify our portfolio. Choice has been working on expanding our residential platform. Currently, we have 3 residential rental assets that are income-producing, and another 7 residential rental assets that are currently in various stages of development. And we are also under contract to acquire another rental residential development site located between Grosvenor Street and Grenville Streets in Toronto. When complete, these residential projects will represent approximately 1,500 units at Choice share, including 800 units located in the GTA. We are excited about the prospect of our residential initiative.The performance of our office portfolio continues to vary in our 2 largest markets. The office leasing market in the GTA remains strong. It has currently significant tenant demand and limited availability. Our portfolio is almost fully occupied when considering all committed leasing.Conditions in the Calgary office market remain difficult. Imbalance between supply and demand persists, and the market vacancy levels remain high. With this in mind, we decided to sell our 50% interest in Sun Life Plaza in Calgary. This decision was based on several factors, including the current market conditions and the lease expiry profile of the asset. Ultimately, we believe there are better uses of our capital, including new acquisitions like the Loblaw [ vendants ] and funding our ongoing development program. Subsequent to the quarter-end, conditions were waived on the sale of our interest in the asset for proceeds of approximately $100 million. This disposition is expected to close in Q4 2018, at which time we'll have more to disclose.Keeping with the transaction activities, during the quarter, we acquired a 75% interest in a 6-acre parcel of retail development land in Sainte-Julie, a suburb of Montréal. The development plans envision a 73,000 square feet of retail GLA anchored by Loblaw grocery store, Dollarama and a liquor store. This project is currently under development and is expected to be complete by the end of 2019.Subsequent to quarter-end, we also agreed to acquire 4 grocery anchored income-producing retail properties from Loblaw for total proceeds of $85 million. These properties are located in strong retail roads of Ottawa, Calgary, Halifax and the GTA, in total approximately 335,000 square feet of GLA.Finally, we agreed to acquire 130,000 square-foot industrial building from Western Foods for approximately $20 million. The asset is located in the greater Vancouver area and is subject to a long-term lease. These transactions are expected to close in the fourth quarter of 2018, and we have more to disclose at that time. That concludes my comments. I'd now like to pass it back to the operator for questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of Mark Rothschild from Canaccord Genuity.

[Mark Rothschild, MD & Real Estate Analyst]

In regards to the asset sales, I mean, you sold some industrial properties in Atlantic, Canada. To what extent was that unique to those assets or are you going to be trimming some of these portfolios? Is that part of the strategy to reduce the leverage? Or will you be looking to actually grow the industrial portfolio?

[Stephen E. Johnson, President, CEO & Trustee]

It's Stephen. These assets basically were older generation assets that were in the CREIT portfolio for many, many years and just don't suit kind of our long-term plans for the industrial platform. We're still reviewing what we're going to do on industrial, but I think our sense is that we will try to grow that -- our industrial platform to be a meaningful part of our business over time. But at this stage, basically, we're just not committed to that. The acquisition in Vancouver a very, very high-quality industrial property, long-term lease and it just fits in with the industrial platform we have now quite nicely.

[Mark Rothschild, MD & Real Estate Analyst]

And maybe just a second part of the question was as far as reducing leverage was something you guys spoke about throughout the merger with Choice. Will asset sales be a source of lowering leverage or should we expect you to operate at this level over time and then at some point down the road do something else?

[Stephen E. Johnson, President, CEO & Trustee]

Yes. We don't have a definitive answer to that now, but we are certainly are looking at the potential for some asset sales. And the proceeds from that would be potentially used to pay down debt, potentially used to fund our development program. So we're just -- we haven't put a pin in it exactly at this stage. Again, keep in mind, it's early days. We've just finished our first 3 months of first full quarter of activities and some of these things basically, as we lead the future meetings, we'll be able to provide more color, more narrative.

[Mark Rothschild, MD & Real Estate Analyst]

Okay, great. And just one more question. Is it possible to provide a little bit more information on what you're seeing from the CREIT portfolio as far as maybe the industrial portfolio and the office portfolio as far as changes in same-store NOIs as far as what we can expect over the next year?

[Rael Lee Diamond, Chief Operating officer]

Sure, Mark, it's Rael. So the industrial portfolio it's really operating at very healthy fundamentals, particularly in Toronto, Calgary and Halifax. I don't have an exact growth percentage numbers, but it's probably around 2.5%. In Edmonton, industrial still remains challenging, but our portfolio is a very high-quality in Edmonton. And on the office side, again, you're not going to see significant growth from the portfolio given in Toronto, we are largely forward limited roll over and then any growth over there would be offset by some further declines in Calgary as we mentioned were very challenging still.

[Operator]

Your next question comes from the line of Sumayya Hussain from CIBC World Markets.

[Sumayya Hussain, Associate]

So just keeping on with the capital recycling theme when you guys are, I guess, evaluating the portfolio for potential sales. Is there any sort of preference or priority to selling the old CREIT assets versus the old Choice assets? Or do you just kind of look at the portfolio in its entirety?

[Stephen E. Johnson, President, CEO & Trustee]

We would be agnostic to where they came from. Basically, do they fit in our long-term plan, so whether it's CREIT or Choice doesn't really matter, which is the quality -- overall quality of assets is the defining -- will be the defining criteria.

[Sumayya Hussain, Associate]

Great. Okay. And then just moving on to the major mixed-use developments and knowing you're filing your disclosures this quarter and the predevelopment timeline of 2 to 5 years. So just of the 3 projects listed, can you remind us which ones are the most advanced and if you can give a status update there?

[Stephen E. Johnson, President, CEO & Trustee]

All 3 basically were moving through kind of an entitlement process. And the time line that we disclose basically is realistic, but I mean, these things can change as you get into hurdles or changes in potential design.

[Sumayya Hussain, Associate]

Kind of at the same timeline there. And then just following up on 60 sites identified previously. Just how static is this number? And are you continuing to review the portfolio? And is there a possibility that, that number could grow over time?

[Stephen E. Johnson, President, CEO & Trustee]

This is the places for future development -- the sites for future development. Yes, I mean, it could grow over time. I mean, -- basically, it's a large enough number and there are a significant number of opportunities. It could quite easily move up or down by a few, so.

[Operator]

Your next question comes from the line of Mike Markidis of Desjardins Securities.

[Michael Markidis, Real Estate Analyst]

I know the number relative to size of your portfolio is pretty small, but just touching on the 30 -- roughly $38 million fair value decline that you took on this quarter. Was that isolated, i.e. was it limited to maybe a handful of assets or was it a very small tweak that was specific to certain markets?

[Mario Barrafato, Chief Financial Officer]

Mike, there's a few parts to it. There was a handful that were property specific, just change in leasing assumptions, timing. The second part was there was a small change in cap rates for properties in Toronto and Vancouver. You've seen compression and you've seen extension in some of the tertiary markets. But I think the bigger issue to is also just an alignment where we would have a cap rate on our property that'll be in a certain range. As we put the portfolio together, we notice that other cap rates of similar properties were in different range, and so we just had to align those a bit. So really a little bit of all these pieces.

[Michael Markidis, Real Estate Analyst]

Okay, that makes sense. On the sale of Sun Life Plaza, is the $100 million, is that a gross proceeds or is that net of debt that's attached to the property?

[Stephen E. Johnson, President, CEO & Trustee]

It's gross proceeds. This existing asset -- financing on the asset, which we have moved to other assets. So it's gross proceeds.

[Michael Markidis, Real Estate Analyst]

It's gross proceeds. And you may not have this off the top of your head, Mario, but do you know what the NOI contribution for Q3 was from that asset?

[Mario Barrafato, Chief Financial Officer]

Q3 would've been -- I don't have that off hand Mike.

[Michael Markidis, Real Estate Analyst]

Okay, no problem. Last question just a higher level question now with the CREIT merger over the past several months being completed and the change now in the ownership from Loblaw to Western in terms of where the -- your majority position sits. Obviously, Loblaw is very important to the organization strategically going forward, but is there any high-level thought in terms of where the concentration of overexposure on revenue side would be going forward? Is it something that you'd expect to try and maintain here or is the goal to push it down over time?

[Stephen E. Johnson, President, CEO & Trustee]

So is your question basically would we try to push the Loblaw total percentage down over time?

[Michael Markidis, Real Estate Analyst]

Yes.

[Stephen E. Johnson, President, CEO & Trustee]

Yes. It will come down by definition given the current development program we have with the -- if you look at the concentration on rental residential, by definition, that will push that down over time and really going forward, if you look at our development program generally, it will again by definition push that concentration lower.

[Michael Markidis, Real Estate Analyst]

So is it sufficient to say, it's just a byproduct of your development efforts and not necessarily a broader strategic goal to reduce the concentration?

[Stephen E. Johnson, President, CEO & Trustee]

That's correct, I mean, basically. So whether that's good, better or indifferent, I mean, it's really -- it's going to happen as a result of our development initiative of our development business.

[Operator]

Your next question comes from the line of Pammi Bir of Scotia Capital.

[Pammi Bir, Analyst]

Just on the Sun Life Plaza sale, can you maybe just provide some color on the cap rate or even the range on that transaction? And was the buyer your partner or another party?

[Rael Lee Diamond, Chief Operating officer]

Pammi, so we've never disclosed cap rates and assets in Calgary at the moment aren't really trading on cap rate just given the flux of the market, so it's really trading on price per foot, and which you can easily calculate, it's around [ $200 ] for our fare. The purchaser we can't disclose, but it was not our partner.

[Pammi Bir, Analyst]

And then just, I guess, maybe look -- I know you made some comments on the outlook for capital recycling. But did some of the additional Calgary office assets that are left, would they be perhaps considered for sale as well?

[Stephen E. Johnson, President, CEO & Trustee]

No. At this time, we're not considering selling them.

[Pammi Bir, Analyst]

Okay. As you look at -- you sort of continue to build sort of portfolio review. How much would you estimate it's perhaps non-core? And I realize that it is early at this stage, but just trying to a gauge of what we could see down the pipe?

[Stephen E. Johnson, President, CEO & Trustee]

Pammi, it's Stephen. It's really just too early to tell. And as you can tell from our comments this morning in our financial disclosures, it's been a busy quarter. And as Rael mentioned, approximately 750 assets plus our development program is very significant. So it's just too early to tell. You've to go through it on an asset-by-asset basis and it will take us some time.

[Pammi Bir, Analyst]

Okay. Last one maybe. Just coming back to the comments around cap rates. What are you seeing at this stage from a retail perspective on stuff that comes across your desk? Are you seeing pressure in any of your particular markets more specifically than others? Or has it been fairly stable?

[Stephen E. Johnson, President, CEO & Trustee]

Pammi. Again, it starts with the quality of the assets. Grocery anchored retail continues to trade well and continues to be a bet for it given they are generally small, but what we are seeing just given some of the retail volume on the market, there appears to be some softness, particularly in secondary and territory markets, but very few data points to really point to.

[Operator]

Your next question comes from the line of Sam Damiani of TD securities.

[Sam Damiani, Analyst]

Most of my questions have been answered. But just on the major mixed-use projects, a couple of questions. When do you think that one of those might be at the stage of being kicked off in terms of serious money being spent? And also would you consider adding a fourth project to that pipeline in the near term?

[Stephen E. Johnson, President, CEO & Trustee]

So it's Stephen. We don't have a date for when we may have shovels in the ground on any of these projects at this stage. So again, we are in preliminary planning and entitlement stages and as we work our way through that basically, we'll be able to get more clarity on start dates. Would we add a fourth one to it? I mean, it depends on the quality of the opportunity and where it comes down to capital allocation decision. So it will depend on the opportunities then.

[Sam Damiani, Analyst]

Okay. So sorry...

[Stephen E. Johnson, President, CEO & Trustee]

You have one for us?

[Sam Damiani, Analyst]

Hopefully, I'll take a look at it. Maybe just over to capital recycling. Your comments, Stephen, were basically, messaging that specific sort of plans in that regard haven't been completely finalized. I guess, some sort of strategy is being formulated on that front. And I'm just wondering, when do you think you could be in a position to message out that strategy?

[Stephen E. Johnson, President, CEO & Trustee]

Yes, again, in terms of the comments I made earlier in answer your question, it's early days in terms of the merged entity. And so we're between the integration of the 2 businesses and our development program, and some of the things we're doing on the IPP portfolio, it will just take a time. So we'll update you from quarter-to-quarter as we progress. But I really don't have a date at this stage where I can say something definitive in terms of what our specific plan will be in terms of recycling.

[Sam Damiani, Analyst]

Okay. And just lastly, on the rental residential pipeline. Do you have appetite today to add more projects as well there?

[Stephen E. Johnson, President, CEO & Trustee]

The short answer is, yes, in terms of again depending upon the opportunity. I mean, we've been very fortunate when we were into the Toronto, our GTA rental residential market a number of years ago. And we have -- based on -- you can see from our disclosure, we have a handful of very high-quality rental residential assets that are in various stages of development. And so we came in at a good time. Our the -- we are going to add some very high-quality assets in that category over the next few years, but if something else comes along, we would certainly take a look at it.

[Operator]

[Operator Instructions] Your next question comes from the line of Tal Woolley from National Bank Financial.

[Tal Woolley, Research Analyst]

I just wanted to ask a couple of questions about the office leasing. You had occupancy pickup a couple of 100 basis points this quarter. Can you give any color on where that leasing was signed?

[Rael Lee Diamond, Chief Operating officer]

The leasing was across the board, and it was -- in Toronto, we are almost full, and then in Calgary, we have continued to chip away some of the vacancy, particularly on smaller spaces, particularly in [ Altius ] in Calgary.

[Tal Woolley, Research Analyst]

Okay. And I apologize if I'm not fully up to speed on some of the buildings in the CREIT portfolio. But I know -- I was aware that I think you had a lease with Suncor that was coming up that you would have to replace this year or upcoming in 2019. Does the sale of Sun Life place take care of that problem for you?

[Rael Lee Diamond, Chief Operating officer]

Yes. That's one of the main reasons we decided to dispose the Sun Life Plaza.

[Tal Woolley, Research Analyst]

Got it. And then, just lastly, again you had a lot going on in the first couple of quarters going particularly with the corporate rework to as well. I was just wondering in your conversations with Loblaw and Weston, was there any discussion about how perhaps being outside of the Loblaw family within Weston, like it could -- they will benefit potentially in terms of accelerating the pipeline or diversification like -- can you give any insight into what the conversations were with the key stakeholders there?

[Stephen E. Johnson, President, CEO & Trustee]

It's Stephen. Certainly, the industrial asset that we announced this morning, announced that Rael spoke about fell out of a discussion with the Weston organization. So that's an area of opportunity for us going forward in terms of possibly growing our industrial portfolio with from the Weston bakery side of the business. And of course, we've talked about what other opportunities there might be not only from an acquisition perspective but also from a leasing perspective and so on. So, I mean, they're committed to the support the success of our business and the long-term growth of our business. So all of those opportunities are now open for discussion, and we'll see as next few years unfold basically, how many of those can be pursued for the benefit of both or all 3 parties.

[Operator]

Your next question comes from the line of Michael Smith from RBC Capital Markets.

[Michael Smith, Analyst]

Stephen, I know it's early days, but as you said, in your prepared remarks, you're working very hard on the integration of the 2 businesses trying to align the organization. Just trying to get a sense of where we are if we use a baseball analogy is we both -- seventh inning.

[Stephen E. Johnson, President, CEO & Trustee]

I'm not a baseball fan, Michael. But in terms of -- I think basically, you made the comment about the first inning. Like I said, as you know, from our CREIT days, we view this as a very, very long time business. And as I said, earlier kind of in the opening comments, we're really trying to -- we've broken the business into 2 main functional areas, and our IPP portfolio, which has its opportunities for -- primarily for stability in embedded NOI growth with the escalations in the Loblaw leases. And then the other main part of our business is the development business. So and -- with our current program of approximately $1.2 billion, it's not small. And so we're not in the first inning. We got $16 billion entity. We got a wonderful platform. I guess, if you want to keep with the baseball analogy, now we're in the majors, now we're in the big leagues. And so maybe it's the first inning from that perspective. But as we go through, we have a long-term perspective and basically we're pulling it from that viewpoint.

[Michael Smith, Analyst]

I can appreciate it. It's a big cash and obviously you're looking at it from a long-term point of view. Is there -- one of your key, sort of more longer term, I mean, you got a lot to undergo right now with development, $1.2 billion and you've got a lot of very big projects coming in the future, very exciting. I think one of the initiatives or one of the objectives at the start of the merger is to beef up your development team and I'm just wondering where you are you on that? Are you bringing any new hires, are you thinking about it? Are you still trying to merge the cultures of the 2 entities before you sort of go into hiring mode so to speak?

[Stephen E. Johnson, President, CEO & Trustee]

Yes, basically, we're thinking about how that -- how we can continue to improve our development capability. A lot of the remaining spending that we have to do in the Toronto GTA rental residential program, we're doing with joint venture partners. So from that perspective, we're very well equipped to complete those developments. But as we go forward, as we crystallize our plan for what we're doing on development, we'll continue to build an intense -- improve and enhance our development capability. It's going to be an important part of our business going forward just like the IPP portfolio will be an important part of our business. Those are the 2 things we focus on: property management and leasing in our IPP portfolio and development capability in our development business.

[Operator]

And there are no further questions, I now pass the call back over to Stephen Johnson, CEO.

[Stephen E. Johnson, President, CEO & Trustee]

Again thank you, everyone, for attending this morning, and thank you for your patience. I know there are some questions you would like to have answers to sooner rather than later, but stay tuned. I think we've made great progress in the few months that we've -- since the merger date in May, and we look forward to future calls. Thank you, everyone. Have a great day. Have a great weekend.

[Operator]

This concludes today's conference call. You may now disconnect.