Choice Properties Real Estate Investment Trust

TSX:CHP.UN

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the Choice Properties Real Estate Investment Trust Third Quarter 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Doris Baughan, Senior Vice President, General Counsel and Secretary. Please go ahead.

[Doris L. Baughan, Senior VP, General Counsel & Secretary]

Thank you. Good morning, and welcome to Choice Properties Q3 2021 Conference Call. I'm joined here this morning by Rael Diamond, President and Chief Executive Officer; Mario Barrafato, Chief Financial Officer; and Ana Radic, Executive Vice President, Leasing and Operations. 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, strategies 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 facts to differ materially from the conclusions in these forward-looking statements. Additional information on material risks that can impact our financial statements and estimates and the assumptions that were made by applying and making these statements can be found in the recently filed Q3 2021 Financial Statements and Management Discussion & Analysis, which are available on our website and on SEDAR. I will now turn the call over to Rael.

[Rael Lee Diamond, President & CEO]

Thank you, Doris, and good morning, everyone. Thank you for taking the time to join our Q3 conference call. We're pleased with our strong financial and operating results. Our business model and our necessity-based portfolio has proven resilience over the course of the pandemic. In addition to our strong results, we're advancing our development program and executing on strategic transactions both with a focus on improving the overall quality of our portfolio and driving meaningful net asset value appreciation. All of this is underpinned by an industry-leading balance sheet that affords us the financial flexibility to execute on these initiatives.Joining me on today's call is Ana Radic, who will first provide an update on our operational results and then Mario Barrafato, who will provide an update on our financial results. I will then provide an update on our transaction activity and our development program. Ana, over to you.

[Ana Radic, Executive Vice President of Leasing & Operations]

Thank you, Rael, and good morning, everyone. As Rael mentioned, we are pleased with our operational results for the quarter. We continue to see positive signs of renewed activity across the portfolio as COVID-related restrictions are being lifted and our tenants get back to business. Our period-end occupancy remained strong, increasing slightly to 97% compared to 96.9% last quarter. We had approximately 1 million square feet of leases expiring in the quarter. We renewed 813,000 square feet, resulting in a retention ratio of 81% and leasing spreads on renewals of 6%. We completed 204,000 square feet of new leasing, resulting in overall positive absorption of 17,000 square feet for the quarter. Our 45 million square foot retail portfolio, consisting of open-air centers with necessity-based tenants, continues to deliver stable and reliable results. Retail occupancy was consistent with the prior quarter with tenant retention of 89%, and leasing spreads on renewals of 4.5% for the quarter, excluding 2 anchors with fixed rate options. Retailers have looked at foot traffic to drive leasing decisions, and our portfolio of neighborhood centers anchored by essential shops, a few steps from shoppers' homes are seeing the strongest level of interest. New leasing activity has been strong. Across the portfolio, we are seeing interest from mid-box value and necessity-based retailers looking to increase their store network, as well as relocate from enclosed shopping centers. Also driving demand is the entry of new QSR concepts and existing food operators expanding their footprint. The desire for tenants to locate at our grocery-anchored sites is evident by our high retention rates and consistently high occupancy. We expect that as restrictions ease further, we will continue to benefit from the positive momentum we are seeing. Our Industrial segment has been our strongest-performing asset class over the past 2 years, with fundamentals continuing to strengthen. The national industrial availability rate dropped below 2%. The demand for distribution and logistics warehouses remains at an all-time high, and the supply/demand imbalance in most markets is driving rental rates to record highs.Leasing activity was strong across our entire national industrial portfolio, resulting in an occupancy increase of 40 basis points to 97.6% in Q3, with occupancy in our 6.6 million square foot Ontario portfolio sitting at 100%. We also retained 80% of expiring tenants and grew rents by 16.6% over expiring rents in the quarter. Office has faced the most headwinds over the past few quarters with many tenants putting large space decisions on hold until they sort through their return-to-workplace strategy. Vacancy rates have ticked upward this quarter in most markets. By the downtown Toronto, where our largest assets are located, vacancy actually dropped 10 basis points to 9.9%, and sublease availability dropped even further. We are encouraged by this and by an increase in touring activity especially on smaller units. New leasing activity for the quarter was slow as occupancy in our 3.6 million square foot office portfolio declined from 90% to 88.7%. I've noticed the fact that some of the space vacated consisted of retail tenancies as downtown and urban core retail continues to struggle compared to suburban grocery-anchored retail. That said, we did see a lift in renewal spreads of approximately 3% on the deals that were completed. We have used this time with fewer people in our buildings to its full advantage. We have completed improvements that reduced the energy and water consumed in our buildings to make them more efficient and cost-effective. We have upgraded common areas and created new tenant amenities as well as built improved move-in-ready office suites, so we are able to lease space more quickly. Overall, we are pleased with the operational performance of our portfolio, and we expect to continue to deliver strong results looking ahead. I'll now pass the call over Mario to discuss our financial performance.

[Mario Barrafato, Chief Financial Officer]

Thank you, Ana, and good morning, everyone. This was a strong quarter operationally with solid third quarter financial performance. The strength and stability of our necessity-based portfolio has proven resilient over the last 18 months, and that has reflected in our AR collection rates, which increased to 99% in the quarter. We also reported bad debt expense of $1 million, our lowest provision during COVID. And as COVID restrictions continue to lift across the country and the Canadian economy looks fully reopened, we are well positioned to benefit from momentum.Our reported funds from operations for the third quarter was $172.7 million. This was a relatively clean quarter apart from the $1 million bad debt expense I referred to earlier. When compared to the third quarter of 2020, FFO increased by $3.5 million due primarily to a decline in bad debt expense of $3.8 million in contributions from development transfers and acquisitions of $1.7 million. This was partially offset by a decline in straight-line rent. On a per unit diluted basis, our Q3 FFO was $0.239 per unit consistent to the 23.8% reported in the third quarter of 2020. Total same asset cash NOI increased by 2% compared to the third quarter of 2020. And by asset class, retail same-asset cash NOI increased by 2.5%, while industrial increased by 3.5%. This reflects the combination of declining bad debt expense, contractual rent steps and higher renewal rates and occupancy gains in industrial. Office same-asset cash NOI decreased 6.4%, primarily due to the reduction in occupancy and lower parking revenues. When excluding bad debts, total same asset cash NOI was relatively flat, increasing by 0.3%. So overall, we're pleased we've been able to maintain stable occupancy and consistent same asset performance over the last 4 quarters. Turning to the balance sheet. For the fifth consecutive quarter, we reported an increase to our net asset value. This quarter reflects a total increase to NAV of $89 million or 1%, including an increase for the fair value of our investment properties of $51 million. The increases were primarily related to the advancement of our residential development projects and gains from capital recycling of retail assets in secondary and tertiary markets. Market demand for grocery-anchored retail in these markets is robust, with significant liquidity and demand from all types of investors. We had very little new financing activity in the quarter. However, we continue to maintain a strong balance sheet in terms of leverage and liquidity. Our leverage ratio was consistent with prior quarter with our debt to EBITDA remaining low at 7.4x. From a liquidity perspective, we have approximately $50 million in cash and cash equivalents, $1.3 billion of available credit on our line and $12.8 billion pool of unencumbered properties. So overall, we're pleased with our third quarter performance, delivering strong operating results and driving net asset value through development and capital recycling while maintaining a conservative and flexible balance sheet. I'll now turn the call over to Rael to address our development and investment activities.

[Rael Lee Diamond, President & CEO]

Thank you, Mario. We had another active quarter, making progress on both our development program and our transaction activities. In terms of transactions for the quarter, we acquired a retail property at 325 Moore Avenue in Toronto for $31.6 million. The property includes a Rexall drugstore and a TD Bank and is directly adjacent to one of our existing Loblaw-anchored sites. The acquisition is strategic because the existing tenants are necessity-based and this allows us to control the entire site, providing flexibility in terms of any re-leasing efforts for longer-term redevelopment opportunities. Taken together, the site forms a 2.5-acre parcel that is exceptionally well located. During the quarter, we also advanced a $41.6 million mezzanine loan to our development partner, Rice Commercial Group. The loan is well secured by 154 acres of future industrial development land in East Gwillimbury, Ontario, just north of Newmarket. The land is currently zoned agriculture. However, it has been designated as employment use in the secondary plan and is undergoing a rezoning process.In advancing the mezzanine loan, we obtained an equity conversion rights into 75% of the land. This option provides the flexibility to acquire an industrial site in the GTA at a very attractive cost basis of $370,000 an acre. We're excited about this mezzanine loan and the possibility of adding to our significant pipeline of industrial development opportunities.On the development front, we continued to deliver exceptional assets to our portfolio and are making steady progress on the rezoning of our longer-term pipeline. For the quarter, we completed and transferred 2 development projects for total development cost of $52 million. The asset transferred this quarter include a new [ shopper's promo ] pad for 17,000 square feet and a retail site in Guelph, Ontario, and the second of 3 buildings at our rental residential development of Brixton located in the Queen West neighborhood of Toronto. The second building includes 93 units at our ownership share. The leasing program at the Brixton is well underway, and activity had picked up considerably in the last few months as COVID restrictions have continued to lift. Of the 165 units that have been transferred to date, 55% are leased. We expect to transfer the last building later this year. Construction is also ramping up at Liberty House and Liberty Village, with an expensive completion in the fourth quarter. We had originally anticipated first occupancy early next year, but based on the leasing activity and the status of construction, the first tenants began taking occupancy earlier this week. So we will transfer this asset to income producing in Q4.In addition to our active residential projects, we continue to find opportunities to intensify our existing retail properties. We commenced development on 8 new retail intensification projects across the country. On completion, these projects will add an additional 55,000 square feet of necessity-based GLA, including 3 new Shoppers Drug Mart locations and 2 new band pads. Looking forward, we're making considerable progress on advancing our longer-term planning projects for our mixed-use developments. In the quarter, we submitted applications on 2 residential and mixed-use projects here in Toronto. The first application is for mixed-use development on a 3-acre parcel of land located at the Southwest corner of Danforth Avenue and Broadview Avenue in Toronto. And the second application is for the residential development at our existing residential property VIA123 located at Don Mills Road and Sheppard Avenue Toronto. Both sides are exceptionally well located within close proximity to a TTC subway station. Taken collectively, with our ongoing planning projects, we have over 10 million square feet of GLA either zoning approved or with zoning applications underway. With more projects ongoing and more submissions expected, we believe we have one of the best development pipelines in the REIT space, and that will drive significant long-term net asset value appreciation. With that, I would like to now turn the call back to the operator for questions.

[Operator]

[Operator Instructions] Your first question comes from Sam Damiani with TD Securities.

[Sam Damiani, Director, Institutional Equity Research]

Rael, maybe just the first question is on the East Gwillimbury land. I wonder if there's a little bit more color you can provide on, I guess, the visibility on the rezoning of that parcel. And is the primary plan to co-develop it with Rice? Or like what is the sort of plan, I guess, over the medium term, exactly?

[Rael Lee Diamond, President & CEO]

Yes, thanks for the question. Our development partner had their preconstruction meeting with the town in September this year. They've assembled a consulting team to prepare all the material to submit a zoning bylaw amendment. And they're targeting the first submission in January of '22. It would be our intention to convert. We just want to see some progress on the zoning side. But overall, we're very bullish on the site. Just to put it in perspective, it's not a traditional industrial zone or node. There has been tenants moving to the area. And the drive is about 25 minutes to the 401. So if you just compare that to other sites east or west, it's exceptionally well located.

[Sam Damiani, Director, Institutional Equity Research]

Yes. No, that seems like an opportunity in terms of location for expansion for the market, for sure. Maybe just flipping over to same-property NOI growth, and that certainly is evident that the office sector is holding the rest of the portfolio back. Any sense on, I guess, the turning points with occupancy in the near term? I'm also just wondering if there was much NOI contribution in this quarter from the space that was most recently vacated that brought occupancy down to 88% and change.

[Ana Radic, Executive Vice President of Leasing & Operations]

Sam, I guess I'll answer your first question. You might have to explain the second question for me. I'm sorry. As to a turnaround, we're starting to see a little bit more activity, particularly, and this is deal activity, particularly with smaller tenants. So subsequent to the quarter end, we completed 14 new deals. They total about 40,000 square feet in the office portfolio, and that was like across the country from Calgary, Montreal, Vancouver. So those tenants are out looking. So that will help. And then the larger ones, those that I think is going to take a little bit longer. And then what was your second question, if you don't mind repeating it?

[Sam Damiani, Director, Institutional Equity Research]

Sure. I mean the NOI, the same-property NOI year-over-year was down 6% and change in the office sector. But sequentially, it was pretty stable. And so I'm just wondering, with the occupancy down at quarter end, should we expect another sort of step down in NOI in Q4 versus Q3?

[Ana Radic, Executive Vice President of Leasing & Operations]

If so, it would be very modest. There is a few smaller tenants we know are not renewing, but we have minimal lease rollover exposure. And so yes, the variance that you saw or the drop relative to Q2 was primarily a result of the larger vacancies that we spoke about earlier at 175 Bloor being the largest one.

[Mario Barrafato, Chief Financial Officer]

Yes. And Sam, I think the one thing with office right now is there's not a lot of visibility. People still -- there's no real big trend back yet. We're seeing people trickle in. So there's been some good news. But I think right now, there's not a lot of longer-term visibility.

[Sam Damiani, Director, Institutional Equity Research]

Okay. Last one for me. On the retail side, occupancy is steady. The momentum is there. The activity is picking up. We're still not back to 98% occupancy pre-pandemic. What's your expectation, I guess, for 2022 to get there? And I guess, what categories might still cause some headaches in terms of headwinds for occupancy going forward?

[Mario Barrafato, Chief Financial Officer]

Maybe, Sam, I'll just talk about, maybe, the forecast and Ana can get into the details. I think by the end of next year will be stronger, but I think in the interim, like on an average basis, there's going to be some turnover of tenancies and with that will come some downtime. So I don't see you'll see -- so we're kind of still projecting that 1% to 2% NOI growth. And depending on the timing, it could be closer to the 1%. So we saw some things to work on. But as far as retail is -- so I don't think, like I think at year-end, we might be closer to that 98%, but during the year, we'll be lighter than that. And as far as retail goes, I think Ana talked about there is some, with the open air centers, there is some traction to the retail. I think as the economy opens, we'll see added activity. So we are very bullish, but it's just on timing. We may see it towards the end of the year, not the early part.

[Operator]

Your next question comes from the line of Mark Rothschild with Canaccord.

[Mark Rothschild, MD & Real Estate Analyst]

Rael, you gave an update on the development pipeline, and it's quite extensive now. Is there any -- just [ staying apart ] from that or read into that, that you're being a little more aggressive in picking up the pace or trying to pick on more projects now? Or is this all just generally what's been in the plan?

[Rael Lee Diamond, President & CEO]

Mark, thanks for the question. I would say we were slightly behind others on advancing our zoning, and we've made significant strides in advancing new zoning. Well, we want to be in a position where we can get more sites zoned and then in a position to commence construction, and they will always commence construction when the market dynamics are right.So if we just look forward over the next 12 months as an example, we have 2 buildings, transferring to income, producing properties this year, and we would expect to commence construction on 2 more projects in 2022. And then maybe, again, in 2023, again, we'll commence construction. So it's really trying to position ourselves that we have this pipeline of wonderful opportunities on the residential side. I think the other thing to note on the industrial side that it will come quicker just given -- and just given the lead time for development is quicker. And I think if you look overall at our pipeline, with the land we acquired earlier this year and with the option with East Gwillimbury, we probably have 450 acres of potential development land, which could add about 67 million square feet of best-in-class industrial, which it's all in the GTA, which will probably grow our industrial portfolio by about 40%. So it's very, very meaningful. And once that land gets zoned, we'll come on quicker.

[Mark Rothschild, MD & Real Estate Analyst]

Would the idea be for...

[Rael Lee Diamond, President & CEO]

The overall -- sorry, I didn't mean to interrupt you, Mark, I think the way we view it is, we have a great mix of residential opportunities, industrial opportunities. And then we spoke about the pickup in resale activity. So overall, we're very, very bullish with our development activities.

[Mark Rothschild, MD & Real Estate Analyst]

I know with some of the mixed use in the residential in particular, you're looking to do with partners. With industrial, would you do, would you look to do that all yourself?

[Rael Lee Diamond, President & CEO]

Well, the 2 big industrial opportunities, we have a partner, Rice Commercial Group, very good partner. And one of them, we would own 85%. One of them would own 75%. They are primarily responsible for -- in the development. Our team works closely with them, but then we would take over leasing and property management on completion.

[Mark Rothschild, MD & Real Estate Analyst]

Okay. And maybe just one more, maybe for Mario. Over the past year, you have issued stock to the vendors, which obviously, is a related party for buying properties. It's somewhat dilutive or it takes place for some of the accretion because you are using more equity. Are you comfortable where the balance sheet is now? And is that something that you will look to do more of in the future?

[Mario Barrafato, Chief Financial Officer]

Mark, thanks. So the first question, yes. I mean, we're very comfortable with the balance sheet. There's 2 elements that we've been focusing on. One is getting our leverage down and pushing out our debt maturities, and maintain liquidity. And I think we've come out of COVID very strong. And then we've been improving our asset quality, which again de-risk the portfolio, which means less pressure on the balance sheet. I think as far as equity goes, I think we would use it if it's very strategic and in some cases, there's some tax benefits to the vendor, which gives us an advantage. And so if we can get access to good properties or use it strategically, we would do that again.

[Operator]

Your next question comes from the line of Himanshu Gupta with Scotiabank.

[Himanshu Gupta, Analyst]

So just on 2022 lease expiries, a fair bit of industrial is coming due I think around 1.6 million square feet. So what kind of rental spreads are you expecting, given how strong the market is? And is it Ontario or is it Alberta, like what's the mix of the expiries coming to?

[Ana Radic, Executive Vice President of Leasing & Operations]

Yes, just to answer your question on the expiry. We have a few large expiries that are coming due in Q3 -- sorry, in 2022. And it's kind of spread out across the country. So it's not heavily weighted in Alberta. But -- so we have a large Loblaw distribution facility in Montreal on Francis-Hughes that is rolling as well as a large facility in Ontario and then another one in Alberta. And then another 0.5 million square feet is spread out as well across all those markets in Halifax as well. In terms of what we're projecting for industrial, we expect to see, on a long-term basis, real growth, rental rate growth and net asset value appreciation in those assets. But in the short term, we do have some temporary vacancies that will be evident in our results next year. And it's the 3 that I spoke of in Montreal, Ontario and Alberta, but we have re-leased the largest one in Montreal, which is 0.5 million square feet that has been re-leased to Amazon. It will be a large distribution facility. Actually, their largest in the province. So we're really excited about that, and we'll see a huge lift in rents relative to the current in-place rent, but there will be a period of downtime while they invest in the facility and get it up and running. So that will have an impact in 2022. And similarly, in Ontario and Alberta, we have tenants that are also relocating to larger facilities, but we have significant interest in both of those sites. So we anticipate re-leasing them very, very quickly. And again, at rents in excess of expiring -- sorry, yes.

[Himanshu Gupta, Analyst]

Got it. That's very helpful, Ana. And maybe on the same-line, on the retail side, and I know you already mentioned about the occupancy terms and leasing environment improving. My question is how is the market rents spreading for grocery-anchored, open-air retail properties? Like we keep hearing about the [ properties ] compressing or more investor interest, but is anything happening on the market trend side?

[Ana Radic, Executive Vice President of Leasing & Operations]

Yes. We are seeing lift in rent, like in our grocery-anchored centers this quarter we saw a lift of about 6% as I mentioned in my call, and we expect that to continue as we have ample demand.

[Mario Barrafato, Chief Financial Officer]

I think I mentioned the -- it's not just the rent. I think you talked about the cap rate compression where there's lease term, especially with the Loblaw tenancy, it's a really valuable commodity.

[Himanshu Gupta, Analyst]

Absolutely. And maybe my next question is on the mixed-use developments. And I know more zoning application was filed this quarter. And there, you mentioned like more submissions expected. So how long the list is that in terms of zoning applications filed?

[Rael Lee Diamond, President & CEO]

I don't have the exact list on what's in the pipeline handy. But if you actually look in our investor material, we have maps of the major cities. And we pretty much have more dots on the map than most. So we're just bullish on the long-term pipeline, and we're working collaboratively with our major tenants and saying where it makes sense to file those applications.

[Himanshu Gupta, Analyst]

Got it. And maybe will you look in the near future to probably quantify what the [ lead and thermal ] long-term development pipeline could look like? I know just looking [ at the other line ]. I'm looking at the chart right now.

[Rael Lee Diamond, President & CEO]

Yes. Look, we've quantified the $10 million in planning applications. And as we get more clarity on timing, we'll look to quantify more.

[Mario Barrafato, Chief Financial Officer]

And Himanshu, we've tried to be very transparent in our disclosures. And I think a lot of investors have told us the long term really is not as valuable. So we're trying to show the potential but the quantification right now is not as relevant as maybe in the near to midterm. So we're trying to very transparent on what is active and what is in the pipeline. And so you'll get those disclosures from us on a regular basis now.

[Operator]

Your next question comes from the line of Sumayya Syed with CIBC.

[Sumayya Syed Hussain, Associate]

Just wanted to confirm that on the Brixton and transferring it to income producing did show up in the fair value gains this quarter?

[Mario Barrafato, Chief Financial Officer]

A little bit. It's been showing up in the last few quarters. So yes. And then -- and also at East Liberty advances, and we're getting closer to cost complete, we're gaining certainty on the remaining costs, and we're having a better view of rent. That all impacts the fair value as well. So they're both there. But it's not one big. It's been coming in as the project advances over time.

[Sumayya Syed Hussain, Associate]

Okay. And then I guess on East Liberty, just curious what rents you're seeing there? And when do you expect it to be stabilized?

[Rael Lee Diamond, President & CEO]

We're seeing rent around [ $390 a month ], and we expect it to be stabilized in about 12 months from now.

[Sumayya Syed Hussain, Associate]

And then as -- I'd also get your thoughts on what you're seeing in the market in terms of buyer demand for more secondary tertiary market retail? And if you can comment on any spreads you're seeing in cap rate compression versus more, I guess, co-located product?

[Rael Lee Diamond, President & CEO]

Look, [ we're certain at ] the last few quarters, we continue to see loss of liquidity for the right type of retail, and the right type of retail is necessity-based retail. And there are lots of different investor types looking for that product. So we haven't -- I wouldn't say we've seen a meaningful compression in cap rates because it's deal specific, but obviously, we've been very active on the capital recycling program, selling assets that we feel are not strategic and may have lower growth.

[Operator]

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

[Tal Woolley, Research Analyst]

Just to start with on, you made earlier comments that you spent a lot of time and capital this year to be building up this future industrial -- this [ piece ] of industrial land. When we're thinking about it from our side, should we be thinking, is this all third party? Or does Loblaw figure into occupying some of this as well?

[Rael Lee Diamond, President & CEO]

Yes. We purchased the land for third parties. But obviously, given the relationship with Loblaw, we will always show it to them first. And we would be thrilled if they would consider leasing there. That is generally going to be third parties. And our current focus is really on the rezoning right now.

[Tal Woolley, Research Analyst]

So the push to acquire these lands is not -- it's not like a sort of Loblaw imperative for their strategy? It's not them driving these decisions. Those are you. You guys are making the choice to drive -- to make these acquisitions.

[Rael Lee Diamond, President & CEO]

Yes, came through our development partner, Rice Commercial. We have a strong relationship with them, and they've shown it to us first and very fortunate we foster these long-term relationships.

[Tal Woolley, Research Analyst]

Okay. And I guess, like maybe just a bit bigger picture, we're a few years out from the Creek deal and you guys taking over as a management team, done a lot of work cleaning up the portfolio. From my ears, it certainly sounds like you're talking a little bit more about playing a bit more offense now, talking about near term development, things like that. Are you trying -- like how do you want to position Choice like for the future in terms of like where you want that split between the asset class is going forward?

[Rael Lee Diamond, President & CEO]

Yes. Look, you hit on it. I'd say over the last 3 years, our focus really was first on integration and get the right people in place. Second was shifting the balance sheet -- so putting the balance sheet in a better place never gets in the way of running the business or in the way of taking advantage of acquisition opportunities. And the way we think about the entity today is we have this wonderful portfolio of stable growing cash flow from necessity-based retail, industrial, office and now residential, we have truly, we believe, the best development pipeline in the REIT space. We have a balance sheet that allows us to take advantage of those opportunities, and we have phenomenal people. So we actually think we are exceptionally well positioned. As far as specific mix is on assets, we will focus on asset quality. But if you even think about capital recycling initiatives, we focus on selling assets that we think have preservation risk or may have lower growth. We're not selling our best assets. In fact, we'd rather buy more of those assets. So we're less focused on specific mixes. We're more focused on quantity.

[Tal Woolley, Research Analyst]

Okay. That's helpful. And then just lastly, again, now that you're sort of at this new kind of phase for the company. Prior to the Creek deal, you had sort of seen annual distribution hikes over a year. Is there any thought to sort of maybe restarting that going forward?

[Mario Barrafato, Chief Financial Officer]

Tal, we haven't talked about it recently, but I think just the way to look at it is, we've had growth and had to make some trade-offs. And so as Rael said, we took some of our growth and put it towards the deleveraging, and that kind of took a few cents. And then the asset quality, you get a bit of inherent dilution when you trade kind of higher cap rate assets for lower cap rate assets, but again, we're generating value and then investing some of the proceeds into this development pipeline. So I think there will be time. We haven't talked to the Board yet about it, but at some point, some of our growth will be diverted back to unitholders. But I think it has to be a time when we're ready that we can consider it long term.

[Operator]

I'm showing no further questions at this time. I will now turn the call over to Rael Diamond.

[Rael Lee Diamond, President & CEO]

Thank you, Julie. We want to thank everyone for joining us on today's call. Please continue to do all you can to stay healthy and safe. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.