Crombie Real Estate Investment Trust

TSX:CRR.UN

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Crombie REIT second quarter results conference call. [Operator Instructions] This call is being recorded on Thursday, August 9, 2018.I would now like to turn the conference over to Claire Mahaney Lyon, Investor Relations. Please go ahead.

[Claire Mahaney Lyon, Manager of Investor Relations]

Thank you, Britney. Good day, everyone, and welcome to Crombie REIT's second quarter conference call and webcast. Thank you for joining us. This call is being recorded in live audio and is available on our website at www.crombiereit.ca. Slides to accompany today's call are available on the Investor Relations section of our website under Presentations and Events. Joining me on the call are Don Clow, President and Chief Executive Officer; and Glenn Hynes, Chief Financial Officer, Executive Vice President and Secretary.Today's discussion includes forward-looking statements. As always, we want to caution you that such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see our public filings, including our annual information form for the year ended December 31, 2017, for a discussion of these risk factors.I would now like to turn the call over to Don, who will begin a discussion with comments on Crombie's overall strategy and outlook. Glenn will follow with a review of Crombie's operating and financial results and discuss our capital allocation and funding approach. Don?

[Donald E. Clow, President, CEO & Director]

Thank you, Claire, and good day, everyone. A strong second quarter results announced last night proved our core portfolio is performing very well. We've achieved 9.4% growth diluted AFFO per unit, advanced our mixed use major development pipeline and continued the execution of our capital recycling program. Occupancy for the REIT reached a new all-time high of 96.1%, the highest in Crombie's history as a public company.In addition to our solid quarterly financial results, our capital recycling program has been very successful. Through the sale of assets that are deemed lower growth and/or noncore to our strategy, we're able to improve portfolio quality and redeploy proceeds into more strategic efforts such as development.Year-to-date, we've closed on a $194 million of asset dispositions in line with IFRS fair values and are negotiating and evaluating another $200 million of asset sales.Recycling of capital amounts in line with IFRS fair values at a time when our units are trading materially below NAV and validates our prior statements that our units are mispriced.Our development pipeline is heavily weighted towards the major mid-markets across Canada, the 17 of our 23 projects located within major cities. These assets currently produce solid operating returns at a 5.3% yield, while we move through the various planning and approval phases.Before providing an update on our development projects, I'm going to make a couple of comments about our development team. Crombie has an experienced development team right across the country that's creating value over time. In addition to my 20-plus years of residential development experience, our team of 20 professionals includes expertise across development, construction and design. From myself, to SVPs, to managers, we have decades of experience and a sizable portion of that is residential.We're working alongside our development partners every step of the way, communicating with them daily, providing our insight and expertise and learning from them wherever possible.Let's discuss the great work our development and construction teams are doing on their own and with our partners.On Vancouver Island, where land is scarce and limited, Belmont Market near Victoria, B.C., will be a vibrant open-air center in the dominant retail node of the West Shore communities. This project is being 100% developed by Crombie. Belmont Market is taking shape with the paving of the internal roadways, parking and sidewalks to be complete by the end of the summer. Phase 1 of the retail will be complete this fall with handover to our tenants scheduled for September.Sobeys is now underway with the construction of a new Thrifty's Food store, which is expected to open in the spring of 2019. Phase 2 has also begun.Our Davie Street Project in Vancouver's West End is moving along well. The market is extremely strong in this area for residential rental, with vacancy rates at or around 1% and rents growing at an astonishing 5.7% according to CMHC. Excavation material has been removed from the site and the lower level of parking garage is beginning to take form. 95% of our costs have been tendered and are on budget. Commercial leasing has been very strong with rents coming in, in excess of our pro forma.Avalon Mall is one of the best retail shopping centers in Atlantic Canada and a dominate center in Newfoundland and Labrador. A redevelopment plan of this asset where Crombie, again, is the 100% owner and developer, is progressing as planned with Phase 1 scheduled to be completed in 2019. Parking garage is near completion, and just 2 weeks ago, the pedway from the parking garage to the mall was installed. The interior of the existing mall is under renovation and Cineplex has commenced construction of its 30,000 square-foot rec room concept. We're building new CRU in the remaining stair space, a new mall expansion and creating an additional pad site. We're in negotiations with numerous international and national first-to-market tenants, which will enhance Avalon's merchandising mix, drive additional customer traffic, sales productivity and, in turn, rental growth. Return metrics of this phase are truly phenomenal, as we're estimating our yield on cost to be in the range of 10% to 13%, demonstrating a well-located and well-managed retail is far from dead and is, in fact, thriving.Le Duke, our latest addition to our pipeline, is being built at $124 million development and is adjacent to the new Bonaventure Greenway in Old Montreal. Vacancy rates in Montreal decreased to 2.8%, with rental growth remaining strong. Our 25-story mix-use tower will contain 390 residential rental units above a 25,000 square-foot urban-format IGA. New structure will incorporate the existing heritage building integrating the 2-story facade, maintaining the current character and streetscape. Excavation is nearing completion with the project expected to be completed in 2020.Steps from the Bronte Beach Park and Marina in Oakville, Ontario our Bronte Village development presents a special luxury rental opportunity in a vibrant, unique and highly sought-after community surrounded by lakefront parks, running and walking trails, shopping, grocery stores, restaurants and cafes. Demand for residential rental is very strong in Oakville, with vacancy rates around 1%, a 16-year low, and rental rates growing at approximately 4% per CMHC. This $277 million development will include 480 units of refined residential rental living and a 30,000 square-foot Sobeys. Project kicked off this quarter and demolition of the enclosed shopping center is now complete.Based upon current estimates and market conditions, we expect Crombie to invest approximately $450 million in our first 5 major developments that at current cap rates are expected to be worth approximately $600 million to $750 million, effectively creating $150 million to $300 million of value or $1 to $2 per unit of net asset value or NAV over the next 2 to 3 years.In closing, we're very pleased with this quarter results, the pace and the pricing of our dispositions as well as our execution of the development pipeline. We're focused on doing what is best for our real estate in the communities in which we operate, including our strategy to position our portfolio to generate consistent growth that will create short-, medium- and long-term shareholder value.Our experienced operating and development teams across the country are successfully driving the transformation of Crombie from a landlord of neighborhood needs-based retail to a fully-integrated owner developer of retail and residential real estate in Canada's top markets.And with that, I'll now turn the call over to Glenn, who'll highlight our second quarter financial results and discuss our capital and development program funding approach.

[Glenn R. Hynes, Executive VP, CFO & Secretary]

Thank you, Donnie, and good day, everyone. Diluted AFFO per unit increased 9.4% to $0.26 versus the same quarter last year. Our Q2 AFFO payout ratio improved to 85.3% compared to 93.6% at the end of Q2 of 2017. Diluted FFO for the quarter was solid at $0.30 per unit, up 5.6% over the same quarter last year. Our FFO payout ratio continues to improve and ended the quarter at 72.7% versus 76.7% for the same period in 2017.On a cash basis, same-asset NOI increased by 2.9% in the quarter as compared to the same quarter last year. Growth was driven by improvements in occupancy, rental step-ups and rental uplifts from redeveloped properties.On the leasing front, during the first quarter, we renewed 138,000 square feet, with an increase of 3.4% over-expiring rate. Taking a closer look, 113,000 square feet of 2018 expiries were renewed at plus 2.8% with 25,000 square feet of future year renewal completed at 7.6%.As Donnie mentioned, committed occupancy was 96.1%, the highest in Crombie's history as a public company. We ended the quarter with 175,000 square feet of committed space, boosting future NOI growth.G&A as a percentage of property revenue for Q2 was 4.4% or $4.6 million, an improvement from the 5.1% or $5.2 million in Q2 of last year. The improvement was mainly driven by $494,000 in tax reorganization costs incurred in Q2 of last year.Cap rates remained stable with our IFRS cap rate at 5.99% for the quarter, up 7 basis points from the first quarter. Although we've mentioned this on previous calls, I'd like to reiterate our methodology. Crombie calculates its NAV based on market cap rates and trailing 12-month in place NOI versus some, who use next 12 months' NOI. In addition to our already conservative approach, IFRS and our weighted average cap rate, it excludes the fair value of future development and air rights until projects are complete and income producing.As Donnie mentioned in his opening remarks, we estimate that our active developments could add $1 to $2 per unit of NAV in the next 2 to 3 years. We finished the quarter with debt-to-gross book value on a fair value basis of 49.9% versus 49.6% at the end of Q1. Our goal remains to reduce leverage over time in order to continue to derisk our balance sheet. Debt to trailing 12-month EBITDA was 8.5x, an improvement from the 8.6x in Q1 of this year. And our interest and debt service coverage ratios remained strong.We continue to focus on improving our capital structure and derisking our business. During the quarter, we repaid the balance of our 2018 maturing mortgages of $35 million, reducing our interest costs and growing our unencumbered asset tool to approximately $1.1 billion, which is up 8% from Q1. Our unencumbered assets now account for 22% of our IFRS fair value of investment properties.Our balance sheet remains strong and flexible with increasing access to the unsecured bond market. We have roughly $360 million of available liquidity, and our weighted average interest rate and fixed-rate debt sits at 4.18%.Lastly, we recently announced the redemption of our $74.4 million of 5.25% Series E Convertible Debentures, which should result in about $1 million of annual interest savings. We're executing as planned on our strategy and capital allocation priorities, directing disposition proceeds into compelling and higher returning developments. Assets we've identified within our portfolio as potential sources of capital are either noncore or lower growth. Year-to-date, we've sold $194 million of assets, deployed capital into developments and acquired a $101 million portfolio from our partners at Empire.With our current momentum on recycling capital and free cash flow, we're confident that we can fund our future investments and improve our balance sheet at the same time. In closing, our core portfolio remains strong, as is clear by our record occupancy, solid same-asset property cash NOI, cash flow growth and improving payout ratios. Our core business is not only strong, but also e-commerce resilient and a wonderful complement to our development pipeline. As we look to the future, we remain acutely focused on creating short-, medium- and long-term value through disciplined capital allocation, through the performance of our core property portfolio and through our development and intensification programs. Thank you for listening. And we're now happy to respond to your questions.

[Operator]

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

[Sam Damiani, Analyst]

So just on the development plans for the next maybe 2 years or roughly maybe 3, can you clarify just the amount of spend that is going to be required? And what the sources of that capital are going to be?

[Donald E. Clow, President, CEO & Director]

So as we've said in our presentation, Sam, we're planning to spend approximately $450 million on our first 5 projects over the next 2 to 3 years. And then funding for that is really in place with a disposition program that we've managed to achieve during the first half of the year with the visibility we have on dispositions in place -- or at least in negotiations today, we believe we can fund that program. And so that's as simple as it is. I believe we are continuing to work importantly with Sobeys on our pipeline. And again, as we've said, we have a $5 billion -- $4.5 billion pipeline that we're planning to do over the next 10 to 15 years, and we're working very closely with them to ladder that program out over those next 10 to 15 years, so we end up with a very consistent program of development over that time line.

[Sam Damiani, Analyst]

Great. And so you're definitely looking at more dispositions to fund that programs?

[Donald E. Clow, President, CEO & Director]

So we have a predisposition to dispositions and...

[Sam Damiani, Analyst]

Can I quote you on that?

[Donald E. Clow, President, CEO & Director]

You can, yes. It's a mouthful. I got it from Claire. So she can take credit for it. But yes, we do. And I mean, it's, obviously, a less dilutive type of activity in terms of raising funds for us. And so we're very focused on that and given the nature of our product, as we've proven year-to-date, grocery-anchored product is still in favor across the market, even though there's a fair amount of it on the market from some of our peers. We still end up with a very, I think, strong market for our product. And we're quite confident in our ability to achieve that over the next little while.

[Sam Damiani, Analyst]

Great. Just a couple of questions on cap rates. The Park Lane asset that was sold. Could you share the cap rate on that with us?

[Glenn R. Hynes, Executive VP, CFO & Secretary]

Sam, that's a difficult one. That was a 270,000 square-foot property with office, retail and sort of the income in place is sort of to be modeled by the buyer. So I think, we'll just say, we're very happy and satisfied with the value. But to put a cap rate other than that would be rather -- wouldn't be a lot of utility in that. So we're not you disclosing a cap rate, because -- and also with a movie theater and all the moving parts there, there's certainly a dynamic income there that's a little bit more complicated than the traditional grocery-anchored center that we're very happy to provide cap rate detail on.

[Sam Damiani, Analyst]

Makes sense. And on the acquisition from Empire this quarter, what was that cap rate?

[Glenn R. Hynes, Executive VP, CFO & Secretary]

It's just over 6.5%.

[Sam Damiani, Analyst]

All right. Okay. Just finally, the province of Nova Scotia there, the office leases is coming up in about a year. What's the status of renewal negotiations there?

[Donald E. Clow, President, CEO & Director]

We're working very closely with them. We have a great relationship with them, especially our local team here in Halifax, and so we'll continue to work with them and basically see how things play out.

[Operator]

Your next question comes from Howard Leung from Veritas.

[Howard Leung, Investment Analyst]

I want to, look, go into the acquisitions this quarter. Most of them -- most of the properties are non-VECTOM and increase your Québec and Western Canada exposure. Can you go over that and -- versus dispositions in the quarter?

[Glenn R. Hynes, Executive VP, CFO & Secretary]

Sure, Howard. The key thing on the acquisitions, over 40% of the value in the income is in VECTOM market. So for example, there's assets in the Edmonton market, there's assets in the Gatineau market, Chateauguay. Edmonton, as you go down the list of the properties in the MD&A. So we're pleased about having a strong VECTOM composition of the acquisition. Secondly, gave us some growth in Québec. If we look at our market share, we're substantial in the West and more substantial in Atlantic Canada than in Central Canada. So we got access to some good strong IGA and other Sobey-branded product in Québec, which is a market we want to continue to grow in. So that was the primary presence of the acquisition. What was your question with respect to the disposition assets?

[Howard Leung, Investment Analyst]

Just comparing the geographies of the disposition compared to the acquisitions and getting a sense of where that might head up in the next couple of quarters?

[Glenn R. Hynes, Executive VP, CFO & Secretary]

Yes. Let me look forward, what we sold in the second quarter, there was some secondary market assets in markets like Red Deer and Napanee, which were sort of more secondary market related. The Northern portfolio, which was a 50% disposition where we continue to have a managed interest in those properties. Those tended to be lower growth assets, nondevelopment potential assets, but in more end markets and the transaction that we consummated at a sub-5.5% cap rate.

[Howard Leung, Investment Analyst]

Okay. No, that's good. And then the increase in the cap rate just for this quarter for your overall portfolio. Is that -- was that driven by -- I'm guessing, it's probably not from dispositions and just -- it's just actually from the remaining portfolio?

[Glenn R. Hynes, Executive VP, CFO & Secretary]

Yes, look, few moving parts. We did have 2 impairments in the quarter, you'll notice in the P&L, we had $8 million impairment relating to 2 properties because we're on IFRS cost versus fair value. We're obliged to report our impairments when they occur, so we -- so that moved a few basis points of cap rate. I think the rest it was just moving parts in the ordinary course of acquisitions, dispositions and, obviously, looking at our ongoing market data, but I think it moved 6 or 7 bps. So it really wasn't much.

[Howard Leung, Investment Analyst]

Yes. Okay. And then the JVs for the Le Duke and the Bronte Village, the rest are not in the financials, I guess, that's -- it's going to be reported in next quarter when the actual title is transferred?

[Glenn R. Hynes, Executive VP, CFO & Secretary]

That's correct, August. We note in the MD&A that we expect those things to be consummated in August and it should be in our Q3 reporting.

[Howard Leung, Investment Analyst]

Great. And then just one more. Glenn, do you have the figure for the reimbursement of property taxes for the quarter or for the first 6 months?

[Glenn R. Hynes, Executive VP, CFO & Secretary]

Reimbursement of property taxes?

[Howard Leung, Investment Analyst]

The recoveries from the -- for the property taxes.

[Glenn R. Hynes, Executive VP, CFO & Secretary]

I am not sure. I understand, you're talking recovery rate, Howard, or what you're speaking to?

[Howard Leung, Investment Analyst]

For the actual revenues in the notes, I think, they're lumped in, in the financial statements note. And for revenue, they're lumped in with the rental revenue?

[Glenn R. Hynes, Executive VP, CFO & Secretary]

Yes, let's take that offline. I'm happy to provide that, but I don't think we've got that in hand right now. But let's -- drop me a note, and we'll get that information to you.

[Operator]

Your next question comes from Tal Woolley from National Bank.

[Tal Woolley, Research Analyst]

Could you -- you've got your Series A debentures, I think, coming up for -- or coming due, sort of, in Q4. What's -- what are your preliminary thoughts on how to refinance that right now?

[Glenn R. Hynes, Executive VP, CFO & Secretary]

So first of all, we have $175 million backstop facility in place, which we put in place back in Q4 of 2017. Our game plan ultimately is to issue new unsecured notes to take out the maturing notes. But we put the backstop facility in place just as a secondary precaution late last year. So our game plan there, Tal, would be to do a new series of notes. Our preference would be to go out a little longer duration. We'd like to continue to build a ladder in the unsecured note space. We currently have only issued out as far as 5 years' duration. So we'd like to look at 6, 7 years as possible duration for that replacement series of notes. But that will be something we'll look at in the next few months. Given that we have the backstop facility in place, it's not an urgent priority to do it fairly soon, but we're looking at doing it between now and the end of October.

[Tal Woolley, Research Analyst]

Okay. That's great. And I can't remember whether Empire's sort of last store closure announcements were previous to the last call or not. But did you have any stores that were in -- affected by that last? I think there was about 10 to 15 stores, I can't remember and...

[Glenn R. Hynes, Executive VP, CFO & Secretary]

Yes, that was announced actually. This is nothing new in that news. I think, from memory, they announced 10 total closures, of which 4 were applicable to us. And I think, ultimately, 3 that were planned to be reopening as discounts. So there was really 1 ultimate closure, which is a property that will be a major development project. So...

[Donald E. Clow, President, CEO & Director]

[ Well, I hope. ]

[Glenn R. Hynes, Executive VP, CFO & Secretary]

Yes, in Vancouver. So no impact of that was announced, I think, back in January, in terms of the gains. But you're right, the closures are actually taking effect here now in the summer of this year.

[Operator]

Your next question comes from Pammi Bir from Scotiabank.

[Pammi Bir, Analyst]

You're doing well on your disposition program with the proceeds in line with IFRS values. But are you seeing any sort of cap rate shifts in some of the markets more recently? You mentioned, Donnie, that there is a fair amount of product out there. Just curious as to what you're seeing there?

[Donald E. Clow, President, CEO & Director]

Yes, there's, I mean, obviously, a number of our peers, and I won't name them, but there was significant amounts of product in the market. And obviously, they're secondary and tertiary market assets. What we're seeing for our product is, obviously, some very strong results year-to-date. And I think continuing going forward, we'll continue to see good results. As we've talked about before, we're looking at doing both a blend of noncore and partial interest in core. And so that combination allows us a lot of flexibility in terms of how we do deals and when. And so we'd be able to, I think, workaround, call that, flooding of the market those -- at least the secondary, tertiary markets, if we want to, depending on the nature of the deal. So I don't see it affecting us significantly, quite frankly, but, I mean, you don't know until we actually transact the deals.

[Pammi Bir, Analyst]

Right. And then just going back to your comments about the additional $200 million that you're planning to sell. Is that all noncore? Or would some of that be core assets or partial interest sales?

[Donald E. Clow, President, CEO & Director]

What I would say, it would be a combination of both is what we're, call it, working on off-market deals primarily in the marketplace. And we'll again choose what's best for Crombie at the time. But we have a number of deals, obviously, to do, call that our target dispositions. You need to have a certain number out in the market and basically feeling out what's going to work out best for us. So I'd say, you always have a little more out in the market testing the waters and seeing where things are to ultimately achieve the result you want. So...

[Pammi Bir, Analyst]

Got it, that's helpful. Just maybe coming back to the development team comments, the amount of development activity increases. The pipeline is, obviously, quite large. Do you feel that you have the sufficient resources in place at this stage to manage the process? Or [ do you see yourselves ] perhaps adding more bodies over time, more expertise? And if so, would there be any incremental G&A tied to that?

[Donald E. Clow, President, CEO & Director]

First and foremost, we're working with partners. And so out of the 5 -- first 5 projects, 2 of them are done by Crombie 100%, and they're 100% retail. And then the 3 mixed use, obviously, yes, people know and we've announced publicly that we have, obviously, great partners in Westbank and Prince Developments out at Montreal. And so they really provide the development talent, and we'll actually provide the operating talent as well on those projects. But importantly, as we've said to a number of investors, we're what we call, active, passive development management people. And so we've got a good team. I wanted, in my remarks, to stress that I've got 20 years plus residential experience in my background and we've got 20 other people inside of Crombie that have significant residential as well already. So it's not like we don't have any. And so the real question will be when do we want to take on one ourselves. And so we are going to consider that over the next few years as we look forward at our different opportunities with Sobeys. And so in terms of the overall team, I'm comfortable with where we are given the way that we are doing transactions today. But it is -- obviously, developments are hard to get and I think very complex talent to obtain in the marketplace. But -- so we'll be, I think, looking to add more people as we go forward. Does is disaffect our G&A, I don't think it does materially. I think one of your peers just released some statistics and many different metrics on G&A in the last few weeks, and I thought it was a decent report. And it showed that Crombie was, call it, lower or just below the middle of the pack in terms of G&A. And that's carrying some G&A cost towards development. So I believe that we'll be able to manage those types of costs over time. And certainly, we'll be adding -- we need great talent to do great things. And as I said to a lot of people that development pipeline is a world-class development pipeline. So we need world-class people to do it. And we'll continue to add as we see fit.

[Operator]

Your next question comes from Tal Woolley from National Bank.

[Tal Woolley, Research Analyst]

Sorry, I forgot to ask this on my last round. Just when you look at the $450 million spend program, how you're thinking you might use construction financing and other tools through that period? What sort of LTVs do you think you could use to sort of let the banks or other lenders fund the cost with?

[Glenn R. Hynes, Executive VP, CFO & Secretary]

Sure. So Tal, we use a variety. So on Davie Street, for example, we did something a little bit more novel. We put in place 10-year permanent financing both construction and permanent financing. We did it through CMHC. So we locked in a 10-year interest rate of 3.22% -- 3.224% to be precise. And that's 10-year financing, so funds are in escrow, small negative, carry through the development phase, but gives us security. The loan to cost on that project was very strong, around 80% range. So that was very good. On the other 2 JVs that we're doing in both Duke and Bronte, we're looking at more traditional bank construction, financing, call it, floating rate, BA plus financing. And generally speaking, we're in the 80% plus loan to cost on those. And once we finish the construction, we'll look at what the permanent financing options are, whether it's unsecured notes, whether it's CMHC mortgages or whether it's traditional mortgages. But we're very comfortable. There's a great supply of bank financing for the construction side. And clearly, what we will do in the REIT is we want to lower leverage over time, but we'll have a disproportionally higher amount of leverage on construction, but we'll be continuing to pay off. You probably have noticed in our financials, we paid off over $100 million of mortgage debt year-to-date. So all of the mortgages that have come due plus our ongoing principal payments are extinguishing mortgage debt, which is reducing our on balance sheet debt. But if we can get inexpensive higher leverage in these JVs for the development and construction program, we'll take advantage of that. Meanwhile, keeping the total aggregate leverage of the REIT at a lower level going forward. So that's the game plan.

[Tal Woolley, Research Analyst]

Okay. And then if you can just talk a bit about the potential major developments that you outlined, like when I look at something like the Avalon Mall project, you're seeing -- your projected returns there double digits, like it's great if you had like 500 million of those, that would be fantastic, right? And I'm wondering like when I look at the potential major development list, you've got both commercial and residential expansion for sort of all the projects. And I'm wondering if you can sort of talk qualitatively about that pipeline, like how much of the sort of $2.5 billion to $4 billion, how much of that is like in your kind of mixed use or residential? And how much of those like really sort of tasty retail projects are there in that bucket too? Maybe -- you can maybe offer some color around that?

[Donald E. Clow, President, CEO & Director]

There's not a lot, Tal. I mean, Avalon is a very unique project. It's for Yorkdale of Newfoundland and Labrador. And it's a dominant regional shopping center. In fact, it's really the only regional shopping center in Newfoundland and Labrador, the entire province. But what I will stress to you is that the -- most -- almost all of the mixed-use project is mixed-use development in the major urban markets. We've said 17 out of the 23 are in basically Vancouver, Toronto, Calgary and now Montreal. And all of those have huge differentials between the yield on cost and, call it, a sale cap rate. So for the most part, our forecast is in the mid-5s, what we're doing today. We call it, 5% to 6%. But most of them are in the mid-to-high 5s on a yield-on-cost basis in markets where cap rates today in Vancouver on this quality residential would be in the low 3s, if not -- it's hard to believe, maybe even in the high 2s. And in Toronto, you'd be talking mid-3s. So the differential is extreme. It's a wonderful thing for us. That's where we try and articulate and we can create a tremendous amount of NAV. And if we really wanted to, we can sell 1 or sell 2 to generate the capital to fund that development program almost into perpetuity. So it gives us not only great NAV creation, but tremendous flexibility in terms of how we fund our business. And really, I think for the long term, as we've said many times, we generally think long term, and -- because we have major shareholders that are long-term investors, so our primary interest is building and creating communities that are A-plus real estate that have long-term cash flow. But there's lots of flexibility, and so it's a wonderful opportunity. I mean, to be truthful, the major mixed use in the major urban markets is the opportunity. It's a world-class real estate, whereas, the Avalon is really -- it's a great property, but it's a one out for us in my view. So I'd prefer to focus on the major urban market stuff.

[Operator]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Claire Mahaney Lyon, Manager of Investor Relations]

Thank you for your time today, and we look forward to updating you on our progress on our Q3 call in the coming months.

[Donald E. Clow, President, CEO & Director]

Thanks, everybody.

[Glenn R. Hynes, Executive VP, CFO & Secretary]

Thanks, everybody.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you, please, disconnect your lines.