First Capital Real Estate Investment Trust

TSX:FCR.UN

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the First Capital Realty Q1 2018 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Alison. Please proceed with your presentation.

[Alison Harnick, General Counsel & Corporate Secretary]

Thank you. Good afternoon, everyone. In discussing our financial and operating performance, and in responding to your questions during today's conference call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in our various securities filings, including our MD&A for the year ended December 31, 2017, and our current AIF, which are available on SEDAR and on our website. These forward-looking statements are made as of today's date and, except as required by securities law, we undertake no obligation to publicly update or revise such statements. During today's call, we will also be referencing certain financial measures that are non-IFRS measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS' measures to aid in assessing the company's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this conference call. I'll now turn the call over to Adam.

[Adam E. Paul, President, CEO & Director]

Okay. Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today. We know this is not a quarter-to-quarter business, but Q1 was another very good quarter across the board. The fundamentals of our necessity-based, retail-focused properties in Canada's largest urban growth markets remain strong, and consequently, growth continued at First Capital. We're not surprised. In the day-to-day grind that we're always going through on the ground, in the business, things feel good. More and more people continue to move into our primary trade areas. Increasing the population or the supply of high-quality retail space is moderate at best and where there is very little new supply. Demand for First Capital space is healthy and is coming from great retailers. We're optimistic against this backdrop, and we'll continue to apply the capabilities of our platform to create value in our urban portfolio, and our pipeline of value creation opportunities continues to grow. For every property we buy, we have a value creation vision. We've acquired over $700 million of these properties over the last 3 years alone, with an additional $550 million in development activities. So in that time frame, we've invested over $1.2 billion in exceptional urban retail-focused assets and, while doing so, created significant value. During that 3-year period, our NAV per share increased 22% from $18 to $22. That equates to roughly $1 billion of NAV creation. It's happening in all of our major markets, as our properties continue to season, like Liberty Village, for example. As the neighborhood and our assets have grown and matured, so have market rents. Several tenants have now renewed their initial tenure leases where the rent has more than doubled. We're seeing preliminary signs that our Yorkville Assets will follow a similar path. As we continue to execute our strategy, the low-end place density on our portfolio limits our downside considerably, as the land is often the most valuable component. And the passage of time typically makes this land even more valuable, while various successful shopping centers continue to operate. There are many examples of this that I can give, like Humbertown Shopping Centre and the shops at King Liberty in Toronto; Meadowvale Shopping Centre, which sits on 42 acres of land in Mississauga; Pemberton Plaza and Staples Lougheed in Vancouver; or Galeries Normandie, Portobello and Domaine, which sit on a combined 73 acres of land in Montreal. These are typical FCR assets, fantastic land, underproductive retail properties that keep getting better and more valuable over time. The strength of these centers gives us tremendous flexibility, so we'll continue to take a measured and thoughtful approach to rezoning and redeveloping our properties to maximize and balance the consistent growth in FCR over the short, medium and the long term. In the interim, our development program continues to progress very well and carries a relatively low-risk profile, given the high level of control we have on the space as well as timing. With increased construction cost and potentially increasing interest rates, the measured and advanced pace of our active projects positions us very well. All of our 5 major projects are nearing completion, with active and substantial pre-leasing and capital funding complete. That, together with our pipeline being almost entirely in the form of successful income-producing property, means we are long development from an opportunity perspective but not from a risk perspective. If interest rates shoot up or developments become uneconomical for a period of time, we simply keep operating and generating increasing cash flow. We don't have large development commitments. Instead, we phase our developments in a measured and prudent pace that allows us to have a material impact on our business over time but without overexposing ourselves. Our debt ladder is also a major factor to consider. We target a 10-year ladder for our fixed-rate debt, and we are even longer than that today. Only 1/4 of our fixed-rate debt will mature over the next 3 years. The interest rate on that expiring debt is 5.4%, roughly 150 basis points higher than our current cost of 10-year debt. This provides a very large cushion if interest rates rise or a meaningful savings if they don't. The bottom line is that our debt ladder materially reduces our risk profile, which helps us execute our development activities.I'll touch on our EBITDA for a moment. Our business is very focused on the creation of intrinsic value, but the way we do so puts a lot of pressure on our debt-to-EBITDA. I'll give you a few examples:So first, the $60 million receivable from CAPREIT on our King High Line project, which will reduce our debt on investment that has no EBITDA; second, Main & Main. We made a lot of money on Main & Main, but it's been terrible for debt-to-EBITDA. And a final example for today, our Royal Orchard property on Yonge Street that we bought in 2013 at a very low yield because the successful grocery anchor had a low-single-digit rent with no term beyond 2019.So now we have options. One would be to renew the food store at a significant multiple to their current rent. This actually turned out to be a great plan B. The better option for us was selling a 50% interest to a res partner at significantly more than our cost, which we've now done. And together, we will develop a mixed-use property. So these are just a few examples that were all great for intrinsic NAV creation, but challenging for debt-to-EBITDA to the tune of almost 100 basis points alone. There are many more examples I can give. We'll talk about Christie Cookie at a future date. As Kay will touch on, we enhanced our disclosure again this quarter related to our density pipeline. Our 22 million square feet of incremental density, or 90% of our existing GLA, makes us the best covered land play available. Only 14% of this density is included in our IFRS NAV. This is yet another source of downside protection with substantial upside opportunity. Even with a very conservative per-square-foot value assumed for the 18 million square feet of incremental density not yet included in our IFRS NAV, the total and per share value is meaningful. I'll move on to leasing. Under Carmine Francella's leadership, the culture, talent and capabilities of our leasing group have never been stronger. The level of collaboration and interdepartmental reliance with other groups, such as operations, legal, design and construction, accounting, HR and so on, to achieve our leasing goals is how our culture has evolved. Some tremendous work has resulted, and our most recent year being the most active ever from a leasing perspective with over 3 million square feet of completed transactions. But equally important to the quantum of the leasing has been the quality of it. The group has a culture of being proactive in identifying retail uses and operators who can have the most impact on the overall tenant mix and, ultimately, overall sales for our centers and then securing those tenants. The easier strategy is to pursue the path of least resistance. We however pursue the path of maximum impact, not only to the individual space being addressed, but the property and our position in the neighborhood as a whole. Barcelona Tavern and Liberty Village, the new daycare in our North Vancouver Pemberton Plaza and Galerie de Bellefeuille in Yorkville Village are just a few very good examples of this philosophy in action. Some of the tenants who took possession of their space in 2018 so far and are preparing to open are: McEwan's at One Bloor, Longos at King High Line and Covenant Health at Westmount Shopping Centre. Some of our tenants who have now opened new stores so far in 2018 are: Loblaws at 3080 Yonge, Radford and Bois & Cuir in Yorkville Village, Willowbrae Childcare Academy at Millstream Centre, Indigo Spirit at Olde Oakville Market Place, Barcelona Tavern in Liberty Village and, most recently, Nordstrom Rack at One Bloor who opened last Thursday to 2 massive lineups on both Yonge and Bloor, as you can see on Slide 5. Early days, but this is one of the strongest openings we've recently seen. We ended last year with an overall occupancy level that was 170 basis points higher than when we started the year, and this activity continued in Q1, 176 transactions with 548,000 square feet of renewals and new leasing, and a period-end occupancy of 96.2%. Back in 2011 when we last achieved this level, the average rental rate per occupied square foot in our portfolio was $16.81. Today, that number is 18% higher at $19.84, which is industry-leading amongst our public market retail peers. This is a true testament for the quality of our real estate, our people and our platform. It's also a number that has increased every quarter, and we expect will break through $20 for the first time this year. So kudos to our all-star leasing team and every group who collaborates and supports their activities.Rental rates are an important metric. High-quality properties command higher rents from strong tenants. And our rental rates and their long, medium and short-term trends make it clear FCR continues to be best-in-class. The last topic I'll address relates to tuck-in acquisitions of adjacent properties. I've talked about the benefits of scale on our target notes. Adjacent property acquisitions is a very difficult skill set in the markets we operate in, but it's something our platform is very good at. We're always planting seeds that continue to sprout over time, which has resulted in us quietly continuing to regularly tuck in properties that cumulatively make a real difference. Over the last 3 years, we've acquired 20 strategic adjacent properties. Examples include the BrightPath Daycare and Scotiabank properties in our McKenzie Towne Centre in Calgary, The Beer Store building in our Kingston Square property in Toronto, the Pharmaprix building in Montreal's Griffintown and in Q1, 2 properties adjacent to our Glenbow assembly in downtown Calgary that we co-own with Allied REIT, as well as the BMO at our Christie Cookie property and 121 Scollard that sits directly to the North of our 102 - 108 Yorkville properties, which has a shared walkway that enhances the pedestrian connectivity and walkability of both properties from Yorkville now all the way through Scollard.The synergies, redevelopment flexibilities, influence over the merchandising mix, integration and scale opportunities that these type of tuck-in acquisitions add is substantial, especially on a cumulative basis. As I spoke about on our last call, our mindset has evolved more towards investing in neighborhoods. And therefore, this part of our acquisition strategy will be an area that we continue to focus on.I'll now pass things over to Kay to review our Q1 in more detail. Kay?

[Kay Brekken, Executive VP & CFO]

Thank you, Adam. Good afternoon, everyone, and thank you for joining us today. We were very pleased with our strong results for the first quarter. As indicated in our Q1 press release, we are no longer reporting operating FFO and have moved to reporting only FFO in accordance with the recommendations of REALPAC. All of the information to calculate our former operating FFO metric is available and will remain available in our MD&A. Our operating FFO was defined as FFO before other gains, losses and expenses, and detail on both of these numbers is included in the MD&A. If you calculate the numbers for this quarter, operating FFO would have increased 6% to $0.298 per share from $0.281 cents per share in the same prior year period.I will now cover the financial results for the quarter in more detail. Starting on Slide 7 of our conference call deck, we generated strong growth in FFO in the first quarter. Our FFO increased 10.7% or $0.29 cents on a per share basis and 11% or $7.3 million in dollar terms versus the same prior year period. The primary driver of the growth in FFO was a $5 million increase in NOI. The increase in NOI was due to 2 key factors: first, growth in same-property NOI of $2.4 million driven primarily by rent escalations; and second, growth in nonsame-property NOI of $2.5 million, primarily due to development completions and the impact of straight-line rents. We have a greater number of tenants in fixturing compared to the same prior year period as a result of development completions and increased occupancy. Moving to Slide 8. Our Q1 2018 same-property NOI increased by 2.6% versus the prior year. The growth was primarily driven by higher same-property rental rates due to rent escalations. As a reminder, our same-property NOI is reported on a cash basis. Therefore, the impact of our increased occupancy rate is reflected in same-property NOI once our tenants began paying cash rent. This has not yet occurred for many of our new tenants.On Slide 9, we present our lease renewal activity for the quarter. Our Q1 total portfolio lease renewal lift was 7.6% on 353,000 square feet of renewals when comparing the rental rate in the last year of the expiring term to the first year of the renewal term. The lease renewal lift was 9.1% when comparing the rental rate in the last year of the expiring term to the average rental rate in the renewal term. We have added this additional metric, as it is more common today that our renewals include escalations over the renewal term than it was in the past. This new metric captures those escalations and conveys a more relevant picture.Moving to Slide 10. Our average net rental rate grew 2.5% or $0.48 over the first quarter of 2017 to $19.84 per square foot, primarily due to rent escalations, renewal lift and development completions. During the quarter, we transferred 42,000 square feet of new GLA plus some common area space from development to income-producing properties with an invested cost of $60 million and an average rental rate of $49.25 per square foot. On Slide 11, our total portfolio occupancy rate increased by 170 basis points to 96.2% since Q1 of 2017, primarily due to significant leasing activity over the last 12 months with new tenants taking possession of approximately 1 million square feet of space. This is our highest quarter in occupancy rate in the past 6 years.Slide 12 highlights our 5 largest developments that accounted for the majority of the $50.5 million of development spend during the quarter. As of March 31, 2018, we have identified approximately 21.7 million square feet of additional density within our portfolio, including 2.8 million square feet of commercial density which is primarily retail and 18.9 million square feet of residential density. This represents a substantial opportunity relative to the size of our existing portfolio, which is 24 million square feet. Approximately 3.1 million of the 21.7 million square feet of incremental density is included in the fair value of investment properties on our balance sheet. This 3.1 million includes 500,000 square feet that is under active development and is valued as part of our development projects and 2.6 million square feet of incremental density, which is included in our IFRS values at approximately $160 million. The remaining 18.6 million square feet of density is not included in our IFRS values. Our conservative approach has resulted in us excluding this density primarily due to tenant encumbrances which will free up, over time, through lease renewal negotiations and through lease expirations. We have not undertaken zoning approvals for all of this density, as it is located in various successful shopping centers with strong tenants, which means there is no urgency to rezone it today and take the risk of increasing the property tax burden on each of these shopping centers or limiting our flexibility in the future.I would also like to highlight some recent activity where we have monetized on the residential density within our portfolio and no longer included in our pipeline. In the current quarter, through Main & Main, we closed on the sale of 18 properties, which included 1.3 million square feet of residential density and a small amount of commercial density. In addition to this, we have sold, over the past several months, over 1 million square feet of residential density as part of our development projects including the following: residential air rights in Carré Lucerne in Montreal to a condo developer who has completed the construction of a 7-story condo tower, including 114 units, which are now fully occupied; residential land in The Brewery District in Edmonton to Great-West Life, who has the potential to build over 700 residential units; residential air rights in Mount Royal West in Calgary to Embassy BOSA who is under construction on a 34-story condo tower with 225 units. This project is expected to be completed in the first quarter of 2019; a 50% interest in the residential land at Rutherford and at Royal Orchard, both of which are located in Toronto to Greenpark Homes, who is our development partner in these projects. And lastly, the residential air rights in Phase 1 of our Wilderton redevelopment in Montreal. These projects, combined with the Main & Main disposition at our interest, have monetized on approximately 1,580,000 square feet of residential density at a value of $125 million. This represents a very small portion of the residential density within our portfolio. As substantially, all of our portfolio is located in urban markets where significant land-use intensification continues to occur, we expect our future incremental density will continue to grow over time, providing us with further opportunity to realize value from this density.Slide 13 shows the factors driving the growth in FFO and the related movements over the prior year. This slide also highlights our FFO payout ratio, which improved to 71.4% for Q1 2018, down from 79% in Q1 2017. Slide 14 touches on our other gains, losses and expenses, which are included in FFO with a $2.9 million improvement in other gains, losses and expenses versus Q1 of last year due to 2 factors: First, a $1.6 million reduction in noncash losses on the redemption of convertible debentures, as we redeemed 2 series of debentures in the prior year period and only 1 series in the current year period; and secondly, an increase in unrealized gains on marketable securities of $1.3 million versus the prior year period. I would also like to highlight that we no longer have any convertible debentures outstanding and, as such, would no longer report noncash losses on redemption activity. Slide 15 summarizes our ACFO metric. Our Q1 2018 ACFO increased 1.3% over the prior year period, primarily as a result of higher NOI, which I discussed earlier. Information on key financing activities for the quarter is on Slide 16. During the quarter, we repaid at maturity the $31 million outstanding balance on a mortgage with an effective rate of 6%. We then refinanced this very same property with a $68 million 10-year mortgage with an effective interest rate of 3.7%. Our total mortgage repayments in the quarter were $89.2 million with an effective interest rate of 5.5%. And as mentioned earlier, we also redeemed in cash $55 million of convertible debentures with an effective interest rate of 5.3%.Slide 17 summarizes the size of our operating credit facility and our unencumbered asset pool as well as key financial ratios. Our unencumbered asset pool is at $7.3 billion or 74% of our total assets. Our net debt-to-EBITDA ratio increased -- decreased slightly in the quarter as we completed the sale of a number of assets and use of proceeds to reduce outstanding debt. I would like to highlight that on the Q1 disposition of the Main & Main assets, which were primarily sold based on the value of the residential density, we achieved a $14 million gain at our interest versus the cost of these assets. This gain is not reflected in our debt-to-EBITDA ratio, but would be had we held and developed these assets as residential inventory, including this small gain alone would result in our net debt-to-EBITDA ratio dropping by 30 basis points. Slide 18 shows our 10-year term debt ladder. Our weighted average interest rate declined to 4.3%, and our weighted average term remained unchanged at 5.4 years. We continue to have future opportunity for interest rate roll down in our near-term maturities. We have $185 million in 2018 debt maturities with a weighted average interest rate of 5.3%. Overall, we were very pleased with posting another consecutive quarter of very solid results. At this time, we would be happy to take any questions you have. Operator, can you please open the call for questions?

[Operator]

[Operator Instructions] The first question is from Dean Wilkinson.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Just on the density and your ability to increase that, Kay, I think you mentioned that there -- you haven't gone for zoning approvals for the majority. Is there any of that, that would be, like say maybe, like, the medium-term residential density? Or is that all to be done sort of as the time you want go into development?

[Adam E. Paul, President, CEO & Director]

So Dean, certainly, the way we're viewing the pipeline is on a phased and measured approach. And there's a lot of factors that we consider in terms of allocating the properties into those buckets from, most commonly, the encumbrances from tenant leases and how it fits into our overall program, the highest and best use for the property at the time versus where we think it may be in the future. And so those are some of the factors. If you're looking for examples of kind of the next set of properties that we're looking at to moving into active development as we complete the 5 major ones we have right now, if that's one of your questions, we certainly would be happy to answer that as well.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Kind of going towards that, yes.

[Adam E. Paul, President, CEO & Director]

Okay. So maybe, Jodi, you want to...

[Jodi M. Shpigel, Senior Vice President of Development]

Dean, so we have a number of projects that are in active predevelopment that will become active over the short term. And we're pleased to say that our Wilderton Shopping Centre we developed in Montreal is active as of the second quarter with our first phase, and that's a mixed used complete redevelopment of that shopping center in a great neighborhood in Montreal. And then over the course of time in a short term, we're going to have our Rutherford land that's developed with our partner, Greenpark, that's a townhouse development. Semiahmoo in South Surrey. The first phase, which is a former Zellers box is being repurposed into multiunit retail, including daycare and fitness. 101 Yorkville Avenue here with -- in Toronto, we're working on our redevelopment of the current building into a 4-story redevelopment that will have retail units, restaurants along with some potentially an office component. That's expected to be active over the next 12 months. In North Vancouver, we have a property that's going to be redeveloped with a partner. We selected a very high-quality local developer. We're going to redevelop this building into a mixed use retail and residential project. Back in Toronto, Leaside, next to our Leaside Village, a very successful shopping center, we have land that we acquired a number of years ago. That's going to be developed into also multiunit retail, fitness and restaurant. Humbertown, we've spoken about this before. Our first phase, which is a mixed use retail and residential building and our partner is Tridel. Royal Orchard in Thornhill, that's the one that Adam touched on earlier. It's the redevelopment of our existing shopping center that will be mixed use, retail and residential. That's also in partnership with Greenpark, a very prominent local developer. And then, finally, here in Liberty Village, our 1071 King Street property, we are working through a partnership to develop this land into mixed use of retail, office and residential. So those are just some examples of the next wave of development over the next while.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

That's a pretty robust list. Jodi, have you run into any issues in terms of sort of the new process with the OMB going out? And has anything sort of kicked in yet, sort of talk to any of that?

[Jordan Robins, Executive VP & COO]

Yes. Dean, it's Jordan speaking. It's probably too early to tell is the very short answer. We really look at it as follows and maybe a little bit on a global basis. We own 161 centers that are -- within the best locations in the 6 largest cities in Canada. And they're all performing and, frankly, getting better over the course of time. The one thing that I would say that we know for sure is that the power has certainly shifted from the board back to the municipalities. And we really see this as a good thing. It bodes well for us, given our relationship with the municipalities in light of the historic development work that we've done, and I would say our mutual interest in building what we refer to as community hubs.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Would you anticipate that it's probably going to be harder if you're not already established in those municipalities and don't have the relationships?

[Jordan Robins, Executive VP & COO]

I would say that's probably true. The good news is we are in those municipalities and we do have those relationships.

[Adam E. Paul, President, CEO & Director]

I'd be surprised, Dean, if that didn't happen because given the city has increased power, the bottom line is when we're developing, the city knows we're developing with the mindset that we are going to own the asset in perpetuity. And it comes through in things like architecture and public realm space and the quality of construction. And they notice a difference between that approach and the merchant developer approach. And obviously, within the merchant developer category, there's some that do it a lot better than others. But as a whole, it's a bit of a different approach than when you're building for the long term and you're considering the contribution to the community because, ultimately for us, we will create more value over the long term if we do those. So there's a lot more overlap and the city recognizes that. And so you've got an advantage when you're seeking approvals with that type of track record, that type of mindset and those types of relationships.

[Operator]

This next question is from Sam.

[Sam Damiani, Analyst]

Sam with no last name. Just on the access density, just to -- want a clarification. Is Christie Cookie in the 22 million square feet or no?

[Kay Brekken, Executive VP & CFO]

Christie Cookie is included in that at a conservative estimate.

[Sam Damiani, Analyst]

Okay. And is it part of the $160 million or 2.6 million square feet?

[Kay Brekken, Executive VP & CFO]

It would be, yes.

[Sam Damiani, Analyst]

Yes. At its cost, I would gather.

[Adam E. Paul, President, CEO & Director]

Yes.

[Sam Damiani, Analyst]

Okay. And that portion, like, how did you approach valuation of that 2.6 million square feet over and above, obviously, the Christie Cookie? You sort of worked out to $60 a foot on average. I'm just curious how you arrived at that.

[Adam E. Paul, President, CEO & Director]

I mean, generally, the mindset to all of our financial reporting is to take a reasonably conservative approach. And so if you look at it from that perspective, we looked at the properties where we have clear visibility over the relatively short term to actually get access to that density, if we don't have it already. And then beyond that, it's generally a review of market comps for what the value of that density is, in some cases, discounted based on a number of factors, and that was from a macro level of the approach.

[Sam Damiani, Analyst]

And how fresh is that $160 million number on the balance sheet? Was that sort of updated a year ago, just this quarter? Just wondering how stale that figure could be.

[Kay Brekken, Executive VP & CFO]

IFRS doesn't allow the option of stale data. So I would say it is something we need to look at every quarter. And if we think there's a significant change, it does need to be updated. The vast majority, 100% of that is land values. You're really looking at a comparable sales approach to do that valuation.

[Sam Damiani, Analyst]

But I guess, when was the last time there was a meaningful increase to that number?

[Kay Brekken, Executive VP & CFO]

It really varies by trade area across the country and what we're seeing through the value of those densities. So any time a new sale happens in that trade area, that would factor in.

[Sam Damiani, Analyst]

Okay. Fair enough. I mean, the sales that you had completed worked out to closer to $80 a foot, so just maybe there's some upside there, but just trying to understand what the basis is.

[Adam E. Paul, President, CEO & Director]

Yes. I'd say there's 2 factors there. Number one, Main & Main was a component of what we sold and that would carry, on average, a higher rate per foot. And secondly, which is not atypical from a lot of the stuff we've sold is that we've been transacting generally at or above NAV.

[Operator]

[Operator Instructions] The next question is from Michael Smith.

[Michael Smith, Analyst]

Just following up on that 22 million square feet of density, is it fair to say that the density potential of the Metro and Liberty Village is included there, but not in the $160 million you have identified?

[Adam E. Paul, President, CEO & Director]

That would be a fair assessment.

[Michael Smith, Analyst]

That's just simply because of the length of the lease, I guess.

[Adam E. Paul, President, CEO & Director]

Yes. I mean, we're just not -- we're not -- yes, I mean, the lease contract has resulted in us not having enough comfort in the visibility of getting access to that density over the relatively short term. And so who knows what will happen? My expectation is there's some agreement that's arranged with Metro prior to that. But until we get to that point, we are likely to carry it in that 22 million square feet, but not carry it on our balance sheet based on the IFRS value.

[Jordan Robins, Executive VP & COO]

But I mean, that's a very good example of the shortcoming. And when we talk about things like debt-to-EBITDA and putting numbers on the chart, these are some of the things that really are material, but don't come through because our res developer may come in and buy that for a 2% cap rate because of the long-term value potential. But that doesn't come through. That doesn't come through our NAV. That doesn't come through our debt-to-EBITDA. But it's kind of one of many what I would describe as hidden components beneath the surface that to us, speak to the underlying risk return profile of the business.

[Michael Smith, Analyst]

Yes, absolutely. And just on debt-to-EBITDA, you spent a lot of time at the beginning of the call just talking about that. How do you talk about your leverage internally? Like what -- forget reporting to The Street or to analysts, investors, how do you think about it internally given all those factors you mentioned?

[Adam E. Paul, President, CEO & Director]

Well, the way we talk about it internally is holistically looking at a lot of different factors and drilling down beneath the surface of what the various metrics we look at, say, to understand the real risk and opportunity behind them. And we have a philosophy that really starts at the board level that this is a long-term active business. We are going to operate this business through various economic cycles, various boom times, various recession or shock times. And we are constructing the business in the balance sheet to prosper and sail through, not only to achieve what we've got underway, but to take advantage of opportunities if and when they arise. And so we structured our financial affairs in that way. And it's not a silver bullet where we can kind of put the metrics in a nice Excel model and it kind of gives us a scientific answer. So we talk about it at the board level by looking at a lot of various metrics, a lot of color behind the metrics and having consensus across the board and the management group that we are comfortable with the risk profile. We understand the costs that we pay for that risk profile and if you look at their debt ladder, it's a very good example. Having a weighted average term of 5.5 years versus 3 years is a huge cost, a huge impact on FFO, but we have agreed at the board level that, that is worth the cost. And it doesn't take many times, but in a major downturn or a major unexpected economic shock that is inevitable at one point that we will fare well in a -- on an absolute basis and a relative basis. And so that's the context on how we view the balance sheet and debt overall.

[Michael Smith, Analyst]

Okay. Fair enough. If you could talk -- just talk about the leasing markets. I mean, you've had some leasing momentum. I wonder if you could just give us some color, who's expanding? Who's contracting? What are -- what -- what's the tone at the negotiations -- negotiation table?

[Adam E. Paul, President, CEO & Director]

Yes. I mean, I'll -- I can start and then Carmine is with us, and he's kind of -- he's obviously even closer to it. But I mean, I'll caveat the whole thing by saying the way we view the business at the end of the day, is the real estate is permanent, the tenants are temporary. And that's no disrespect to the tenants who are obviously a critical part of our business. But 25 years ago, if you looked at the tenants that you wanted in your portfolio, it's a totally different list than you would have today, not totally, but substantially different. And we always focus on the real estate and ensuring that we're comfortable that the demand and the value of the real estate, over time, will go in the right direction regardless of whether the same tenant is there or not. And then, as you know, we've merchandised the assets with what we refer to as primarily necessity-based retail. And we're fortunate that the categories within necessity-based retailers are all doing very well, including the food stores and particularly in the major markets. You look at 2017, food stores had a lot of headwinds in the sector, resulted in generally flat same-store sales growth for the grocery industry at large. Our portfolio, the food store sales were up nearly 3.5%. It speaks to the momentum and the bifurcation that's occurring in the major urban markets and the secondary markets. And so if you look across our sectors, fitness, restaurants, medical, daycare, fitness, liquor, anything related to food, a very strong bid and demand for space on our markets. Anything else, Carmine, that you were seeing -- that you're seeing?

[Carmine Francella, Senior Vice President of Leasing]

No, that hits them all. But I mean, we're still seeing -- we're still experiencing strong demand from a lot of the retailers we're targeting, which is leading to a stable environment and providing us with an opportunity to grow our rental rates.

[Operator]

The next question is from Matt Kornack.

[Matt Kornack, Analyst]

Just wondering if you could touch a bit on what is near term in terms of moving into cash generating from the development portfolio and maybe some more on timing of how you see King High Line coming on, what's going on at One Bloor and then also any update with regards to Yorkville Village.

[Adam E. Paul, President, CEO & Director]

Okay. Let's break down those questions. So the first part, I think, we -- this is in the MD&A.

[Kay Brekken, Executive VP & CFO]

Yes, near-term development completion. So it is outlined in the MD&A in terms of what underdevelopment and the timing of when we expect things to complete. So included in that list would be further development completions in Yorkville. We have one tenant in possession now at King High Line, which is Longos, took possession in the first quarter. At One Bloor, McEwan is in possession of Nordstrom Rack. It's open. Mount Royal West, we will expect the development completion is largely in the second half of this year.

[Adam E. Paul, President, CEO & Director]

What did we miss, Matt?

[Matt Kornack, Analyst]

And -- but it sounds like it doesn't. It's not like those -- when it says Q1 or H1, it's sort of a staggered process. And then presumably, they go into fixturing. And then when exactly does the capitalized interest come off? And also, in this quarter in particular, it looked like capitalized interest ticked up. Is that related to those projects or the addition of some longer-term projects, including Wilderton and others like that?

[Kay Brekken, Executive VP & CFO]

The capitalized interest stops when the tenant takes possession of the space. And we do have more in terms of the total dollar amount under development right now. So that's what's causing capitalized interest to move up.

[Matt Kornack, Analyst]

Okay. And I don't know if you can provide this, but do you know what the spread would be between the yield on cost for King High Line versus the capitalized interest just in terms of what the differential would be to hit when that does come online? And then I don't know if you can speak to it as well, but it's -- there's been some reports that you're getting pretty solid residential rents in that property.

[Kay Brekken, Executive VP & CFO]

So in terms of the MD&A disclosure that we do, we do it on all of our projects overall. So going in yield of 5.1% and capped interest rate of about 4.3%. And I'll let Jodi touch on leasing of the residential.

[Jodi M. Shpigel, Senior Vice President of Development]

Thanks, Kay. So Matt, we just actually started the leasing of the residential at King High Line very recently in the last week or so. And so it's early days, obviously, but we're quite optimistic. We know that the market has moved up over the last number of months and years. So we will have more information to share over the next couple of quarters on that.

[Adam E. Paul, President, CEO & Director]

I think what we didn't fully appreciate until recently is the premium that a product like King High Line will command as a result of the retail amenities embedded in the project. And so to have a 40,000-foot Canadian tire and a 40,000-foot Longos food store and a shoppers and probably the best daycare in downtown Toronto, including the actual indoor space, the outdoor space and the way caregivers can drop the child off, either by foot or by car or by public transit, and then all the amenities that are actually embedded in the residential component. But I think from the retail, I think we probably underappreciated the premium that, that type of residential product will command based on that retail amenity package, not to mention what's going to happen in a few years when the SmartTrack station opens up, the pedestrian bridge connection onto the King High Line project, our improvement of the bridge across King Street that connects us to the South side of the property. And, ultimately, a pedestrian or cyclist will be able to get all the way from Davenport down to Liberty Village without crossing a public street. And so I think when you -- when we kind of pro forma the rental rates, we underestimated the type of premium that, that type of product will attract, not to mention just the general market improvement in rental rates period across the residential space.

[Matt Kornack, Analyst]

Interesting. No, I appreciate that commentary. You guys just need to call yourself food and service distribution, and then maybe you'll be trading at a 52-week high as opposed to where you currently are.

[Adam E. Paul, President, CEO & Director]

That would be nice.

[Operator]

The next question is from Pammi Bir.

[Pammi Bir, Analyst]

Just maybe coming back to leverage for a minute and the debt-to-EBITDA discussion. Are you comfortable where you are, where you're operating in that, call it, a little above 9.5x and where you see that over the next, call it, 1 to 2 years as you have some of these projects come online?

[Kay Brekken, Executive VP & CFO]

So Pammi, we look at a number of metrics. And I would say that, overall, that's just one of amount of the group of debt metrics. And most of them are very conservative, so we remain comfortable in that range. I think I spoke on the last call given the large amount of development completions expected this year and early into next year, that we would see it moving down this year and again next year as well.

[Pammi Bir, Analyst]

And if you think about, again longer term, and I realized you're -- you likely have multiple projects kind of going on at the same time, but you're coming down. But then as the other projects start to -- you start spending on some of those projects, where do you sort of see it operating in a -- on a longer-term basis?

[Adam E. Paul, President, CEO & Director]

I think it's a range that we're not really best suited to comment on now because I would say, right now, we're kind of at the high range of where we would like to operate. But the bottom line is if we have great opportunities to create a lot of value in the business like we have and it pushes the debt-to-EBITDA up a bit, then we're probably going to do that. And it's going to have an impact on our debt ladder and how the rest of our balance sheet looks. But if you look at the last few years, we've taken our debt-to-assets down meaningfully. But because of the investments we've done and we've created huge NAV creation, it's pushed our debt-to-EBITDA up. So have we delevered or not, depends which metric you look at. And so we'll continue -- we're not going to kind of box ourselves in on debt-to-EBITDA. We're going to look at it in the context of the overall business and the overall opportunity set. We're going to continue to move towards a more conservative balance sheet, but it's going to be a function of a bunch of factors, Pammi, if we're looking at the long term.

[Pammi Bir, Analyst]

Right. I guess, it's also just -- you're also trying to manage -- or you've strive toward a certain FFO growth since that has been the focus over the last few years. So does that factor into your -- or I presume it does, but maybe just some color on how that may factor into your decisions on capital structure.

[Adam E. Paul, President, CEO & Director]

Yes, of course, it factors in. But I would say that we would place very similar relevance to growing our NAV per share and our FFO per share. What's been different the last couple of years is that our track record prior to that had been much better at growing NAV per share than it had been FFO per share. And our equity investors were very comfortable letting us know that, which we appreciate and we listen to. And so for a period of time now, we made FFO a very high priority, and we've done a good job. We've certainly grown our core FFO well above the industry average. We've taken advantage of the position that we had created over the last 15 years of what we've assembled in the business. And now we've been doing a very good job of growing both FFO and NAV. And so that's what we expect to continue to do going forward. And obviously, our balance sheet, and the more flexible it is, the more flexible our opportunities are or the ability to take advantage of them will be.

[Operator]

The next question is a follow-up question from Sam Damiani.

[Sam Damiani, Analyst]

Just on the funding of the developments, on the next line of the developments you've got on the go, is it going to be more dispositions? What sort of assets would you consider selling to maintain the balance sheet?

[Adam E. Paul, President, CEO & Director]

Yes. I think some of the funding will come from the retained operating cash flow that we continue to generate as we have kept growing our earnings, but we've held our dividend. And then we'll continue to sell. And I think it'll come through a combination of the type of asset sales you've seen over the last year or 2. So we've got a roster of assets that are -- we think are very good and still have growth left in them. But they're a little more stable. And I would put our London portfolio in that category. And so we sold a half interest to an institutional investor we have an existing relationship with. And so that's been a great capital source for us and a great opportunity for our partner. And so I think we still have some real estate that has that type of profile. And then we still have, albeit an increasingly shrinking amount, but some assets that we're prepared to part with entirely where we feel that the value creation opportunity, in terms of what we do, has either been maximized or due to proximity to other assets and the inefficiencies of managing them, we just -- for us, we can't move the needle with them and we'll just move on.

[Sam Damiani, Analyst]

And how would you characterize the market for shopping center investments? Is it as strong as it was a year ago in terms of buyer demand or investor demand?

[Adam E. Paul, President, CEO & Director]

Yes. I mean, we'll look at it from both sides. We'll look at it from what we're seeing as a buyer as well. And I would say for the type of real estate we generally own, things have been more expensive than ever, more expensive than a year ago and a little tougher to buy than a year ago.

[Operator]

There are no further questions registered at this time. I would now like to turn the meeting over to Adam Paul.

[Adam E. Paul, President, CEO & Director]

Okay. Thank you very much, operator, and thank you, everyone, for attending today and for your continued interest in First Capital. Have a great afternoon. Thank you, and bye-bye.

[Operator]

The conference has now ended. Please disconnect your lines at this time, and we thank you all for your participation.