First Capital Real Estate Investment Trust

TSX:FCR.UN

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the First Capital REIT Q1 2020 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Alison. Please proceed with your presentation.

[Alison Harnick, Senior VP, General Counsel & Corporate Secretary]

Thank you. And good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today's 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 statements. A number of these underlying assumptions, risks and uncertainties -- a summary of these underlying assumptions, risks and uncertainties is contained in our various securities filings, including our Q1 MD&A, our MD&A for the year ended December 31, 2019, 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 any 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 & Trustee]

Okay. Thank you very much, Alison. Good afternoon, everyone. And thank you for joining us today. After I speak, Kay will take us through the quarter, and there are other members of our management team joining us as well for the Q&A section. Q1 really does seem like a distant memory. The world has changed so much since then. So my comments today will focus on the state of our business in light of the environment brought about by COVID-19 and the related government-imposed shutdowns. I'll frame the discussion by starting with the current shutdown phase, followed by the reopening phase and conclude with some thoughts we have as we look into the future beyond COVID-19 as it relates to FCR. To begin with the current phase, I'd like to start by acknowledging the efforts of the First Capital team, who have done a remarkable job in responding to the pandemic as a result of their focus, agility and dedication. When this first hit, one of the first act was our IT team. Within 48 hours, they had 100% of our staff up and running with the tools needed to work safely, effectively and remotely. Our property operations staff have been exceptionally busy as well, ensuring the safety and security of our tenants and properties. FCR's frontline workers are our property operations team. These dedicated employees continue to be front and center at our properties to ensure they are safe, secure and that maintenance standards are met in order for our essential tenants to continue serving their respective communities who are relying on them more than ever.Communication with tenants has been a big priority. This is not business as usual. So the focus on direct communication has been increased. Everything from dealing with tenant requests, helping them navigate available government programs and sharing links and information on COVID-19 best practices among other information. Our accounting valuations and finance teams didn't miss a beat and completed Q1 results and reporting while working together but apart. Our leasing and legal teams continue to work with operations and with many tenants directly. In addition to our small business support program, this team has also been negotiating and completing lease renewals and even a handful of new lease transactions.Our brand and culture team has been providing employee support and implemented a communications hub for information on the coronavirus as well as a resource center for webinars on topics such as leading teams remotely and enhancing mental wellness. And our development and construction teams are doing their very best to move our active projects along while keeping the site safe, whether they're open or closed. Furthermore, this team is preparing for the full reopening of our sites and projects while still working directly with city officials on high-priority files the city has kept working on remotely, such as the rezoning of our Christie Cookie site. In terms of our portfolio, its foundation is necessity-based, which has provided us with some cushion. Through the lockdown, there has obviously been bifurcation between retail that is designated essential versus nonessential. FCR has been and remains focused on providing communities with essential services through our properties, including grocery, pharmacy, liquor stores, restaurants for curbside takeout or delivery, certain medical uses, among others. This, combined with our urban locations, should serve us well as we slowly commence reopening.Our portfolio today can be summarized as follows. Approximately 1,700 tenants representing 54% of total rent are fully open. Approximately 330 tenants representing 7% of total rent are partially open. And roughly 2,300 tenants representing 39% of total rent are closed, although we still consider these tenants an important part of our tenant mix going forward.In terms of April rent, we collected 74% of the total gross rent payable before adjusting the rent role for rent deferrals that have been agreed to, such as those under our small business support program. At this stage, we believe that a significant portion of the uncollected April rent will ultimately be collected. Aside from small business tenants subject to deferral arrangements, tenants that have not paid generally fall into 1 of 2 categories. The first are large companies who we believe have the means to pay rent. Aside from whether or not they are operating, their covenant strength and access to liquidity are important factors to us in assessing their ability to pay. We will take an aggressive approach to collect the rent owed from these tenants. The second are tenants who we believe do not have the means to pay full rent. Many of these are our small business tenants who are among the most vulnerable. To help them, we launched FCR's small business support program in March that provided immediate relief through up to $30 million in the form of rent deferrals. Thus far, approximately 1,400 qualifying tenants with a total monthly rent obligation of $9.3 million have applied.We launched this program to provide immediate relief. Since then, government has announced additional support. One such program is the Canada Emergency Commercial Rent Assistance Program, or CECRA for short. While well-intentioned, important details need to be finalized and understood before we definitively understand the impact to FCR. However, at this stage, we believe that roughly 25% of our tenants may qualify for the CECRA program, including substantially all of our tenants who qualify for FCR's small business support program. CECRA may prove to be a better option than FCR small business program, both for FCR and the tenant, but we'll await further details on CECRA to make that determination.Now on to May. It does take a bit of time to get an accurate picture on monthly rent given the timing of when tenants pay or are obligated to pay, time lines for checks to clear, time lines for electronic fund transfers to clear and so on. However, based on the 3 business days incurred to date to start the month, May rent collection is shaping up to be very similar to April. Nevertheless, we'll wait for funds to clear before making that final determination. Speaking of May, I'll move into the reopening phase with preliminary plans already in place in certain provinces. The only thing we know for certain is that the reopening phasing and time line will vary by province. Our team will be supporting our tenants with health and safety requirements, customer physical distancing control, PPEs where applicable, designated curbside pickup areas and more. We have a wonderful tenant base. However, we can't predict how different retailers will adapt to a graduated reopening. But some tenants may not survive causing vacancies. We'll endeavor to work with our tenants to ensure their success, failing which we're very confident in the quality of our locations and our ability to re-lease space. Now looking beyond the immediate future. Our team's focus is now turning to how best to harvest the learnings from this global tragedy and to develop a plan to enhance our current property attributes and business in general. We're more convinced than ever that our Super Urban strategy of creating thriving urban neighborhoods positions FCR well for the future. We know that essential service tenants have fared better in close proximity to higher or more dense populations. We know that food service locations, while impacted by the loss of seeding and in-dining availability, were able to shift a larger portion of their businesses to take that and food delivery, again, because of their proximity to higher and more dense populations. More than ever, we also know the value proposition of our real estate being centrally located in the heart of the last mile, a major factor in the future value of real estate. The likability of our properties should also result in better performance coming out of this. From a financial perspective, our objective to lower our debt through dispositions remains. However, we recognize the property transaction market is largely paused, as was the case during the initial phase of every previous crisis. We have had great success over the last year or so selling over $900 million of our leased urban properties. Fortunately, we were ahead of our disposition plan coming into this. We will not be inclined to dispose of high-quality properties at undervalued pricing. And accordingly, we expect our dispositions program to pause for the time being. Capital allocation, always a very strong focus, will be of paramount importance. It's too early to talk of any specifics in this regard as the lockdowns remain in place and the reopening time frame lacks clarity. But we are not coming off our objective to reduce debt in the short to medium term. Before I conclude, I would like to again reiterate FCR's deepest sympathy to those who have been victimized by this pandemic. I would also like to express thanks and gratitude to the many frontline workers who are the true heroes of this pandemic. As a means to support FCR's independent food tenants through this and to express our appreciation to front line staff, FCR is proud to be providing thousands of healthy and delicious meals to frontline workers in several cities in which we operate.I will end where I began with the FCR team. Through video calls, phone calls, town halls and emails, we have kept connected as a team, and we've accomplished an awful lot. I am tremendously proud of how the FCR team has lived our values and worked as one team with one purpose through this. I will now turn things over to Kay. Kay?

[Kay Brekken, Executive VP & CFO]

Thank you, Adam. Good afternoon, everyone. And thank you for joining us on our call today. As Adam mentioned, due to the worldwide pandemic, we are operating in a very different environment today. Never has it been any clearer how important our properties are to the communities in which we operate. Many of our tenants are providing everyday essentials in the midst of a global pandemic, the daily essentials, we've always assumed that we would have ready access to and literally cannot live without. We would like to recognize and thank all of our team members and our tenants for how quickly they have transitioned to the new requirements for social distancing and operating our properties, which has allowed the residents of our communities to safely acquire the products and services they need. I want to touch on our balance sheet and liquidity position leading into the pandemic prior to discussing our results for the quarter. In 2019, we completed $835 million of dispositions, which put us ahead of our internal targets. Early in Q1, we closed on another $81 million of dispositions and had another disposition go firm with closing expected in Q2. Given the significant amount of dispositions completed over the past 15 months, combined with our investment activities, our asset quality has never been higher. And we were in a positive cash position with $800 million of undrawn operating credit facilities heading into the pandemic. We had approximately $7 billion or 70% of our assets unencumbered, including the vast majority of our very best assets. Additionally, our near-term maturities were very manageable, with about 6% of our debt coming due in 2020 and another 7% in 2021, which is well below the 10% target we set for our annual maturities. Overall, a very solid position.I would like to briefly touch on our results for Q1, which, for the most part, were unimpacted by the pandemic, with the exception of $119 million noncash adjustment to the fair value of our properties as described in our MD&A. We've posted our conference call deck on our website, which presents the quarterly results in detail. I will briefly summarize the results rather than taking you through the deck to allow more time for Q&A.As we expected, our Q1 FFO declined versus the prior year, given the success of our disposition program over the past 15 months with $916 million of completed dispositions as well as a year-over-year reduction in our outstanding loan receivables. The loans that were repaid, primarily in Q3 of last year, generated very attractive returns for us and supported our deleveraging objectives. But as we previously indicated, this has and will result in lower interest and other income in 2020. We also had higher other losses in the year, which included $1.4 million of selling costs related to our Humbertown condo project, which has reached presales of 50% and is slated to begin construction in 2021, as well as $900,000 of nonrecurring REIT conversion costs as we closed out this project.Same-property NOI growth was negative as expected due to an unusually large lease termination fee we received in the first quarter of last year from a tenant, which we have sent back field. Our occupancy declined 50 basis points from Q4. The majority of this decline was intentional as we are making room for new tenants taking occupancy throughout the remainder of the year.For the eighth consecutive quarter, we achieved double-digit increases on our lease renewal rates with an overall lift of 18% in the quarter. This is a testament to the quality of our assets. We continued to advance our Super Urban strategy in Q1 by further enhancing our portfolio quality through the disposition of properties inconsistent with our strategy, while at the same time investing capital in our targeted high-growth urban neighborhoods. As a result, the average population density surrounding our properties increased to 293,000 at quarter end, which is very close to our 300,000 target and up 42% from January of 2017. Additionally, our average rental rate grew by 5.5% over the prior year. Record growth and well above our 5-year historical average growth rate of 3.2%. During the quarter, Gazit sold its remaining interest in FCR, which further increased our public float.Looking forward, our liquidity position as of May 5 remains strong and includes approximately $680 million of cash and undrawn credit facilities. Our debt maturities for the remainder of 2020 totaled just $80 million, with $310 million maturing in 2021. And our unencumbered asset pool exceeds $7 billion and 70% of our assets. To further enhance our liquidity, we are implementing a $75 million cost reduction program, which includes both proactive and naturally occurring reductions in spending over the remaining quarters of the year. This program includes a reduction in property operating costs and in general and administrative expenses totaling approximately $15 million as well as a reduction in development spend and elective maintenance CapEx of approximately $60 million.We will also be taking advantage of the government support programs that are available to us, including the ability to defer certain payments like HST and royalty tax, and we'll continue to evaluate the potential merits of the CECRA program Adam touched on earlier as well as any other programs announced by the government as details become available. While it is too early to predict the full impact of the pandemic, we are actively monitoring and evaluating all aspects of our business as the impact of this crisis continues to unfold. During this time of uncertainty, we continue to be guided by our values and our corporate responsibility and sustainability program. I am proud of our employees who now more than ever demonstrate, day after day, our core values of collaboration, innovation, excellence, accountability and passion. And I'm confident that the superior quality of our portfolio and our tenants, the vast majority of whom offer everyday essentials, will differentiate us in the months and years to come.At this time, we would be pleased to answer any questions you have. Melanie, could you please open the call for questions?

[Operator]

[Operator Instructions] The first question is from Mark Rothschild.

[Mark Rothschild, MD & Real Estate Analyst]

Adam, maybe in regards to your comment about reducing leverage, you also said that you probably will not be selling assets in the near term. So outside of the cost reductions, can you maybe just talk a little bit about how you plan on reducing leverage in the near term?

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

Thanks, Mark. I think it's a very good question, and it's a topic that we're spending a lot of time on as a management group and a Board. And I think I would first come back to the capital allocation in general. And despite the intense short-term focus that the pandemic is forcing on all companies, including ours, our approach, meaning management and the Board, the approach we're taking extends beyond the short term. And a lot of the discussion at the Board level is geared to the best long-term interest of the company. So it's been discussed within that framework. And certainly, our Board has been and will continue to meet more frequently than normal to consider all courses of action. Nothing is off the table for consideration, I can tell you. I think it's an obligation of the Board to make sure nothing is off the table. And capital allocation decisions are being discussed and will continue to be discussed at every meeting. And whether there are decisions to change certain courses or not will be discussed each month. And as we meet on the most relevant information we have and the future visibility that's available at the time, and that's continuing to unfold.So this is a very fluid situation. So I can't point to one specific lever today that I can tell you over the next few months we're going to execute on, because there's so much volatility in the world and in our business. But we're looking at all of the potential options, and we will think through all of the potential options and then we will act accordingly where we have a firm belief that it is in the best interest of the company. So certainly, dispositions is our preference. We've said right now that's on pause. We don't know how long that will be on pause for and a bunch of other factors that -- and how they unfold over the short to medium term, but we're going to look at all of them.

[Mark Rothschild, MD & Real Estate Analyst]

Okay. And you also said that you expect to get most of the rent from the tenants or retailers that haven't paid yet in general. But clearly, some are likely to need some help and not able to pay much of it. To what extent are you willing to accept vacancy and just not allow the tenants to get by? Or are you willing to work with them and understand that they might be able to operate their business and pay rents once we come through this, but in the near term, they will need additional help than just a deferral?

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

Yes. It's a very complicated scenario or I should say it's a very time-consuming endeavor because we don't believe that a cookie-cutter approach is the right approach to this. And so unfortunately, I say unfortunately from a time perspective, we have to really analyze each situation individually. We created a small business program that actually provides for a lot of efficiency. And you could make the case for some of the tenants that are qualifying for this, like a doctor, let's say. Well, we know that a lot of medical practitioners, like doctors, in our portfolio can probably find a means to pay their rent and get through this differently than certain small businesses that may be in a different scenario. We have not segregated both. And so we've said, look, with the dentist or the doctor, we've said we're going to give it to you. We're not overly -- we're not scrutinizing it differently than other small business tenants and kind of the worst-case scenario is we have a higher probability of collecting the full rent from that type of tenant. But it is a case-by-case basis. And we look at the space that they occupy, we look at their business heading into this. We look at their history with First Capital, their payment history, their sales history, the strength of their business, and then we make a call. And unfortunately, there are some tenants that perhaps were weak heading into this. And it won't make sense for us to do extraordinary things to keep them alive. And the space is really good. And we'll say, look, there's not much more we can do here, and we will look for an alternate tenant, if required. And we're very comfortable with our ability to secure another tenant, given the quality of the space and generally at more rent. And of course, you've got downtime and other things.So -- and then others, we may say, look, this has been a long-term great tenant. The business has been a great business. They didn't plan for pandemic where their revenues went from a certain level to near 0. And they really do need some help, and we will work with those tenants to get them the help and to get them back to where they were if we believe in them and there's a demonstrated track record. So a bit of a long-winded answer, but it's really been done on a case-by-case basis, and there's a lot of factors that we consider in making the decision, including compassion as part of it. I can tell you, we -- the way tenants are approaching this with us does have an influence over the type and depth of help that we're prepared to provide, including large tenants. Large tenants that are being very transparent and respectful and reasonable on the situation, we're going to get to a meeting of the minds between us and them much more quickly than some others who have taken a, I'll call it, a more opportunistic approach.

[Operator]

The following question is from Sam Damiani.

[Sam Damiani, Analyst]

First off, maybe just on the fair value losses that you booked in the quarter. Seems like a pretty substantial number at $129 million relative to the quarterly revenue run rate for the REIT, especially when you think about the pretty high collection rate that the REIT has enjoyed for April. I wonder if you could just give a little more color as to how you arrived at that fair value loss.

[Kay Brekken, Executive VP & CFO]

Sure. Sam, it's Kay. So we adjusted the value of certain assets that had a lower percentage of essential tenants by adjusting the growth in market rents and vacancy rents in the near-term years in our 10-year DCF model. We didn't make any adjustment to cap rates as you noted when reviewing materials. We really felt there was a lack of objective evidence that's reporting to date to conclude on an overall change in cap rate. However, we did feel there was evidence of change in cash flows. We had announced our small business support program prior to the end of March, which is why we made a look at all of our DCF models and selectively made those adjustments. It's obviously a very fluid environment, as Adam said. So we'll be reassessing cap rates at Q2 based on the information that's available at the time. But overall, that was the approach that we took is to look specifically at near-term assumptions in our DCF models for certain assets within the portfolio.

[Sam Damiani, Analyst]

Okay. No, I think I was thinking the impact of the rent deferrals was the primary driver, but it sounds like there's obviously a lot more thought put into within that. It looked like Calgary occupancy declined almost 2 percentage points quarter-over-quarter. Is that -- was there anything particular driver in that? And it looked like a good chunk of the fair value loss was actually within that market as well.

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

I'll start that, and then I'll turn it over to Carm. And just to dovetail on the back of Kay's comments, I can tell you that our auditors' comments to our Audit Committee was that the gold standard was demonstrated in terms of our approach to IFRS valuations in the quarter. So they were very happy that we did a dive into things at the property level versus taking macro assumptions. And so that's why you may have seen a larger decline than perhaps one would expect that was a result of a pretty deep dive of work. In terms of the decline in Calgary, I'll let Carm speak to the details, but there's a tenant who we have relet their space and terminated early. But Carm, the details, if you have them, please?

[Carmine Francella, Senior Vice President of Leasing]

Sure. Sam, it's Carm. We had a tenant in one of our properties, an anchor tenant, that we had decided to negotiate a buyout with them because we had another national tenant, a TJX banner that wanted the space. So we ended up backfilling it and now we're in the progress of getting the space ready for that tenant. So we purposely made that 40,000 square feet come available and ended up doing a deal with -- at significantly higher market rents.

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

It was home allocators, right, Carm, that's the tenant that went out?

[Carmine Francella, Senior Vice President of Leasing]

Yes.

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

Yes. Yes.

[Sam Damiani, Analyst]

Okay. Yes. Sure. Maybe just one last one, if I could. I noticed today, the Ontario government is allowing more stores to open up over the next few days, including basically any store with outside -- with an outside entrance and for curbside sales. So what percentage of your tenants that are today closed would then be allowed to open in Ontario as a result of this change? I'm thinking it would be the vast majority. But I'm just curious what the answer is.

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

Yes. We're trying to understand the full details, which has been a routine thing when kind of the government announcements come out because -- and look, this is about an [option, I understand,] it's just we want to make sure we get the details right. And it's based on the stores that have an exterior access, it's well over 90% of our tenants by revenue and tenant count fall into that category.

[Operator]

The following question is from Johann Rodrigues.

[Johann Rodrigues, Former Associate Equity Analyst]

Just kind of going back to the Mark's question, just on the 2 buckets you had mentioned about those that had the means to pay and those that don't. I can appreciate it's [timing] exercise as you mentioned. But what actual metrics do you use to determine whether a company kind of has the means to pay or not?

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

Market cap is one if they're a public company. Access to liquidity is another. Demonstrating their true current financial position through sales and things like that is another. So look, we're asking, in some cases, for nonpublic information, but we're being asked to amend the contract. So we want to make sure that we have adequate information to make the right decision to do that. So look, obviously, we're dealing with a lot of tenants who -- their sales in April would render them not being able to pay rent. But we could say the same thing on certain properties we own that we can't afford to pay certain things there. But the expectation is that we pay. That we pay our loans when they come due and when they're scheduled to be paid. And we enter into contracts with strong covenants, and that's part of the decision-making process. And so we want to make sure that it's not just about we had a really bad month that no one planned for. That doesn't necessarily mean you can't pay your rent for the month. So it's a typical financial analysis that one would look to and the metrics and access to liquidity, things like that. Private equity, you look at what type of distributions or capitals come out of the company recently, if there's a major amount, if there's a major sponsor, we encourage that tenant to use their sponsors and owner's balance sheet to finance their rent, not ours. So these are some of the things that you obviously think about.

[Johann Rodrigues, Former Associate Equity Analyst]

Okay, okay. And then of the 26 that haven't paid April rent, what percentage of that would fall under the government small business program that was announced last week?

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

The CECRA program?

[Johann Rodrigues, Former Associate Equity Analyst]

Yes, the CECRA.

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

Johann, we may have more info. I think it's roughly half because we believe 1/4 of our total tenants would qualify. And we think roughly 15% of our tenant base is small business that qualifies for our small business. So those would all qualify forward, and then there'd be another 10% of our tenants that we believe would qualify for. Does that answer your question, Johann?

[Johann Rodrigues, Former Associate Equity Analyst]

So then roughly half of the group that haven't paid you think would fall under this program then? And then presumably, the other half would be ones that would maybe fall under a larger retailer program that is rumored to being developed right now?

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

Yes, that's correct.

[Johann Rodrigues, Former Associate Equity Analyst]

Okay. Okay. All right. That's helpful. And then lastly, I know you said it was similar, but as of May 5, what was the rent paid versus April 5?

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

Identical.

[Operator]

The following question is from Jenny Ma.

[Jenny Ma, Analyst]

So just one more question on the rent collection. It looks like that the April number you guys revised up a little bit. I mean, it's not that much. But I'm just wondering, is that just a matter of accounting for it? Or was there some sort of change on the part of a few tenants who decided to pay their April rent?

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

Yes. They're -- it's not accounting. The numbers are apples-to-apples. So we announced whenever we announced that it was mid-April, we said it was 70%. Since then, 4% of the rent payable -- or by the end of the month, 4% of the rent payable that was not paid was paid. So that takes us to 74%.

[Jenny Ma, Analyst]

Is there anything behind that? Or is that just some tenants getting around to paying? Or was it in response to...

[Dori J. Segal, Trustee]

Jenny?

[Jenny Ma, Analyst]

Yes?

[Dori J. Segal, Trustee]

Sorry, it's Dori. So a lot of it is really a result of tenants paying by virtue of the fact that we issued, first a demand level done default notices. And so certain tenants responded, I guess, in fear of losing their unique and, I would say, urban and hypothetic locations, and paid the rent, albeit, later than they typically do. But it was more often than not in response to discussions with us and/or a response to having received default notice.

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

So just to expand on that, Jenny. So our approach in early April was one that applied a high degree of patience. And so when some of the large tenants did not pay rent or in general, it doesn't necessarily have to be large, but when some of the tenants were viewed to be able to afford to pay rent, as mainly the large ones did not, we did not default them out of the gate, okay? And so we tried to work with them for a while. And some of them we felt that it was inappropriate for them to pay no rent at all. And so we moved to default, okay? And because we got a lot of letters like many others. And in some cases, there was a paragraph. In some cases, it was 4 pages, but they also had the same thing. We're not paying rent. So when we drilled into that, the landlord actually has a lot of rights when the tenant is in default. And so we started to take a harder line towards the latter part of April. And that certainly has brought some of those large tenants to the table. And I think it's one of the reasons why May is shaping up to look similar and not worse at this stage because there's no tenants -- unless reopenings commence, which it looks like some will, and we're hopeful that continues. But at this point, that hasn't really happened. So no one's doing more sales generally in May than they did in April if they were closed. So -- but now it's a function where the landlord's rights are starting to be exercised. And to lose -- to be locked out of some of the locations that we have in our portfolio would be a very significant problem for a lot of tenants because in many cases, they're amongst their most productive stores. So that's part of the background and gives you a little bit of color. We were very patient at first. We're trying to figure out who is in dire straits and perhaps who was being more opportunistic in trying to take advantage, and we're convinced that tenants or retailers are more in the take advantage camp. And like I said in my opening remarks, we've become more aggressive with them.

[Jenny Ma, Analyst]

Great. I really appreciate all the color around rent collections and also about May. Moving on to the same-property number. I see that there's a little bit of footnote referencing the residential contribution to same-property NOI. And I'm not sure, I can't find it in the MD&A. But was the residential piece, and I know it's small, was that negative impact on same-property? Because I noticed that the operating costs went up. So I'm wondering if that's coming from that and perhaps the hotel, but I know it's a very small piece as well. Maybe some color on that would be useful.

[Kay Brekken, Executive VP & CFO]

Jenny, it's Kay. So King High Line residential is our largest residential project, but it's just gone online. So it wouldn't be part of our same-property NOI at this time. We did have higher operating cost in same-property NOI. It does relate to our properties in development. So as a number of those have transitioned into IPP, we have tenants who may not be paying cash rent yet, but we're capitalizing the less of the operating cost as a result of that. And King High Line residential, a good portion of that is no longer in [indiscernible]. So we are seeing those operating costs come through as well. So I would say those are the factors that are increasing the operating cost year-over-year that you're seeing with NOI.

[Jenny Ma, Analyst]

Okay. So is the -- so is it fair to say that all the op costs are being captured now with the rent contribution on the top line coming in, in the next few quarters?

[Kay Brekken, Executive VP & CFO]

Yes. Rent collection as we continue lease-up of the residential and as tenants start paying cash rent in some of those development properties, you'll see the NOI flow in.

[Jenny Ma, Analyst]

Okay. And then my last question is more like an operations question in the context of COVID. So when you've done leasing, you talked about the property that you're doing up for TJX. But if the presumed opening date or transfer date is sort of in the middle of this, how does that happen in terms of lease payments? Like are they paying anyway and then they just have to work with the conditions we have now? Or are there other terms you can work around to sort of delay handovers or openings or rent payment? Just trying to understand how that works in this environment.

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

Yes. I will try and give you an answer. I mean, it's not business as usual, but the business is not closed. So -- and look, for a lot of reasons, it's -- I mean it's terrible what's happened in the world, but can you imagine if this happened 10 or 15 years ago before things like Uber Eats and the technology that we have, and that's flowed through at the properties, too. So look, most businesses are focused on the here and now. And so the new leasing, it definitely slowed down. So I don't want you to misunderstand what we said. Fortunately, it hasn't stopped yet. And in fact, Carm has had a number of inbound inquiries from tenants that are hoping some of our space shakes loose, and they've expressed a strong interest, including some of the hardest hit industries or sectors within our tenant base. So that's an encouraging sign. But look, it's just through the use of technology, we're respecting social distancing, we're not forcing our leasing staff out to the property. You can use lock boxes. You can use virtual things. You can use FaceTime technology and that's what we've implemented where appropriate. And I would assume for the foreseeable future, we're going to continue to leverage that as part of our overall leasing marketing program.In terms of tenants that are slated to take occupancy, we've been fortunate, by and large, that our construction group has done a remarkable job of keeping those time lines for landlord work generally on track. And so we haven't had to exercise like a force majeure clause or anything like that for delay occupancy. Our approach is, if we meet our time line for tenant turnover, we've fulfilled our obligation. Our expectation from the tenants is that they fulfill theirs.

[Jenny Ma, Analyst]

Can the tenants come to you and say, look, we don't want to open this month? Can we push it out by a couple of months? Or do they still have to just fulfill the terms of the lease?

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

No. I mean, a lease is a binding legal contract. And so the lease will outline how all of these things are dealt with. And it's not infrequent for a lease to say your rent commencement starts at the earlier of an outside date or the day you open. And look, we're not -- we don't lack compassion. So we understand the environment we're in. And so if a tenant comes to us and they've got a legitimate issue with opening that they want to bump out by a month or 2. I mean, they can't even open now, it depends on the tenant. If it's a really well-capitalized tenant, then our expectation is that we go by the lease. If it's a small business tenant who's really stretched on investing in this new store, and it's going to put a lot of pressure on them, then we're probably going to work with them.

[Operator]

The following question is from Pammi Bir.

[Pammi Bir, Analyst]

Can you maybe just comment on any updated conversations that you may have had with the ratings agencies? And your thoughts on staying on side with respect to their requirements?

[Kay Brekken, Executive VP & CFO]

Pammi, it's Kay. We're in regular discussions with the rating agencies. We have provided both of our agencies with current updates given the evolving environment, and we'll continue to do so. So those discussions are ongoing. And as Adam said, we are still looking to deleverage over the medium term, and we'll look to restart our disposition program as soon as markets stabilize.

[Pammi Bir, Analyst]

Okay, has there been any, I guess, indication of potentially perhaps relaxing some of the time lines or even the goalposts that they have currently or previously indicated?

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

I'm not sure. Hold on, Kay. I'm not sure that's an appropriate question for us to answer, Pammi. I mean, we have a lot of -- and Kay, if you feel differently, go ahead. But I would imagine that's not an appropriate question for us to answer.

[Kay Brekken, Executive VP & CFO]

Yes. I think they've made some comments publicly about the entire real estate industry and how they plan to rate it through the cycle. So I refer you to their public comments on record for that.

[Pammi Bir, Analyst]

Okay. And just with respect to the -- some of the reconversion costs that carried over into Q1 and some of the other condo selling costs, for those -- first off, on the reconversion costs, those pretty much -- are those done at this stage or will there be some additional amounts going forward?

[Kay Brekken, Executive VP & CFO]

We've concluded the project. So I would not expect additional REIT conversion costs going forward.

[Pammi Bir, Analyst]

Okay. And then just on the condo selling -- on the condo sales, I guess, at Humbertown, would those carry on, I guess, if the sales process continues? And that's sure where you are and whether that's still happening or the sales centers still open?

[Kay Brekken, Executive VP & CFO]

Yes. As I mentioned in my comments, presales are continuing. We are over 50% at this time, and I'll hand it over to Jodi to give a little more color on the project.

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

Thanks, Kay. Yes. So the selling does continue. The sales center on-site did close. And Tridel, who's our partner, consolidated a number of their sales centers into one, just to respect the physical distancing measures and to keep everyone safe. But the project from a selling perspective is going to continue. We do expect start next year in 2021. And I think it's important to note that the purchasers for Humbertown are local. They're not investor-driven, and the neighborhood, of course, remains one of the most desirable in the city.

[Operator]

The following question is from Tal Woolley.

[Tal Woolley, Research Analyst]

Adam, you had mentioned earlier like just the process of receiving communication from a tenant. You're getting letters, some short, some long. In those letters, like, are tenants are saying, yes, we're not paying you? Or are they trying to use like lease clauses to justify not paying?

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

Yes. And I should qualify, not all of our tenants have the respect to send us a letter, although they weren't that enjoyable letters to read, but some of them just didn't pay rent and didn't send us a letter. But no, to your point, no, the leases are pretty clear. So we have not had tenants try to challenge the requirement to pay rent. It was more of, yes, we know we have a contract, but we're not going to pay rent anyways.

[Tal Woolley, Research Analyst]

Okay. And then just bigger picture, like, I think we're also struggling with how to think about how the sequencing of the reopening of the economy might go. Do you guys have, like, a base case like to try and like marshal your resources in a coherent way, like do you think like by -- okay, by July, we expect to have all of our shopping centers open? We think there could be like a second wave of this coming in the fall winter. Like, have you sort of gotten to that level? Or how are you trying to think about the sequencing of all this going forward?

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

Yes, we have. But the reality is we don't know. So we've run all these scenarios, and then we've looked at the impact of each of them. But the medical experts don't know. So how -- government doesn't know. So we're not going to sit here and pretend that we know. So we're planning for a variety of scenarios, and some are a lot more challenging than others. So I don't really know what to tell you beyond that. I mean we spent a lot -- notwithstanding the majority of this call has been spent on items I'm actually surprised we're spending time on like Q1 and things like that instead of the general outlook for real estate and our strategy and the impact on strategy and consumer behavior, et cetera. But nevertheless, we're here to answer the questions, not create them. But it's -- we're spending a lot of time on it. And we don't know. And that's one of the things that makes us most uncomfortable because we are used to running the business with a lot more clarity and more information than we have now. The last 2 or 3 weeks, cautiously encouraging in terms of things. But we are running a lot of scenarios, and some of them are significantly better than others. So we have no idea which one will unfold. So we're trying to prepare for all of them.

[Tal Woolley, Research Analyst]

Okay. And just, obviously, like, new leasing in the short run could be difficult. I'm just wondering if, like, you guys, I think, have shown some willingness in the past. I think when you -- about a year ago, you were talking about kind of restructuring how you put growth into the lease -- in terms of the renewal rates and how you would grow rent over the term of the lease. How are you thinking about managing that through this period as you try and write new leases? Do you think you might have to get a little innovative here to try and be able to find new deals?

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

Absolutely, especially coming out of this. We will get to a state of normalization and stabilization in terms of our business. We're not there today. And so it will be a race to get there. Two of our big advantages is our people plus platform and, exceptionally importantly, our real estate. Our real estate is not a commodity. And we believe we have a great portfolio. And so we will use it to the best of our abilities. It will require creativity. We're spending a lot of time internally right now on that. And so one of the big things in our view of this is that the bifurcation that's been happening in retail for several years now is going to dramatically accelerate. So weak properties and weak retailers will likely not survive or survive in their current form. And strong properties and strong retailers will find new opportunities to advance their business and become even stronger. We think that's a good thing. And we think that we're well positioned to provide the real estate component of some of these retailers' strategies. So it will be a bumpy road, but we've got great real estate, we've got great people, and we'll have to see. If we get into an environment where potentially on a specific space, it's really -- the environment really tilted in tenants' favor, then we'll push for a shorter term. We'll do things like that. But there are other things that we're working on from an innovation and creativity perspective that we won't get into now just from a competitive perspective. But absolutely, it's going to require creativity, hard work, great real estate, great people. And if you have that, you're going to come out of this much stronger. And if you don't, you will get weaker.

[Tal Woolley, Research Analyst]

Okay. And then, Kay, just -- I know sometimes you guys will have like options to buy properties where you've maybe got a joint venture or something like that. Do you have any of those situations in 2020 that we should be aware of just for capital spending purposes?

[Kay Brekken, Executive VP & CFO]

Yes. So in terms of acquisitions for the remainder of the year, I think there's 1 or 2 potential acquisitions that could come into the numbers later this year. But we'll continue to evaluate and, as Adam said, look very careful at any capital allocation decisions we make.

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

To give you an order of magnitude, Kay, correct me if I'm wrong, but the aggregate number of those 2 potential items are less than $20 million in aggregate.

[Kay Brekken, Executive VP & CFO]

That's correct.

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

We're talking pretty small properties.

[Tal Woolley, Research Analyst]

Okay. And then just lastly, on the fixed income side, the quantitative using program proposed by the government, I think, is using sort of the BBB rating as a threshold for broader purchases. I know you guys are split rated. Do you know what if you qualify under that program?

[Kay Brekken, Executive VP & CFO]

Unfortunately, Tal, we have not received those details as of yet, I think that remains a question out there of -- they just said BBB. So what does it mean, we do not have the clarity at this time.

[Operator]

The following question is from Ken Lever.

[Unknown Analyst]

My name is Ken Lever, as she said, I'm from Alberta. I just got a -- I'm a retail investor. I just got a very general question. With the double whammy in Alberta with the COVID and the oil situation, what percentage of your financial business is in Alberta? And the second part of the question is, when you mentioned 64% open, 7% partial and a 39% closure, do you have the numbers for Alberta for those percentages?

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

Thank you very much, Mr. Lever. The percentages in composition of our portfolio in many categories, including closure, is similar across our portfolio, including in Alberta. We're really in 2 places in Alberta. We're in Calgary and Edmonton. And in terms of the first part of your question, in terms of the concentration in those 2 markets -- in those markets, we're about 20% of our total portfolio is in Edmonton and Calgary.

[Operator]

The following question is from Dean Wilkinson.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Adam, I couldn't agree more with you on the issue of the myopic focus on there's been a 2% increase in rent collection over the past 24 hours. When you look forward on a bigger picture and real estate to 10-year DCF, so let's ignore the next 6 months, what do you think the biggest change is that comes out of what we've seen here, either for better or worse?

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

Well, that's exactly what we're working on trying to figure out because there's no question in my mind that some company strategies will -- their long-term strategies will be impacted by this. We don't yet think ours is one of them, but we do think around the periphery, there are definitely things that will impact it. But if you look at the underpinnings of our Super Urban strategy, it's about the high-density neighborhoods that are located in areas that have tremendous amenities and close proximity to employment centers and entertainment destinations and education and culture and transit and health care and so on. And certainly, at this stage, we certainly believe that those fundamentals remain in place over the long term. And it's also about jobs because people are going to go where the jobs are. And at this stage, we certainly don't see large sectors moving out of cities. I've heard things like people are -- I had -- my mother told me last night that everyone likes working at homes, so offices are going to be in trouble. I said whoever told you that doesn't work in an office because everyone I know that works in an office is fed up with working at home and wants to get back to the office.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

I'm [indiscernible], yes.

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

Yes. Yes. So young people are a big part of the employment market and the big growth drivers in the job market has been in the tech sector, which has attracted a lot of the young people. It's not lost on us, but they are also the group that's least frazzled by everything that's going on in the world. It could be in part that there's a certain degree of invincibility that you have when you're younger, that wanes as you get older. The hard evidence is such that young people are dramatically less affected by the virus, if they get it than old people. So all of these are factors. But we will continue to study this carefully as things evolve. And we will -- we are looking for ways to tweak things in our business to make it better that we believe will be advantageous versus try to protect something that we thought was not subject to change because this is a massive event. And there will be things that change in the world permanently. But we're not at a stage where we're prepared to tell you with a high degree of conviction that we figured those out. We haven't yet, but we're certainly paying close attention to try and do that.

[Operator]

The following question is from Sam Damiani.

[Sam Damiani, Analyst]

I was just wondering if any of your leasing discussions recently or if you're thinking this might be an increasing trend, if some tenant is looking for larger stores because of the need for keeping customers with a little more physical distance, is that something that you think is going to be a trend? Have you seen any evidence of it so far?

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

Well, I'll let Carm chime in as well. As far as I know, we have not seen that. We think that there's 2 phases that are important. There's the phase between reopening and, let's say, when there's a vaccine, and then there's a period beyond that. And we think that behavior, certainly, at the earlier part of the reopening phase will result in less density in certain users like fitness centers and restaurants and things like that. But we haven't yet got to the point where tenants are saying, well, I used to be in a format of x thousand square feet and now because of this, we're going to increase it to y thousand square feet. Carm, if you have anything to add, please go ahead.

[Carmine Francella, Senior Vice President of Leasing]

No. I think, Adam, you captured what's happening. I've not received any interest from tenants who want more space because of this.

[Sam Damiani, Analyst]

If I may just follow-on, like what about the restaurants, that's a sizable component of your portfolio. How do you see those businesses reopening successfully and generating, I guess, sufficient sales to pay the rents that they've agreed to?

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

Yes, it's interesting because we have some tenants that have several locations with us and just in their business and the composition of the sales profile has unfolded very differently. It's only reinforced our Super Urban strategy. But what they told us, a lot of them, is that in the urban centers, a lot of their sales are down single digits now, which is, I think, phenomenal, given how they're operating. When they get into the suburbs or secondary locations, it's like way into the double digits in terms of the sales decline. And so look, I think -- I do think there's some pent-up demand in the food sector in general. I think a lot of people have been eating at home a lot. I think that was nice for a short period of time. I think a lot of people are beyond that now. I think it's one of the reasons we have seen a spike in our own restaurant sales over the last 3 weeks or so. And I think coming out of this, the great restaurants that are desirable and people want to eat at, assuming they feel safe in however they consume the food, whether it's on-site or not, as long as they feels safe, I do think that they will come back, but they're going to come back on a gradual basis. And it will take some time until we get to the same volume. I don't see on the initial opening the same number of seats in the restaurant that they had before. But the good thing is a lot of them -- this has really accelerated the integration of takeout and utilizing the food delivery services to complement their sales profile. A lot of them, obviously, as you know, were not doing it at all. And in some cases, not doing it to the same level that they're doing now. And I think long term, that should bode well for the sector. But obviously, it's a really challenging time for restaurants.

[Operator]

There are no further questions registered at this time. I'll turn the meeting back over to Mr. Paul.

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

Okay. Thank you very much, and thank you, everyone, for joining us today during this definitely unusual time. We look forward to updating you on FCR's business over the coming months. And in the meantime, I would like to thank you, again, stay safe and be well, everyone. Thank you very much.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.