First Capital Real Estate Investment Trust

TSX:FCR.UN

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, and thank you for standing by. Welcome to the Q1 2024 Conference Call. [Operator Instructions] I would now like to turn the conference over to Alison. Please proceed with your presentation.

[Alison Harnick, executive]

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 forward-looking statements. 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, 2023, and our current AIF, which are available on SEDAR and on our website. These 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. 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 on the complement to IFRS measures to aid in assessing the REIT'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 Paul, executive]

Okay. Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today for our quarterly conference call. We've had a busy start to the year, and I'll start today by touching on our Investor Day that we held during the first quarter. We spent the first part of the date covering our current business operations, including an overview of First Capital's core competencies and competitive advantages. These primarily relate to both our capabilities and portfolios in 2 areas. The first is our defining strength as a leader in acquiring, owning, operating and developing grocery-anchored shopping centers. With an IFRS value of over $7 billion, our portfolio of open air, grocery-anchored centers represent over 80% of the real estate we own today. This core component of our portfolio has a current NOI yield of roughly 5.5% and an NOI CAGR of between 3% and 4% as we look ahead. The second area relates to our rezoning capability and consequently, our large portfolio of high-quality development [ sites ]. The noncore portion of our portfolio in which many of our development sites are held, represents nearly 20% of our total portfolio and has a current yield of only 2%. This portion of our asset base continues to be a meaningful source of value creation. We expect to create incremental value of approximately $450 million, which equates to over $2 per unit over the next 3 years for rezonings alone. But these properties are currently dilutive to FFO and negatively impact our debt metrics, while striking the right balance in terms of how many of them we hold is key. It's also important to note that by applying our expertise in this area, we continue to expand the value of this group of assets with very little additional capital through our entitlement program. Manufacturing or creating more development sites through rezoning and then monetizing some of them and reallocating the proceeds continues to be an important part of our strategy. Next, we covered where we're taking the FCR business and how we're going to get there. The most important part of the day was reviewing the key objectives that our strategy is specifically designed to deliver. These key objectives are stability and growth in FFO per unit, NAV per unit and distributions per unit. So in terms of where we're taking FCR, that is what we're trying to achieve for our investors. Our [ delivering those ] is an even stronger balance sheet. We made significant progress on this front. Our unsecured debt spreads are in roughly 100 basis points since the beginning of this year. A little less than half of that is attributable to the market, meaning our peers have seen similar spread compression. But over half of it is FCR specific, and this is a good news story for all of our investors, particularly our equity investors as this lower cost of capital accrues directly to unitholders. During the first quarter, following our Investor Day and the significant improvement in FCR's credit spreads, we issued $300 million of 7-year unsecured debentures. Our offering was more than 8x oversubscribed with over 60 institutional investors purchasing our bonds. Our own coupon was roughly 5.5%. During our Investor Day, Neil laid out several key operating and financial metrics that we expect to achieve for both this year and over the next 3 years. Progress towards achieving these goals will be driven by the same strategic approach that we first announced over 18 months ago as the optimization plan, which had an initial 2-year time frame. Our successful execution since that time and the positive impact on FCR's key metrics has only strengthened our conviction that this is the best path forward to deliver on our stated objectives. And so it is our capital allocation strategy, and we remain well on track. An important part of achieving our goals is, of course, our real estate and ensuring that we have a portfolio that will deliver what Neil presented at our Investor Day. This includes continuing to grow the NOI generated from our core portfolio of grocery-anchored shopping centers. We also spoke about our development program and specifically the types of development we will undertake. This includes our entitlements program, development or more typically redevelopment of core grocery-anchored shopping centers and mixed-use development with FCR typically holding a 25% to 50% equity interest. Dispositions comprise a critical part of our strategy to achieve our objectives. Our dispositions will continue to be focused on the non-grocery-anchored portion of our portfolio. It's important to note that each property we've sold and continue to sell has the dual benefit of simultaneously improving our balance sheet and increasing our FFO given how low the yields are. This is a rare combination that remains a short-term competitive advantage for First Capital. We will continue to use the proceeds from these sales to pay off maturing debt, make strategic real estate investments and potentially more purchases under our NCIB. For those who are not able to attend our Investor Day remains available to watch on our website. So now moving to Q1. It was another active and successful quarter, and there are really 2 elements I'd like to discuss. The first [ stems ] over 18 months ago when we announced our optimization plan, which I noted has become our ongoing capital allocation strategy. We remain laser-focused and very disciplined. Our entire team is fully bought into the strategy, and we are all unitholders, which creates alignment. I'm very proud of our team for the successful execution to date and for what we have in the pipeline. Our activities in this regard continue to set FCR apart, and that came through in Q1 with solid earnings growth and a stronger balance sheet. Exactly the combination of our strategy is designed to deliver. The second element contributing to our solid quarterly results are the strong fundamentals for grocery-anchored retail, which I discussed in more detail last quarter. The increase to our tenant customer base from significant population growth, combined with next no supply continues to decrease the square footage per capita of grocery-anchored centers in FCR's trade areas. As well, the positive impact of inflation on our tenants' top line sales, together with profit margins largely being maintained, has resulted in improved store profitability and therefore, better positions our tenants to pay higher market rents. So it should come as no surprise that our leasing pipeline remains deep across all 10 categories. Owing to these solid fundamentals and the quality of our portfolio, we continue to expect strong operating performance as we look ahead. And with that, I will now pass it over to Neil, who will review our first quarter metrics. Neil?

[Neil Downey, executive]

Thanks, Adam, and good afternoon to all of our call participants. Consistent with our usual practice, we have a slide deck available on our website at fcr.ca. And in my prepared remarks today, I will refer to that presentation. Overall, we're very pleased with the performance of the business through Q1. And in this regard, FCR's operating results were slightly better than our internal expectations. While the underlying financial results were in line with budgets. Beginning with Slide 6 of the presentation. First quarter operating funds from operations was $78.1 million. This is an increase of $24 million from $53.7 million earned in the first quarter of 2023. On a per unit basis, OFFO was $0.365 in Q1 2024 relative to $0.25 even last year. While operating FFO excludes other gains, losses and expenses, even OFFO from time to time will include revenues or expense amounts that are not necessarily recurring in nature. And this was very much the case with both the Q1 2024 and prior period results. I'll provide a bit more color regarding 3 items, each of which are outlined in our disclosure documents. Firstly, Q1 2024 interest and other income includes an assignment fee of $9.5 million. This is $0.04 on a per unit basis. The assignment fee related to a small development parcel in Montreal that FCR had an agreement to acquire. Rather than closing on the acquisition, FCR assigned its purchase rights to a local developer. The $9.5 million fee was the difference between the property's $13.5 million fair value and the price secured by FCR's purchase agreements. Under IFRS, the transaction required the recognition as fee income. Now in substance, we view this fee as much more akin to the profit on a property sale. Therefore, we don't view it the same way as recurring income for FFO purposes. The second item of note in Q1 2024 relates to FCR's final settlement with Nordstrom in relation to its former lease at our One Bloor property. The settlement accounted for nearly all of the $5.6 million in lease termination fees recorded in the quarter. The settlement is a very good outcome for FCR. Keep in mind, the REIT has been carrying this 39,000 square meter vacancy since June of last year. And the cost of carry is notable. The Q1 settlement equated to 1 year of gross rent. Finalizing the settlement dictated that we recognize all of the revenue in Q1 in a single [ month summer ]. Now our perspective on this is that roughly 1/2 of the settlement amount is essentially revenues that we should have received in 2023, while the other half is revenue we should be receiving this year. Now thirdly, turning to the year ago results. In Q1 2023, FCR incurred approximately $7 million of expenses related to unitholder activism. Included in G&A, these costs depress operating FFO by approximately $0.03 per unit. So with [ Bill's ] explanatory remarks out of the way, let's turn to some of the more pertinent details of our core operating results by walking through some additional components of FFO. Starting with NOI. Same property NOI prior to lease termination fees and bad debt expense was $101.7 million. This was a 2.3% year-over-year increase. Higher base rents and improved recoveries were the key drivers. And we believe the growth rate for the quarter was quite respectable in the face of the ongoing drag of roughly 140 basis points related to the former Nordstrom space. Total same-property NOI of $107.3 million increased by 7.8%. This was driven in large part by the $5.6 million of lease termination fees earned in Q1 2024 versus only $100,000 in Q1 2023. Moving down to NOI. On a year-over-year basis, the impact of property acquisition activity accounted for $900,000 of incremental NOI, while disposition activity has the effect of reducing NOI growth by $700,000. Now these impacts are notable as FCR has completed property acquisitions totaling roughly $95 million over the past 4 quarters, and this is relative to total disposition activity of roughly $450 million. Other same-property NOI of $4.7 million improved by $1.1 million year-over-year. The increase relates mostly to redevelopment coming online including the length of our [indiscernible] project, which was completed in the back half of 2023 and into Q1 of this year as well as the increase in straight-line rent, mostly related to new tenant possessions at our One Bloor property. Therefore, to sum up NOI in totality, it was $114 million in Q1 of this year, an increase of $9 million from $105 million in Q1 of last year. Moving further down the FFO statements. Interest and other income was $14.6 million in the quarter. Excluding the assignment fee, interest and other income was $5.1 million for the quarter, and this is comparable to the $4.9 million earned in Q1 of last year. Corporate expenses were $10.8 million. Adjusting for the activist costs that I previously mentioned, these corporate expenses increased by approximately $300,000 or 3% year-over-year. We remain proactive in managing corporate expenses. We know that every dollar saved flows into FFO and FFO growth is a key corporate objective for FCR. Interest expense was $39.1 million in Q1 2024. This was unchanged from the fourth quarter, but $1.7 million higher than Q1 '23 interest expense. The year-over-year increase is the product of higher rates, gradually working their way through FCR's debt capital stack partly offset by a total debt balance that's approximately $88 million lower year-over-year. [ Now as a side ], at March 31, 2024, FCR's net debt is $174 million or 4% lower year-over-year, and this has been achieved while at the same time increasing FFO per unit. Slide 7 outlines the components of other gains, losses and expenses and provided primarily for reference purposes. The key takeaway is that the components of [ OGLE ] are almost entirely unrealized mark-to-market income and expense items. This quarter, the OGLE amounts tallied to a net gain. But in economic terms, the net gain did not make FCR more valuable, just as in Q4 when we had a net loss that did not detract from value. The 2 mark-to-market line items in OGLE should all net to 0 over the 5-year life of the financing to which they relate. Referencing Slides 8 and 9, FCR's operating performance metrics were strong in Q1, and as I indicated, slightly better than our internal business plan. A few highlights include occupancy of 96.2%. This was unchanged from year-end 2023 and consistent with the first quarter of last year. During the quarter, FCR had 165,000 square feet of tenant possessions relative to 175,000 square feet of closures. We had expected that Q1 occupancy might be down relative to year-end 2023. That was mostly due to a sizable office tenant nonrenewal that I mentioned on our fourth quarter call. I'm pleased to note that the leasing and ops team backfilled roughly 25% of that office space by March 31. And more broadly across the portfolio, the teams did an excellent job of getting tenants into spaces, thus maintaining occupancy stability. First quarter renewal leasing volume of 466,000 square feet was completed at a strong average rent increase of 11% at an average rent of $27.27 per square foot. This helps drive March 31 in-place net rent per square foot to $23.62. And representing a new all-time high and a 2.4% increase year-over-year. Slides 10 and 11 provide distribution payout ratio metrics. These 2 are mostly for informational purposes, and they show how we view and measure the cash generation and sustaining CapEx requirements of the business. The key takeaways. During Q1, FCR generated $70 million of adjusted FFO, excluding OGLE. Relative to $46 million of cash distributions, the AFFO payout ratio was 66%. As referenced on Slide 11, based upon rolling fourth quarter adjusted cash flow from operations of $240 million relative to $183 million of cash distributions, the ACFO payout ratio was 77%. Advancing to Slide 12. The net asset value at March 31 was $22.10 per unit. This is relative to $21.95 per unit at December 31, 2023, and $23.48 1 year prior. So on this basis, FCR's NAV was steady relative to Q4, while it decreased by $1.38 per unit or 6% on a trailing 12-month basis. The year-over-year change relates principally to an increase of approximately 30 basis points in the portfolio's weighted average cap rate from Q1 of 2023. During Q1 of 2024, however, this theme was stability, meaning general stability is portfolio level cash flow models and stability in cap rates and discount rates. The March 31, 2024 weighted average portfolio cap rate of 5.5% was unchanged from year-end. Turning next to an update on capital deployment as summarized on Slide 13. During Q1, $78 million was invested into the business. This included the acquisition of a 50% interest in Seton Gateway shopping center in Southeast Calgary for approximately $34 million, thus bringing FCR's ownership in the property to 100%. We also invested $27 million into future income properties and residential developments and [ $17 ] million in the portfolio CapEx and leasing costs. The next slide 14 summarizes key financing activities over the last 3 months. As Adam mentioned, on March 1, FCR completed the issuance of its Series B unsecured debentures. The $300 million offering carried a coupon of 5.57% and a 7-year term to March 1, 2031 maturity. The offering spread was 200 basis points over the equivalent government of Canada bonds. We're pleased to see this spread has narrowed in post issuance secondary trading activity, and this should benefit FCR as it relates to future debenture issuance. Proceeds from the offering were principally applied towards the repayment of 2 floating rate loans that had $250 million of principal outstanding and a weighted average interest rate of approximately 6.7%. Those loans had contractual maturity dates in 2025, but there were no prepayment penalties incurred. And finally, and this is really more of a reminder than anything particularly for the call participants that aim to model FCR's earnings in detail. Back in November, we preemptively addressed 2024 as the second largest debt maturity. This is a $200 million unsecured term loan that matured on March 29 of this year. Late last year, we arranged for a 5-year renewal that extended the term to January 2029. In doing so, the low interest rate of 3.17% on the loan remained in place until March 29 of this year, [ when even ] increased to a new fixed rate of 5.8% through to maturity. Turning to Slide 15, where I'll make 3 key points on debt and liquidity. Firstly, Q1 net debt was $4.1 billion, reflecting some normal seasonality in working capital and other factors, this net debt amount is a little changed from Q4. It is, however, $174 million lower on a year-over-year basis. Secondly, FCR's 4 quarter trailing EBITDA of $437 million is $25 million higher relative to Q4, and therefore, the REIT's net debt-to-EBITDA multiple decreased to 9.3x from 9.9x at year-end. And thirdly, FCR's liquidity and financial strength remains excellent. At quarter end, the REIT had $6 billion of unencumbered assets and more than $860 million of unrestricted liquidity, comprising $700 million of revolving credit facilities that were undrawn and $169 million of cash. Lastly, for your reference, details related to debt maturities are also provided on Slide 16 and 17. And so to wrap up, we're making solid progress and tracking well towards the key 2024 objectives that we outlined at our Investor Day, including same property NOI growth was in the range of 2.0% to 2.5%. And for clarity, this excludes bad debt expense and lease termination fees. We're tracking towards a year-end 2024 net debt-to-EBITDA multiple that's in the low 9x range, and we're tracking well towards operating FFO that exceeds $1.20 per unit. And again, for added clarity, for this measurement, we're not counting Q1's assignment fee, which equated to $0.04 per unit. I'll now turn our session over to Jordi to broken provide an update on operations, development and investments.

[Jordan Robins, executive]

Thank you, Neil, and good afternoon. Today, I'm going to provide you with a brief update on our investment and entitlement activities and the progress that we made this quarter. In Q1, we closed on $147 million of previously announced dispositions. The aggregate sales price of these properties, excluding Royal Orchard, which I'll discuss in greater detail shortly, represents a 30% premium to their pre-marked IFRS values. These assets that we sold had an in-place [indiscernible] of approximately 2%, which is consistent with the objectives we set out. The income-producing assets we closed on this past quarter include our circa residential property located in Richmond, BC. This property is a 68 residential unit building and includes above-grade parking garage. The [ in-line tenancies ] are all subject to rent control, so turnover is exceptionally low, and its income growth is limited as a result. In Q1, we sold the Yonge-Davis Centre and income producing non-grocery-anchored [ trip center ] who is our only asset in new market and the only FCR asset within a 25 kilometer radius. One of zone for residential density, the property does possess long-term intensification potential. Considering the hybrid nature of this asset, the cap rate on the sale reflects this long-term potential. This quarter, we also sold 71 King, a small 5 story, 45,000 square foot medical office building located in Mississauga. Turning to our sales pipeline. In Q4, we closed on the sale of our 50% interest in our Royal Orchard property. The property of the development site located in Yonge and Royal Orchard and Thornhill. In 2021, as part of our entitlement program, we have submitted an application for 3 residential towers and 1.6 million square feet of density. [ While not yet ] zoned the sale price of the asset was reflective of its zone density value, which was imminent. This resulted in an outsized 200% premium to our carrying value internal given our internal valuation policy doesn't reflect value uplift until we formally secure zoning. This quarter, we also sold a 42% interest of our 1071 King residential development project to Woodward, an existing strategic partner and a leading operator and developer of residential multifamily apartments. We retained a 25% interest in this purpose-built residential rental development site located here in [ Liberty ] Village. Now while we didn't make any new disposition announcements with our quarterly results, we remain active with respect to dispositions. We have several properties that are currently subject to conditional agreements. In each case, a prospective purchaser for these assets are in the respective diligence periods. We continue to see adequate demand and good activity for the properties we are selling under our plan. As we articulated at our Investor Day in February, as part of our 3-year plan, we will continue to allocate a portion of our disposition proceeds to the acquisition of high-quality grocery-anchored properties. We will also look at potential tuck-in investments as both are important to long-term value creation. This past quarter, we closed on the purchase of our partner's 50% interest in the Seton Gateway Center located in Southeast Calgary. Given its location, its tenant mix, its growth profile and its price, our purchase of the remaining interest in [ Seton is ] well with this strategy. Seton is a 130,000 square foot center anchored by a Save-On-Foods grocery store and a Shoppers Drug Mart. The property is 100% occupied with more tenant demand than we can accommodate. Our institutional partner articulated a stretch to sell down their direct real estate investments. However, under the terms of our co-ownership agreement for Seton, their liquidity rights were severely restricted. As a result, we were the only practical buyer, so we were able to purchase their interest in its core assets at a cap rate that is compelling. In fact, it was more compelling than buying back our own units. Turning to Construction. In Q1, we invested approximately $27 million in our development projects. Now Q1 is typically a seasonally low period for [ Seton ]. Our investments this quarter was fairly broad-based and includes our Roselawn, Humbertown and 400 King Street projects in Toronto and our 200 West Esplanade project in Vancouver. With respect to entitlements, this past quarter, we were successful in securing a minor variance for 3 additional stories on each of the 2 towers under construction at our Yonge and Roselawn development. While technically [ miner ], the impact in terms of the related increase in value was meaningful and a real benefit for the project economics. To date, we've submitted for entitlement and over 16.4 million square feet of incremental density, netting out the density we've already sold. This represents 71% of our 23 million square foot pipeline. We expect to submit for an additional 1 million square feet of this density over the course of 2024. Q1 was another busy quarter in FCR. We expect that this pace will continue through the balance of '24, and we look forward to updating you with our progress. And with that, operator, we can now open it up to questions.

[Operator]

We will now take questions from the telephone lines. [Operator Instructions] And the first question is from Mario Saric from Scotiabank.

[Mario Saric, analyst]

Just sticking to -- or starting with the operational aspect, I think Neil mentioned that the operating results were slightly excessive internal expectations due to higher-than-expected occupancy outside of the partial backfill of the office space in Montreal, Where there specific cities or tenant categories that were just surprisingly strong to you?

[Adam Paul, executive]

The -- look, we've obviously got a sizable portfolio that's got a lot of moving parts. So every quarter, we're filling a lot of space that's vacant and having some tenants leave. But the other notable space or spaces that were occupied in the quarter that we thought would not happen until Q2 was the former Walmart and our Deer Valley shopping center in Calgary. So we had a large 50,000 square feet of that space that we had slated for early Q2 that ended up being in Q1. That was the other big one.

[Mario Saric, analyst]

Got it. Okay. And then I think we've touched on this in the past. But in terms of the lease spread, which remains quite strong, was there an unusual amount of leases renewing in Q1 that had fixed renewal rates? Or was it fairly customary?

[Adam Paul, executive]

Unfortunately, it was fairly customary in the sense we did have a full of fixed flat options. But overall, over the pretty typical quarter, we had about 125 leases that were renewed totaling 46,000 square feet. There were a number of grocery stores. As I noted one was a fixed flat rate renewal. We had a couple of ones that went to market that are double-digit increases. We had some pharmacies in there, medical. We had some banks in there, restaurants. But [ all in all ], we would characterize the mix as pretty typical.

[Mario Saric, analyst]

And can you give us a sense of what the delta between the 2 is like the fixed rate increases versus with the market rent. So if the blended is 11%, are you looking at like 5% for the fixed increase rate and 20% for the market, is that a reasonable range?

[Adam Paul, executive]

Most typically, the fixed ones are actually flat. So think of like a Walmart or a food store, none of which we would have written the leases, but they would have been properties to be bought over the years. We typically run closer to 15% if you carve out those fixed renewals. So it depending on the quarter, 200 to 500 basis points impact on the blended number. But as you know, we -- we provide a very pure number, so it includes everything.

[Mario Saric, analyst]

Okay. That's really helpful. My last question, more of a theoretical question either for you, Adam, or for Jordie. And it relates to the proposed changes to the capital gains treatment that have been announced by the federal government recently, including a higher percentage of [ gain ] income. Do you think that in any way impacts your ability to hit [ tax ] dispositions? And would it alter the types of assets you look to sell from a tax efficiency standpoint?

[Adam Paul, executive]

The short answer is no. What we've seen are stuff that I described on the margins, so if you are already planning to solve something, obviously, there's a motivation to get it closed prior to the deadline. I think it's June '24, -- but no way. And we can say that from a perspective where in the last kind of couple of weeks, including after the announcement was made with respect to the budget. We have put more than one property other conditional agreement. We would say that we've seen no noticeable impact from the announcement -- and Jordie is not -- Jordie is signaling. -- he agrees.

[Operator]

The next question is from Lorne Kalmar from Desjardins.

[Lorne Kalmar, analyst]

Just on the renewal spreads, going back to that theme, do you expect the levels achieved in Q1 to be relatively consistent over the balance of the year? And secondly, I think you mentioned 15% on non-fixed rate renewals. What's preventing you from pushing that further? Or is sort of 15% kind of as good as it gets?

[Adam Paul, executive]

We've seen an evolution in it. So if you look at our renewals, like the composition of how much is fixed versus market is -- that's remained fairly consistent, not quarter-to-quarter but say, year-to-year. And if you look at 2022 or 2021, our renewal spreads in round numbers were 8.5%, the increase to 9.5% in 2022, the increase to north of 12% in 2023. So that's a function of a number of things, including strong fundamentals for the product that we own, and we think they remain solid. So we are seeing an increase. And keep in mind, our tenants are large retailers by and large. They're sophisticated operators, they're sophisticated with respect to their real estate skills that they have real estate department, staff with real estate professionals. So these can be complex negotiations when the fundamentals and replacement costs and the value of the space arena have changed so dramatically over a short period of time. And it takes a little bit of time to get full access to that. A lot of our renewals are done at market but subject to fair market renewal options and -- that sounds benign, but in a market like we've seen in the last couple of years, it's not benign because if you don't agree with the tenant on what market rent is, then your mechanism is arbitration and the way things work in arbitration is you look at comparable space in the comparable trade area for leases that have been done. Trade areas for grocery-anchored retail are fairly small in geographic terms. And so if you make it to arbitration, the tenant starts producing market comps that are several years old just because there aren't not many. But those comps -- if those leases were done today with unrestricted access to space, they'd be a lot higher. So this is a factor that is just going to require a little more time to get the full market. But clearly, you see the trend where we went from high single digits, we'll call it, to low double digits -- we certainly expect to be in the double digits throughout the course of the year. Again, never look at any single quarter no matter how high or low the spreads are. That's not a trend. But certainly, when you string 4 quarters together, we think it's a pretty good indicator.

[Lorne Kalmar, analyst]

Fair enough. And what do you figure the mark-to-market on the portfolio would be?

[Adam Paul, executive]

That's something that years ago, we disclosed and there's some inherent issues with how you look at it and how meaningful it is. But -- so we try and stay away from it. But we look to our renewal spreads. That's one data point. We see higher spreads on new leasing. Again, it's not a metric we post because that one is subject to gaming with the renewal lifts are a very pure number. There's no deal cost, there's no free rent. There's no inducements -- and one of the things we want to make sure doesn't get into the leasing culture is on new leasing, things like giving higher rent or higher TIs or -- sorry, free rent to try and boost space rates. So we try to keep it pretty [ sure ]. What can tell you is when a tenant leaves the space, and we put a new tenant in that exact same space, the increase in net rent is notably higher than our -- the way our lease renewal lifts [ have been ] track.

[Lorne Kalmar, analyst]

Okay. And then I heard one of your peers talk about retailers now actually seeking out forward deals just because there's such a shortage of space. Have you seen any element of that?

[Adam Paul, executive]

Yes, we have. Look, the reality is when you go down the list of retailers looking for space in Canada and what their store expansion plans are and you look at the available space and what's likely to be built, it's very obvious, not everyone is going to achieve their store expansion plan. So that's obvious to us. It's obvious to retailers. So they're coming to us earlier. They're being more flexible in the type of space that they're looking to lease, whether it be size, dimensions, column spacing, the way loading works. It used to be certain retailers were very committed to planning space that fits one of several kind of predetermined prototypes for themselves. We're seeing those same retailers look at space well outside those prototypes.

[Lorne Kalmar, analyst]

Okay. And then I'm guessing you haven't really seen any retailers augment their growth plans on the back of the announcement with regards to the change in the immigration policy.

[Adam Paul, executive]

No.

[Lorne Kalmar, analyst]

Okay. And then one last one. Can you just quickly remind me, and I'm not sure if it's included already, but the occupancy impact of the [ lease-up ] of One Bloor?

[Adam Paul, executive]

Yes. So at the end of Q1, all tenants were in possession.

[Neil Downey, executive]

Yes, that's right. It's in the numbers you see, Lorne.

[Adam Paul, executive]

So one were fully reflected in the occupancy numbers, it is obviously still a headwind to same property NOI given same-property NOI is reported on a cash basis. So while the tenants are in occupancy, they haven't commenced paying rent yet.

[Neil Downey, executive]

And I might just add to that. You do see the uptick in Q1 straight-line rent. That's the function in large part of those One Bloor tenants taking possession of their space for fit-out. That's a very short, I'll call it, turnaround cycle in our business to convert that straight-line rent into cash rents. As you know, and as we've spoken to, that will be largely cash rent paying for most of calendar 2025.

[Operator]

The next question is from Sam Damiani from TD Cowen.

[Sam Damiani, analyst]

Just following on Lauren, one more questions there about the sort of forward interest in space available in the future. I mean, we've seen a lot of retailers announced pretty aggressive expansion plans. Is it your view that some of these announcements are really just sort of way like unrealistic, just a way to get landlords attention? And like how realistic is it that some of these expansion plans are actually going to be accomplished?

[Adam Paul, executive]

Well, look, I think some are realistic and will be accomplished. And I think some will not. I don't think -- we certainly don't get the sense from our dealings with the retailers that any of them have made these announcements to get landlords attention. We think there is a legitimate desire to execute that store expansion program. So I think they're coming from a sincere place. But the reality is there's just far too many spaces that are desired by retailers given the inventory of what's likely to be available.

[Sam Damiani, analyst]

All right. That's helpful. And then just looking at the occupancy for the REIT. It did peak over 97% pre-pandemic. What would be the biggest hindrance of achieving that again in the next year or 2?

[Adam Paul, executive]

Yes. So Q4 2019 was a peak 96.9%. That's the all-time peak. And look, I think it's likely we encroach on that number. I'm not sure when it will be, but things are strong. We're not far off of it today. We're slightly above 96%. Certainly, when we look into 2025, we think there's a strong likelihood we encroach on that number, who knows maybe surpass that number.

[Sam Damiani, analyst]

All right. Appreciate that. And last question for me, just on the watch list of tenants. Any change has gotten any bigger? I mean, do see announcements every few weeks of a small retailer kind of giving up, but these are pretty small. I'm just wondering, are you starting to see any rumblings of anything emerging that that would be a bigger factor going forward?

[Adam Paul, executive]

. No. The watch list has been -- the watch list, we're focused on is at the other end on retailers who we can do more deals with.

[Operator]

The next question is from Dean Wilkinson from CIBC.

[Dean Wilkinson, analyst]

I'd like to come with the leasing maybe from a different angle, Adam, are you seeing an increase in the tenant installation costs or general construction costs? What I'm trying to get to is, are the economics on those lifts the same? Or are they compressing a bit just from a shortage of construction labor materials, that sort of stuff?

[Adam Paul, executive]

Not really. I mean, it's obviously space [indiscernible] in the sense that a higher rent space typically has a higher leasing cost per square foot versus a space that's got a lower market rent. Obviously, we've seen an increase in material and labor costs from inflation over the last number of years. But from our perspective, the pace of rent growth is -- or the rent [ rose ] pays that. So we see no material change both to the overall structure or economics of the deals with respect to cost of doing the deals, number of months of free rent fixturing periods, et cetera. If anything, some of those have kind of come in where we've been able to get slightly more favorable terms from a landlord perspective.

[Dean Wilkinson, analyst]

Great. And then, Neil, I just want to clarify your clarification. On that -- the low 9x debt to EBITDA by the end '24 -- it doesn't include the $9.5 million on the assignment, but it does include the [Technical Difficulty].

[Neil Downey, executive]

Okay. So the answer is I didn't actually specify as it related to the assignment fee and not to make light of it, but Dean, I don't think it matters much. You can do the math. If you include the assignment fee versus exclude the assignment fee, the impact on the debt-to-EBITDA multiple would be roughly 0.2 turns -- we're at [ $9.3 million] today. If you took out the assignment fee, it's [ $9.5 million ]. We've got lots of momentum in the business in terms of operations and leasing and the like, and Jordie talked about an active disposition pipeline. So we're confident that we're headed into something in the low 9s. We've not been specific as to what precisely that multiple is, but low 9s, you're assured is.

[Dean Wilkinson, analyst]

Perfect. And can you just remind me what the FX instrument is in the OG LE, I can't remember.

[Neil Downey, executive]

Yes, I can remind you. You may recall, it was in the fourth quarter of last year specifically. We entered into a [ CAD $150 million ] 5-year unsecured term loan. And at the time we talked a bit about this, the rationale for using the term loan was that the cost of funding was 100 basis points inside of pursuing an unsecured debenture offering. That term loan is actually the floating rate loans [ BA was ] a spread of [ 145 ]. At the time, we entered into a 5-year cross-currency swap. So we've got a cross currency swap there. We've got a U.S. dollar, Canadian dollar hedge. Ultimately, there's no foreign currency exposure over the life of the loan. The accounting instruments, the revenues get picked up, in essence, as financial instruments that require a mark-to-market every reporting period. And so you end up with this gain or loss in essence, on the rate hedge, and you end up with an FX gain or loss. And that's what flows through each and every reporting period. As I indicated, we view this as no net economic impact because when you run this over the entire course of the loan, all the gains and losses net to 0, notwithstanding they bob around each and every single reporting period.

[Dean Wilkinson, analyst]

Right. But the obligation is -- it's not in U.S. dollars, so.

[Adam Paul, executive]

It's U.S., but it's been swapped.

[Dean Wilkinson, analyst]

It's swapped. Okay. Got it.

[Neil Downey, executive]

I'm glad you ask because I do there is some confusion on this number of some people. So think of it as we've entered into a hedge that actually is a perfect hedge but doesn't qualify for hedge accounting. So we have this noise at the -- [ think the ] beginning of the loan term to the end of the loan term, the net impact is nil, but there's always noise in between.

[Dean Wilkinson, analyst]

Right. Texas hedge. Got it.

[Operator]

And we have a final question from Pammi Bir from RBC Capital Markets.

[Pammi Bir, analyst]

Just coming back to the disposition program. You've got another CAD $150 million for sale. You've had good success over the past several years and even this year as well. But as bond yields have continued to rise, are you sensing any change at all in terms of the momentum or the buyer appetite or behavior?

[Adam Paul, executive]

The short answer, Pammi, is no. We've seen bond rates bump around over the last year, 1.5 years, certain periods, they came down quite a bit. We did notice a strong firming or a strong positive composition of the market. And then we've seen them tick up. And the bottom line is we've actually seen a high degree of consistency with how constructive the market is. Again, it's dominated by private capital. Smaller is better in terms of deal size. It needs to be high-quality products you're selling, especially given it's [ not ] little to not yield. But again, Jordie and his group remain active. We've got several deals that have gone under contract in the last few weeks. And from a high level, we would describe the market today is very similar to the way it's been in the last 6 and 12 months.

[Pammi Bir, analyst]

Got it. I wanted to just come back to the fixed rate renewals. I'm just curious if you have an estimate of roughly how much of the portfolio lease [ GLA ] subject to fixed renewals. And I'm just curious if you're still doing any new leasing that has that feature.

[Adam Paul, executive]

The latter part, no, have been for many, many years. So the ones we have are ones that we typically acquired. Neil, I don't know the answer to -- we're going to have to get back to you on the first part of the question, Pammi. We just don't have it on hand.

[Operator]

There are no further questions registered at this time. I'd like to turn the call back over to Adam.

[Adam Paul, executive]

Okay. Well, thank you, operator, and we'd like to take this opportunity to thank everyone for their interest in First Capital and for taking the time to attend our first quarter conference call. Have a wonderful afternoon. Bye-bye.

[Operator]

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