First Capital Real Estate Investment Trust

TSX:FCR.UN

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the First Capital Realty Q2 2018 Results Conference Call. [Operator Instructions]I'd like to turn the conference over to Alison. Please proceed with your presentation.

[Alison Harnick, General Counsel & Corporate Secretary]

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

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

Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today. Q2 was a very good quarter. Our team is doing an excellent job executing on our plan, with many facets of the business all moving in the right direction during the first half of this year. We don't expect all quarters to be as strong as those, but at a minimum, we anticipate achieving our initial mid-single-digit earnings expectation for the year and beyond. We're very happy with our investments, both recently announced and those prior, which have accumulated to a level that made our equity issue prudent to preserve the strength of our balance sheet. We were able to do this while maintaining our NAV per share and, as I just spoke about, our expected earnings growth.The recently announced investments are a very unique collection of properties, and I'll touch on some of them today. Starting with the largest. Being an asset we know well given our historical ownership, the 2.1-acre assembly at Yonge and Roselawn, which, for those of you who don't know, is in Midtown Toronto. We know the difficulty in assembling this size of a development site in the city, especially in a node that is designated urban center, steps from the entrance to the TTC subway and the new Eglinton LRT that is under construction. Our plans are to redevelop it into a mixed-use property.We are most excited about the opportunity to create substantial retail given the site is over 90,000 square feet of land area. At least 2 levels of well-designed retail will work well in this location. We'll create larger-sized formats that are highly in demand but very unique in this trade area.There will also be a residential component. And we have had a great deal of unsolicited interest from residential developers to partner with us. But for now, we're focused on completing the rezoning process. This will increase the value of the property substantially. It wouldn't surprise me if rezoning alone created $0.20 a share of NAV.The next property I'll touch on is the Hazelton Hotel. You'd be hard-pressed to find a more strategic piece of real estate to us given our large position in this neighborhood, including our adjacent Yorkville Village mall entrance, which abuts the hotel and possesses unutilized density. It goes without saying that we have a number of value creation ideas for both the hotel and our shopping center that we started working on, but it's early days, so more about that another time.Aside from the strategic merit, given our fixed price option secured several years ago, this acquisition made great financial sense. At our 60% share, the hotel has a fair value of $60 million versus our cost of $44.4 million.Our focus is on our core business, which, as you know, does not include hotels. So acquiring a 60% interest versus 100% was logical given the quality of our operating partner and the hotel expertise they bring to the table.Our partner is the original visionary, developer and sole operator of the Hazelton, which is Toronto's first and one of its top-performing 5-star hotels. Importantly, this investment increases our position in the Bloor, Yorkville neighborhood to 450,000 square feet and nearly $700 million of investment and growing.Momentum in Yorkville continues to build. Q2 was a milestone quarter for our 102 - 108 Yorkville development, where construction started last summer, with 50% of the space pre-leased. The new 4-story building adjacent to our new Chanel store is really taking shape and will be ready for tenant occupancy later this year.Leasing demand and rental rates have been better than expected. The entire property is now 100% leased with Jimmy Choo, Brunello Cucinelli and Versace, who will each open 2-story boutiques.The third level will be fully occupied by Her Majesty's Pleasure, a global award-winning salon, spa and cocktail bar. And the entire concourse level is leased to the Aburi Group, owners of Miku, for a very cool high-end Omakase-style restaurant. Yorkville continues to evolve as one of, if not the strongest, nodes in Canada. It's clear that the completion of 102 - 108 Yorkville will elevate the neighborhood to yet another new level, which will contribute to the future value of our other holdings, including the hotel and the pending redevelopment of our 101 Yorkville property across the street, a project we're very excited about; and, of course, 121 Scollard, which we recently added to this assembly.Another property we acquired was the retail at 775 King Street West. We know this node extremely well given its adjacent proximity to our Liberty Village portfolio and our head office. The value creation opportunity here is through rental rate growth.In-place rents are roughly half of current market, which has resulted in a purchase price per square foot of $1,250, very attractive for at-grade retail in the King West and Liberty Village area, where market rents are in the high double digits and growing. In fact, the nearby property just east of us subsequently traded at a mid-3% cap rate at $1,950 a square foot, which compares favorably on both metrics.Including our King High Line project, our position in Liberty Village is now comprised of 495,000 square feet of mainly retail space, which includes 3 supermarkets, 2 pharmacies, 4 coffee shops, 7 financial institutions, 2 liquor or wine stores, 7 restaurants and 1 very busy gym, among other typical FCR tenants. It also includes over 500 new residential rental suites, which, together with the retail, represents a total FCR investment of $500 million on completion of King High Line and after factoring CAPREIT coming into the res component.The population growth and improved connectivity to many other neighborhoods through new transit and cyclist and pedestrian paths will make Liberty Village even better and more valuable in the years ahead. It's not surprising that market rents have more than doubled here over the last 10 years, with above-average rent growth set to continue.In Vancouver, we acquired an initial position in the Kerrisdale neighborhood in Vancouver's west side. The property is fully leased with Save-On-Foods in possession and preparing to open in Q4. Vancouver is one of the most difficult markets in the country to acquire great real estate. So the fact we could acquire this new property and do so at below market value is very compelling. But more significant is the reason this occurred. It's a situation that has started occurring across several of our key markets, and it's happening for 2 reasons.The first is the desirability of the large residential density pipeline we have. Because of this density, we are regularly approached by many of the most competent residential developers in the country who are aggressively looking to partner with us as we develop this density. A differentiating factor for us in selecting partners for these developments is the ability for us to also invest in new properties. In this case, the developer and FCR are pursuing a larger relationship. And as the first step towards that, they're selling us this Vancouver property. In turn, we're selling them a 50% interest in our 200 Esplanade property in North Vancouver at a market price, where we plan to jointly redevelop it into a mixed-use residential and retail property after entitlements are finalized and tenant leases expire at the end of 2019.Second, unrelated to our own pipeline, many residential developers have told us that they value and are seeking a retail and place-making expertise in some of their most important projects. Hines and Tridel are an example of this, and it's the reason they approached us off-market to co-own, operate and merchandise the retail on their Queens Quay property we announced in downtown Toronto's east waterfront.There are more of these types of opportunities being presented to us, especially in Toronto. This is unfolding as a new avenue to complement our growth. It can also work very well from a capital recycling perspective in situations where we buy into a project and also sell that potential partner a partial interest in an existing FCR property.In Alberta, we achieved an important milestone in our Mount Royal West development in downtown Calgary's Beltline neighborhood. Both Canadian Tire and Urban Fare took possession of their spaces and are preparing to open early next year. Longos and Canadian Tire will soon do the same in Liberty Village.The position we've assembled in Calgary's most desirable retail district is another large assembly that now stands at 384,000 square feet and $250 million invested. It's comprised of income-producing properties that are either newly redeveloped or those with future redevelopment potential. The latter category includes several blocks, including GM Glenbow that we co-own with Allied REIT, where we recently acquired 2 additional properties to expand our footprint.We also commenced construction of 2 meaningful transit-oriented mixed-use properties, Wilderton in Montreal and Dundas and Aukland in Toronto. Given their size, they fit very nicely into our program and are a good reflection of how our development pipeline is evolving, projects that are meaningful but are of a comfortable size from a risk perspective.I've talked before about the increased risk of very large single projects. Our program will continue to see us investing roughly $200 million per year across multiple development projects in our core urban markets with staggered time lines, resulting in a steady stream of both investment capital and completion deliveries. This reduces development risk.So we've been busy on the property side. Obviously, it includes leasing, where we continue to achieve high occupancy levels with the highest quality and most productive tenants we've ever had. We'll have several leasing announcements coming up, including projects like One Bloor and our Dundas and Aukland development amongst others that we look forward to making.But for now, I will pass things over to Kay, who will review our second quarter results. Kay?

[Kay Brekken, Executive VP & CFO]

Thank you, Adam. Good afternoon, everyone, and thank you for joining our call today. We achieved strong results for the second quarter and the first 6 months of the year, with FFO per share increasing by more than 11% in both time periods. Slide 6 of our conference call deck shows the factors driving the strong growth in the quarter and the year-to-date period.Our Q2 FFO increased 11.5% or $0.033 on a per share basis and 12.1% or $8.6 million in dollar terms versus the same prior year period. This increase was due to 3 key factors: first, growth in same-property NOI of $3.9 million, driven primarily by rent escalations, lifts on renewals, and, to a lesser extent, by increased lease termination fees over the prior year; secondly, a $2.3 million increase in interest and other income, primarily due to residential condo income earned through our investment in Main & Main; and third, an increase in net realized and unrealized gains on marketable securities of $2.5 million in the quarter.I want to take a few minutes to discuss our results in the first half of the year versus our expectations for the second half of the year. First, on lease termination fees, we recognize these fees year in and year out, and over the past 5 years, they've averaged about $2 million per year. This year, we earned the majority of these fees in the first half of the year, whereas last year, the majority of these fees were earned in the second half of the year, primarily in Q3.We are currently not forecasting any lease termination fees in the second half of 2018, but it is possible that we may have some. We are also not expecting any significant additional residential condo income, and we are not forecasting any other gains for the second half of the year as we only include other gains that are certain in our forecast.Last year, we recognized $1.7 million of other gains in the second half of the year. These timing shifts will make our results a bit lumpier this year. But overall, we expect our growth in FFO per share for the full year to be comfortably in line with our prior expectation of mid-single-digit growth.Moving to Slide 7. Our Q2 same-property NOI increased by a strong 4.2% versus the prior year. The growth was primarily driven by higher same-property rental rates due to rent escalations and lifts on renewals and, to a lesser extent, by higher lease termination fees.On Slide 8, we present our lease renewal activity for the quarter and year-to-date period. Our Q2 total portfolio lease renewal lift was 7.8% on 1,045,000 square feet of renewals when comparing the rental rate in the last year of the expiring term to the first year of the renewal term. For the quarter, the lease renewal lift was 10.4% when comparing the rental rate in the last year of the expiring term to the average rental rate in the renewal term. On a year-to-date basis, our total portfolio lease renewal lift using the rate in the first year of the renewal term was 7.7% on 1,398,000 square feet of renewals. On a year-to-date basis, the lease renewal lift using the average rate of the renewal term was 10%. We present this additional metric as it is more common today that our renewals include escalations over the renewal term than it was in the past. This metric captures those escalations and conveys a more relevant picture, especially considering the average renewal term is less than 5 years.Moving to Slide 9. Our average net rental rate grew 2.9% or $0.57 over the second quarter of 2017 to $19.96 per square foot, primarily due to rent escalations, renewal lift and development completions.During the first 6 months of 2018, we transferred 121,000 square feet of new GLA, and importantly, for the purpose of calculating development yields, some common area and public realm space from development to income-producing properties with an invested cost of $110.5 million and an average rental rate of $36.76 per square foot. Given cost allocations on quarterly transfers involve judgments, and at times we transfer significant amounts of common area space from development to income-producing properties, it is best to use the total project cost and the overall average yield on our development projects, as disclosed in our MD&A.On Slide 10, our total portfolio occupancy rate increased by 130 basis points to 96.3% since Q2 '17, primarily due to significant leasing activity during the fourth quarter of 2017. This increase incurred notwithstanding higher-than-typical lease termination fees in the first half of 2018. This is our highest quarter in occupancy rate in the past 6 years.Slide 11 highlights our 5 largest developments that accounted for the majority of the $58.9 million in development and redevelopment spend in the quarter, bringing our year-to-date investment to $109.5 million.As of June 30, we had identified approximately 21.6 million square feet of additional density within our portfolio, including 2.8 million square feet of commercial density, which is primarily retail; and 18.9 million square feet of residential density. This represents a substantial opportunity relative to the size of our existing portfolio, which is 24 million square feet.Approximately 3 million of the 21.6 million square feet of incremental density is included in the fair value of investment properties on our balance sheet. This 3 million square feet includes approximately 400,000 that is under active development and is valued as part of our development projects and 2.6 million square feet of incremental density, which is included in our IFRS values at approximately $161 million. The remaining 18.6 million square feet of density is not included in our IFRS values, primarily due to lease encumbrances, which will free up over time.As a result of our recently announced acquisitions, we expect our pipeline to grow further by approximately 1 million square feet as we close on these purchases. As substantially all of our portfolio is located in urban markets where significant land-use intensification continues to occur, we expect our future incremental density will continue to grow over time, providing us with further opportunity to realize value from this density.Slide 12 shows the factors driving the growth in FFO during the quarter and the year-to-date period. This slide also highlights our year-to-date FFO payout ratio, which improved to 69.1% from 76.8% over the same prior year period.Slide 13 touches on our other gains, losses and expenses, which are included in FFO. Our Q2 other gains were $2.5 million higher than our other gains in the same prior year period. This was primarily due to a year-over-year increase in net realized and unrealized gains on marketable securities of $2.5 million. On a year-to-date basis, we recognized $3.5 million of other gains versus $2 million of other losses in the same prior year period. The loss in the prior year was primarily due to noncash losses on the redemption of convertible debentures. I would like to highlight that we no longer have any convertible debentures outstanding, and as such, will no longer report noncash losses on redemption activity.Slide 14 summarizes our ACFO metric. Our Q2 2018 ACFO was up $15.3 million or 26% versus the prior year, primarily as a result of higher NOI, other gains and lower CapEx. On a year-to-date basis, ACFO was up $15.8 million or 14.7% versus the prior year period. Our ACFO payout ratio, which is on a rolling 4-quarter basis, improved to 80.9% from 90.5%.Slide 15 summarizes our year-to-date financing activities. During the first half of the year, we completed $126 million of new 10-year mortgages at an average effective interest rate of 3.8%, which was much lower than the interest rate on the debt we repaid, which included $89.2 million of mortgage repayments with an effective interest rate of 5.5%, and $55.1 million of convertible debentures with an effective interest rate of 5.3%. Although our preference is to focus on unsecured debt, we believe this market is currently mispriced. Spreads on 10-year unsecured debentures are as much as 65 basis points wider than comparable spreads on 10- to 12-year mortgages provided by a number of our secured lenders, which is a significant gap that is difficult to understand. As a result of this gap, we have been focused on placing new long-term mortgages. And given we are repaying maturing mortgages at the same time with very low loan-to-values, the size of our unencumbered asset pool has remained consistent. In July, we completed a $200 million equity offering to preserve our strong balance sheet as our investment activities increased.Slide 16 summarizes the size of our operating credit facility and our unencumbered asset pool as well as our key financial ratios. Our unencumbered asset pool is at $7.3 billion or 73% of our total assets, which gives us significant financing flexibility. Our net debt-to-EBITDA ratio declined in the first half of the year as a result of significant disposition activity in Q1 and increased EBITDA driven by higher NOI. Our debt-to-asset ratio also improved in the first 6 months of the year and will improve by approximately another 30 basis points as a result of our recent equity offering. The immediate impact of the offering will be greater as part of the proceeds will be invested over time.Slide 17 shows our term debt ladder. As a result of our year-to-date refinancing activities, our weighted average interest rate declined to 4.3% at June 30, and our weighted average term to maturity was 5.2 years. We continue to have future opportunity for interest rate roll down in our near-term maturities.Overall, we were very pleased with posting another consecutive quarter of very solid results.At this time, we would be happy to take any questions you have. Operator, can you please open the call for questions?

[Operator]

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

[Mark Rothschild, MD & Real Estate Analyst]

Maybe on the lease termination exempt, can you give some more information on where those assets are and what the opportunity is for -- or the vacancies from that space and what you think can happen there in the near term? And then also, when you back out lease termination income, is that a good general run rate for where you think same store NOI growth should be for the second half of the year?

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

Thanks for the questions. So on the first one, the only, I would say, larger-than-normal one was Staples in our Normandie property. And we've got a high percentage of the remaining gross rent obligation. We have a tenant that is set to backfill the space from the property, and we have an alternate new tenant to backfill that tenant space. So to be clear, it was a negative impact on our occupancy, but we plan to -- we plan for that to go away in the short term. So lease termination fees are interesting. Some people say, well, they're onetime items. They're not onetime items, they're recurring items. They're just a lot lumpier. And the impact of them being totally removed from consideration is not totally fair because, usually, you get a lease termination fee, there's a negative immediate impact on occupancy. And so generally, you got to either remove both or include both. But the bottom line is in this particular one, it was Staples at our Normandie property, and that's how it unfolded. In terms of the general ongoing same-property NOI growth, yes, that -- look, we had a very strong quarter, but I think the way you looked at it is probably a more realistic way of looking at a longer-term run rate.

[Mark Rothschild, MD & Real Estate Analyst]

Okay, great. And maybe a general question on the recent acquisitions. You raised equity at a price that I'm sure you didn't want to. Yet, clearly, it sounds like you're excited about the acquisitions. Can you maybe talk about the near-term return threshold for new acquisitions? And what type of return do you expect over the longer term that motivated you to raise equity?

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

Yes. Look, I mean, I'll caveat the whole conversation by looking at what we've been doing for a very long time now. And the numbers speak for themselves. So we have a proven track record of well above average NAV creation in the business. But it's not a smooth linear path. And so a lot of what we do is assembly complicated redevelopments, and the value creation time line, if I had to pick a number, it's probably the better part of 10 years. And when you look at that time frame and you look at assets like Liberty Village, McKenzie Towne Centre in Calgary, our South Oakville property, the way we repositioned Appleby corners in Burlington and so on, it's that type of time frame where there's really material value creation. And I'm not talking like 2%, 3%, 4%, 5% on average, but I'm talking higher than that. And so we're -- obviously, we're trying to balance the fact that we operate this business in the public markets where we speak about our results every 3 months, but we're making decisions for 20 years and beyond. And so when we look at the set of acquisitions that we made, we don't have a specific year 1 hurdle in terms of yield or cap rate that we stick to. We think there's a lot of really important metrics that all need to be factored in, and then you make a decision on your capital, your cost of capital, how much value you can create over various periods of time, and then you make a decision. And so we certainly have a lot of conviction in the quality of the assets. Immediately, they're highly accretive for the quality of our existing portfolio, which is already high quality. And we have a value creation vision for every single one of them. And so in the context of that, we had to make some capital decisions, and there are a lot of variables that went into that decision as well like our overall NAV, our FFO, our leverage, the short-term impacts, long-term impacts and obviously, most importantly, the use of proceeds. And so we step back. I know I look at the broad picture, we have a lot of tools in the toolbox, one of them being equity. We don't use it very often. We only use it where it makes sense. We view it as precious, and we certainly don't take any decision in that regard lightly. You've seen a shift in other parts of the business where we sold more assets than normal. We stopped redeeming our converts with equity. We used cash instead. And so again, very similar mentality and approach to those decisions. In this case, wonderful investment opportunities. We considered all of the options available to us, and our conclusion was unanimous across management and our board to proceed the way we did. So that's kind of the color and the mindset around how we viewed the equity in this particular case and how we view it overall. Never viewed it in isolation, and that's how we looked at it.

[Operator]

The next question is from Dean Wilkinson.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

On the Yonge and Roselawn, just to make sure I heard you correctly on that, did you say you're thinking that there could be as much as $50 million in excess NAV on the rezoning of that site?

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

Yes, that's correct. And the caution that I would flag for you is that if you look at the anticipated density on the site, there's a much higher retail component as a percentage of the total density. And obviously, retail density in a location like that carries a much higher value per buildable square foot than residential. And so if you apply a market value per buildable square foot of the retail and a market value per buildable square foot for zone residential in that location, yes, that's -- we're comfortable making that statement based on the state of the market today.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. So that would imply that it's probably something in the order of, I'm guessing, 250,000 to 400,000 square feet that you're looking at total?

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

So the application that we would have in would be 565,000 square feet.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

565,000, okay. So that would -- so your $50 million is kind of based upon kind of the -- call it, that 2.6 million square feet of uncommitted density that have already got on the balance sheet at $60, $70 a foot, in that range? Higher on the retail.

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

Well, higher on both. So on this one, we would have strictly looked at comparable values per buildable square foot for similar-type density in that location and generally around the Yonge and Eglinton area.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. That makes sense. And the other question for me, Kay, was sort of a housekeeping on the accounting. Just trying to reconcile the net cash position through the statement cash flows. Did you change the methodology of netting out the bank indebtedness there in the quarter?

[Kay Brekken, Executive VP & CFO]

Yes, there was a new accounting guidance that was put out that said if that was not repayable on demand, it should be reclassified into your financing activities on your statement of cash flows. So we did make that change in the quarter, and there is disclosure in the financial statements related to it.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. But there's no prior adjustments. It's just -- the cash balance carries through the same way, right, onto the balance sheet?

[Kay Brekken, Executive VP & CFO]

We restated the prior period to make it comparable.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. All right. That's clear. I'll go back and scrub that again. Last one was just, seems like there was another increase in the prepaid expenses in the quarter of about $25 million. Was that just prefunding of construction commitments? Or was there something else in there?

[Kay Brekken, Executive VP & CFO]

It's primarily related to realty tax payments that we make, and then we ultimately collect them back from our tenants.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. So that's -- is that a CAM reconciliation at the end of the year? Or is that done as you go through Q3 and Q4?

[Kay Brekken, Executive VP & CFO]

They make payments throughout the year, but there's true-ups at the end of the year.

[Operator]

The next question is from Pammi Bir.

[Pammi Bir, Analyst]

Maybe just going back to the Yonge Roselawn assembly. What's your sense of timing there from a rezoning standpoint? Or when you estimate it, the approval could happen?

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

It's Jodi. Thanks for the question. So just one point to make on Yonge Roselawn. That application has been appealed to the former regime of the OMB, so we're actually under the prior regime. I think it's just important to note that because that is a favorable position for us. And in terms of timing, best estimate is approximately 2 years to go through that whole process.

[Pammi Bir, Analyst]

Okay. So still a bit of work to do on that but moving along. And just going back to, I guess, the comments with respect to partnering with residential developers. Can you comment on whether you're at a stage of perhaps considering selling portions of some of the marquee assets, be it Yorkville or Liberty Village? Or is it still early days for that?

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

So in Yorkville, it's definitely early days. So we talked -- or I talked about a longer than most people think in terms of how long it takes to really secure really material value creation. And when you look at a similar time line for Yorkville, we're still not there. And so our belief would be at this stage to sell -- almost to sell any part of Yorkville at this stage. We would be leaving a lot on the table based on what's happening. So definitely not there. In Liberty Village, we have a site at 1071 King Street. It's a site that's primed for redevelopment. We're in the process of bringing in a residential partner on that piece. But basically, Pammi, we're looking at it and saying we own some fantastic land, mostly with income, that's getting more valuable over time. And so our intent is to bring partners in. If we decide to bring a partner in, much closer to when we're ready to construct.

[Pammi Bir, Analyst]

Got it. That's helpful. And then just maybe going back to the comments around development yields, Kay. As you gain more experience here and as you look at some of the upcoming projects from some of these recent acquisitions, how do you see that 5.1% target deal trending? Is it getting harder? Is it getting easier to hit those thresholds?

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

Well, I can jump in and say, it's always felt hard. We have not -- we certainly have not picked the easy part of the sector to operate in. But that being said, given our experience and the fact we've been early adopters of a lot of the occurring trends, we -- I also feel it's become one of our competitive advantages. And so notwithstanding, it's hard. It always feels hard and always has felt hard. My expectation is that, that yield is trending up. And when you look at that chart in 5 years from now, all other things being equal, it should be a higher number.

[Pammi Bir, Analyst]

Okay. That's helpful. And just one last one. In terms of tenant demand, what can you comment on in terms of maybe changes that you're seeing in any of the tenant behavior, whether it's on lease terms or their space requirements?

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

Yes. We've got Carm with us who's closest to it than anyone. So in terms of the leasing environment, Carm?

[Carmine Francella, Senior Vice President of Leasing]

I'll start up by saying we have really strong properties in desired urban markets. This is leading to a robust environment. As shown by the leasing that we've completed year-to-date, we've done about 1.8 million square feet, and we've completed notable deals with tenants of Miniso, Starbucks, Zales, Shoppers Drug Mart, several specialty grocers, fitness operators, restaurants, daycares and even new banks.

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

So overall, Pammi, we're feeling pretty good. It's coming through in the numbers. It's coming through in our leasing volumes. It's, I would say, more of a testament to the real estate than anything else. The way we look at the business, the average is a dangerous way to assess it. We've been very targeted in the type of real estate we invest in and own, and we're seeing pretty good activity right now based on that.

[Operator]

Our next question is from Michael Smith.

[Michael Smith, Analyst]

I was wondering if you could just give us a ballpark range of the market valuables -- market value per buildable in the Yonge Eglinton area for resi and retail.

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

So from what we've seen, you're generally north of $200 a buildable foot for res today and probably less than $300 a buildable foot, so it's somewhere in that -- I know it's a wide range, but it's been -- as you know, Michael, it's been a pretty interesting market. And what we're seeing in certain nodes like that is there continues to be a major supply-demand imbalance, and that continues to drive values up. So it's certainly not less than $200 a buildable foot. In terms of retail, it really depends. And to get scalable retail like we have at Yonge and Roselawn, I mean, $500 a foot is probably the low end of what it's worth on a value basis.

[Michael Smith, Analyst]

You mean -- like -- on a value, what do you mean by that?

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

I mean, a value per buildable square foot.

[Michael Smith, Analyst]

Okay. That's the zone.

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

Yes.

[Michael Smith, Analyst]

You're talking zone for both, right?

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

I'm talking zone for both, correct.

[Michael Smith, Analyst]

Okay. So roughly -- like in the neighborhood of $500 for retail and north of $200 for resi.

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

Correct.

[Michael Smith, Analyst]

Okay. And just switching to Yorkville, you've done some great leasing at 102 - 108. It's amazing, actually, when you add it to Chanel. And I think you mentioned that rents are better than expected. I wonder if you could just give us some -- how should we think about the economics of that project.

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

The economics, well, I mean, it's obvious at this stage the value is higher than our costs will be. I'm not sure what exactly -- I mean, we don't typically get into specific projects and what the individual yields are and things like that. So what can I tell you within that context, Michael, in terms of what you're looking for?

[Michael Smith, Analyst]

Well, I guess, going in kind of yields, but I mean, obviously, you don't want to give away any secrets on that very specific project. But suffice to say that you're happy with the going in yields?

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

Yes, we're happy with the going in yields. It's marginally ahead of what we expected. And I'm not saying it's wildly ahead, but it's slightly ahead of where we expected to land. We're also just cautious because we've got a lot of activity going on. We're creating a lot of space, and we're going to be leasing a lot of space and entering into competitive discussions with prospective tenants. And so that's one of the reasons why we're being selective. We don't want any one project to have a strong impact on our position vis-à-vis other acquisition opportunities or lease negotiations. But look, we love the neighborhood. Our expectations were pretty strong to begin with. We're marginally ahead of those.

[Michael Smith, Analyst]

Okay. Good. And can you give us a little bit of color on the capacity in the organization in terms of development? Like, you've got a lot of things on the go, but things are starting to -- you have some big projects that are getting into later stages. You've got some new ones. Like, how are you from a capacity point of view?

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

I would say -- and Jordie and Jodi may disagree with me, but I would say we're in a good spot. Look, we do have a lot on the go, but when we restructured close to 3 years ago, we came out of that restructuring with slightly less people in these groups than we had. We came out with a lot less people across the whole organization. And at the time, we had about 450 people. We went down to about 350. We're at about 370 today. But what I would say is based on the structure and the culture shift -- and not all parts of the culture shifted but some, but the combination of those 2 factors created a more efficient platform for the way we have evolved. And so we have more on the go today than we did back then. We have slightly less people, but I would say we're more efficient. And I would say we're near capacity, not at capacity. And certainly, we don't have a lot of redundancy. And that's why we're managing the program. Obviously, if the program shifted -- what's driving the program is our -- is not our capacity. We can create more capacity. We can shed capacity. So the idea is that we'll continue to structure the organization and staff it in a way that can deal with the program we have. But we've also moved towards more stability in how much we have on the go at any given time. And so as these new projects get completed over the next 12 months, we've identified a number that we're starting, and it's providing for an appropriate level of work given the people in place and the platform in place.

[Michael Smith, Analyst]

Okay. Good. And just on the rental steps, is there a concerted effort to structure leases with, like, annual rent steps as opposed to kind of a flat or bumps after a number of years? There seems to be a general trend in Canada for that. Is that something that you're making an effort to do?

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

Yes, and we have for a little while. Now there's a few things that we've had a higher degree of focus on when it comes to renewal and sitting down with a tenant to discuss a renewal. One of them is improving the CAM recoverability. And so -- especially with a lot of leases in properties we bought, leases were structured in a manner where certain tenants, especially large anchors, the way their lease is written it creates a shortfall in the recoverability of operating costs. And so we are very keen. And we would -- for example, we would be happy to give up $0.50 a square foot on net rent to pick up $0.50 a square foot to get that tenant to a full pro rata share of CAM recovery. So Carm and his team have had a very high degree of focus on that. Other restrictions in the lease like no builds, for example, is another thing that we are highly focused on improving when it comes time to renewal. So in this particular quarter, we had 2 meaningful tenants that we definitely renewed at a lower rate because we were able to free up no builds in 2 properties that they occupy that has unlocked significant value for us, where there's strong demand for pads in those locations. And so we were happy to renew the tenant at a lower rate to free up those rates. It could be things like exclusivities and other factors. And so we really -- there's a lot of money to be made or lost in leases beyond rental rate -- net rental rate. And so there's definitely been a heightened focus on that. And obviously, growth. In the old days, you would typically do a 5-year renewal. It would be at a flat rent; ideally, higher than what the expiring rent was. And that was kind of the standard. That's more the anomaly for us these days. Most of our renewal leases end up with rental steps within the term. If you look at this quarter, similar to last quarter, and that's why we started disclosing the spread between the expiring rate and the average rate in the renewal term versus just the year 1 rate. And what's -- obviously, what you've seen is a big spread. We went from 7 and change to 10 and change percent. But these are not long renewals. Our average renewal term in 2018 is less than 5 years. So we're getting that really strong growth within our -- not a super long renewal term.

[Michael Smith, Analyst]

Right. And just last question. I don't want to pin you down, Adam, but I think you said in your opening remarks that you see -- that you're pretty confident about mid-single-digit earnings growth this year and you also mentioned beyond. And I know you're not giving book guidance for '19 or what have you, but is there a general sense that that's kind of the range you're comfortable with or you're -- at this early stage?

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

Well, maybe that should be my guidance and then we won't have to talk about it in February. Look, when I arrived here, this company had been firing on a lot of cylinders. And one of the ones that we hadn't for well-identified reasons was earnings growth. And so we made it a top priority because the business was performing exceptionally well. And the truth is, at that stage, looking forward, there was no reason why we shouldn't deliver better earnings growth than we had in the past based on how we've matured and the evolution of the company. And so now we've got kind of 3 years of pretty strong mid-single-digit earnings growth. I think the market expects that from us. I can tell you, we expect that from us. And the truth is it could be higher, but it's a balancing act because -- I mentioned the types of investments we make that really drive the long-term value of this company, and they extend over many years. And so one path could be to try over the next few years to take that up to something a little bit higher than mid-single-digit growth. But if we want to keep investing for the future and driving that growth in 5 years, in 10 years down the road, which is more on our radar than probably a lot of other people, then that's the balancing act. And so our expectation, subject to something that we're not aware of or something that changes, is that we'll continue to deliver that growth in that range but also plant the right seeds that allow us to deliver that growth. And what we expect is higher than that growth in the future.

[Operator]

Next question is from Sam Damiani.

[Sam Damiani, Analyst]

First question is on same-property NOI growth. It did accelerate in Q2. And what's the occupancy at an elevated level for the last sort of 3 or 4 quarters? Do you expect that above-average growth to continue into the latter half of this year?

[Kay Brekken, Executive VP & CFO]

So one thing I would highlight is the shift in lease termination fees, Sam. They are front-end loaded this year. They're back-end loaded last year. So in terms of same-property NOI growth, that includes the lease termination fees. So there's a big one to comp against it in Q3. It's about $1 million in Q3 last year. So if you normalize for that, I would expect our same-property NOI growth to be fairly consistent where it's averaged over the past 5 years but likely slightly higher given the increased occupancy.

[Sam Damiani, Analyst]

Okay. And when you look forward beyond this year, I mean, occupancy is at the higher end of the range, as you've noted. Do you think with the portfolio in the quality that it is in today could operate at a higher range of occupancy than it historically has? Like is there upside to the current level in your mind?

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

Yes. I mean, our expectation is that we do operate at a higher -- we're at a higher level right now, call it 96% or slightly over. Our expectation is that's not a peak. That's kind of a more normalized level. Carm, are you -- do you disagree?

[Carmine Francella, Senior Vice President of Leasing]

We're -- I don't disagree. We're encouraged with the strong demand we're seeing for our properties, and we're expecting this to lead to us maintaining a 96% or better occupancy in '18 and into 2019.

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

I mean, the other factor is the portfolio has never been as high-quality as it is. So all other things being equal, we should have a slightly higher occupancy than we have historically given the portfolio is more evolved, higher quality, and that should certainly result in higher occupancy.

[Sam Damiani, Analyst]

And the renewal uplift, excluding the contractual steps that you are getting, is around 8%. Again, fairly consistent. When you look out into the future, do you see that being consistent again or potentially improving? It just feels like you're seeing strong rental growth in some of your urban concentrated nodes. So I just wonder if you could see some elevated growth going forward.

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

Right now, we'd expect -- we think it's a healthy range. And the way we look at it, if you go back even 5 or 10 years ago, you'd see something closer to 10% -- 9% to 10%. But again, it involved more flat rate renewals than we do today. So we actually think it's similar. We're looking at that average increase in renewal rents. And so our expectation is we think we'll hold in around that range at this stage. Maybe at a later stage, we think it can get better. The other thing I would say is, again, averages in the business can sometimes be a little misleading. And so we're getting nice growth across the board. But as some of our leases continue to expire, and what you have is these lumpy, really, really big renewals. I think in 2016 or '17, we had a food store where the rent went up 60%. We had a couple of other anchors where the rent really went up a lot. And so as the portfolio -- as we get closer to those expiry dates where tenants don't have contractual rental rate rights, down the road, you could certainly see a spike because there's a lot of embedded future value in that format that as time goes on, you'll get closer -- we will get closer and closer to monetizing. But over the foreseeable future, I think what you've seen is a fair expectation for what you'll continue to see.

[Sam Damiani, Analyst]

Okay. And just in your discussions with banks, I think you'd mentioned you've added maybe 1 or 2 bank leases in the last -- or at least year-to-date. Any discussion on banks wanting to shrink their footprint? And where do you see that trend impacting the portfolio?

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

So discussions with banks on shrinking their footprints in general or in...

[Sam Damiani, Analyst]

Yes, in general. In general, yes.

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

Well, yes, I mean, I think it's clear that the trend for bank branches is that they're going to be shrinking their networks. How aggressively that happens will depend -- will vary from bank to bank. I mean, RBC had a pretty aggressive reduction statement this year. But we are not seeing that same trend unfold in our business. And maybe, Carm, you can talk a little bit about what you're seeing from the banks in the portfolio.

[Carmine Francella, Senior Vice President of Leasing]

We've had about 30 bank expiries for this year. We expect to retain 28 of those, including all the 9 RBCs. And we've also added 1 new branch, and we're actually negotiating 2 on-site relos. So we're faring fairly well.

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

No, I was just going to say that, again, the averages are -- can be a little misleading in our business because I don't think we have an average portfolio. And so when you look at the banks, it's clear -- if you listen to them from a broad perspective that the trend is the same or less branches. But even in Liberty Village, where TD, for example, has a large branch, they went and opened up another one in another property we own less than a kilometer away because the volume was so high that they were operating at maximum capacity. So we own great real estate, it’s where a lot of retailers want to be. It includes the banks. We've taken a cautious approach in terms of asset management planning for higher turnover in the bank branches. And we've got great Plan Bs if they decide to vacate. That hasn't materialized because they do see a lot of value being located in the urban markets where there's still really strong population growth, great mortgage business growth. And again, Liberty Village is a telling example. This is a young demographic. It is a very busy branch. It surprises me whenever I walk by at how many people -- how many millennials are actually physically in the branch. And they're still doing a lot of digital business as well in the market. So we are just not seeing the same trend in the portfolio right now in the bank branches that would be intuitive.

[Sam Damiani, Analyst]

And just those 2 of the 30 that you don't expect to retain this year, I mean, you don't want -- never want to extrapolate from just 2 instances, but what is the experience there? How are you replacing those spaces? And what kind of rental uplift are you getting?

[Carmine Francella, Senior Vice President of Leasing]

Well, one of them hasn't closed yet, and that doesn't happen until later this year. And the other one, we're actively working right now, combining it with some vacancy to actually cater to a much, much larger tenant. That's going to be about 18,000 square feet.

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

The most common replacement tenant in the few cases where we have replaced banks has been restaurants, particularly quick service. So that's been a growing segment in the markets we're in. And when you look at a lot of the bank space, they're either in pads, often with drive-throughs, which is very valuable to quick-serve restaurant, or they're in end-caps often with unutilized patio space, which, again, lends very well to sit-down restaurants. So I expect, if you look at the broad branch network in our portfolio and we fast-forward 5 years from now, some will turn over, they always do. Probably restaurants, we think, will be the highest replacement category.

[Sam Damiani, Analyst]

Maybe just one last one. Completion dates on Yorkville Village and 3080 Yonge were pushed back a little bit. Just wondering what the reasons were.

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

Yes. It was a small shift in just part of the space. Nothing major. We're looking at how we classify the redevelopments because if literally one unit gets pushed, the whole property gets pushed. The bottom line is there's nothing major in there, Sam. And that's why if you look at our development yields, they've held firm. Generally, delays in time cost money and put pressure on yields. These are just too small to do that.

[Operator]

The next question is from Jenny Ma.

[Jenny Ma, Analyst]

Just going back to the Yonge and Roselawn value creation opportunity, and maybe this question is for Kay. But what are the milestones or hurdles you have to get through to get that recognized in IFRS?

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

It's Adam. I'll just answer quickly because the first milestone -- there's going to be 2 points of critical milestones for value creation in Yonge and Roselawn. The first is going to be on rezoning. So milestone is finalizing the rezoning, and we think that could take upwards of 2 years. That's what we've planned for. We do have income in place. We've got 70,000 square feet of existing retail space right now, plus a meaningful amount of surface parking in the rear of the property that is generating some income. And then the next milestone will be once we redevelop the property, which will be several years after that in terms of the completion date.

[Jenny Ma, Analyst]

Okay. And are there mechanics involved in getting that recognized through IFRS? Or does it go -- does it have to go through the entire completion process before you can actually roll it into that?

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

Our expectation is they will not be recognized in IFRS until we go through the full rezoning process.

[Kay Brekken, Executive VP & CFO]

Yes. Generally, when you have an income-producing property, you do need to value it as an income-producing property based on the in-place rent. If there's excess land, that can certainly be valued separately on the site.

[Jenny Ma, Analyst]

Okay. Got you. And then moving on to the res density. Adam, can you walk us through how you think about building out res density for your own account versus selling it? Obviously, there's a lot of moving pieces involved. But internally, what's the discussion like when you look at each individual project?

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

It's a very good question, Jenny, and it's a topic that continues to evolve inside the business. And one of the things that we're more in tune with today is the fact that the reasons we really like the neighborhoods from a retail perspective are also the reasons that make the residential very successful and profitable. And so for that reason, we are more keen today than probably historically to retain an economic interest in the residential component. And so that's what you're seeing. You've seen us stay in more properties that are under development now than we have historically, whether it be Rutherford and Royal Orchard and 200 Esplanade in North Vancouver, 1071 King in Liberty Village, King High Line, so on. So the way we're looking at it is similar to developing the retail, there's a value creation opportunity in the residential. At this stage, we continue to do it with partners. We think that aside from their capital, more importantly, their strategic expertise reduces the execution risk for us and -- but also allows us to retain at least a meaningful equity component that we believe will create value for very similar reasons on why we've experienced value creation on the retail side. And when you think about it, in great neighborhoods, whether it's Liberty Village or Yorkville or Mount Royal out west and Griffintown and Carré Lucerne and so on, when you look at them and you've got residential -- and King High Line is probably one of the most concrete pieces of evidence of this because we've leased about 35 of the units to date, and they're tracking ahead of where we expected and they're tracking at a meaningful premium to other alternatives in the market. And probably the main reason why that's the case is because of the retail amenities that are physically built into the property. And I think we have a deeper appreciation today of the premium that the residential commands when you have a full-size food store, a full-size Canadian Tire, one of the best daycares in downtown Toronto, shoppers, restaurants, services, and having that physically in the building is generating a premium that's higher than we would have expected. And then conversely, obviously, from a retail perspective, the more customers you have in close proximity to the stores, generally, that's got a positive impact on sales. And so I think that our thinking has evolved in a way that the lines are starting to get a little more blurred between retail and residential and what makes each of them successful. And so we're factoring that into our decisions on when to bring in partners, where to bring in partners, where to sell the density rates outright.

[Operator]

[Operator Instructions] The next question is from Matt Kornack.

[Matt Kornack, Analyst]

Quick one for Kay on the funding side. You mentioned a pretty juicy spread there between mortgage debt, financing and the unsecured markets. Would you entertain taking up mortgages to pay off maturing unsecured debt? Or do you want to maintain the unencumbered asset pool at current levels?

[Kay Brekken, Executive VP & CFO]

Given we're paying off mortgages at low loan-to-values, even by doing additional mortgage financing and using it to pay off unsecured debentures, we have been retaining the size of the unencumbered asset pool. So at this stage, we really think the market needs to be repriced for it to make sense to be in the unsecured debenture market.

[Matt Kornack, Analyst]

Okay. So you're committed, I guess, for the near term to the mortgage market over the unsecured debt market.

[Kay Brekken, Executive VP & CFO]

Well, I would say, be careful because the market shifts in the unsecured debentures very quickly. In January, it was quite attractive. And in February, it wasn't. So our plans can change quickly depending on what the markets do.

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

Yes. The good thing is the markets do change quickly. The other thing we're very cognizant of is we were very early in the unsecured debenture market in Canada from a real estate perspective. We did pay a price to do that, but it's put us in a fortuitous position today where we have a lot of flexibility. And we shouldn't be in a position anymore where we have to continue paying that price. And at 65 basis points, that's a big price. And so because of the flexibility we built over that time line and being early into the market and paying a price at the time, we can do mortgages for a long time and we will still be heavily, heavily skewed towards unsecured debentures in our capital stack, and we will still have an enormous unencumbered asset pool.

[Matt Kornack, Analyst]

Fair enough. And I would presume with your recent acquisition activity and the equity raise, those would have to be on the unsecured -- sorry, the unencumbered asset pool as well?

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

That's correct.

[Matt Kornack, Analyst]

And just on that front, looking forward, would you say the equity raise is somewhat an indication that you have less noncore assets to sell at this point? And then on the flip side, as you look to fund the development pipeline going forward while keeping in mind that the EBITDA numbers and potentially chunky projects like Christie Cookie, how should we look at that from a time line standpoint and a funding basis? And what other sources of capital can you secure should you not want to issue equity again at certain prices?

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

Yes, I mean, Matt, depends on the time line you're looking at. Certainly, every asset we sell, all other things being equal, reduces the pool of assets that we have available to sell. And so when you fast-forward to something like Christie Cookie, by then, we will have less noncore properties than we have today. But we'll have other properties that may be more appropriate to sell a partial interest. And if you look at what we did with our London portfolio, it's a great portfolio. It's stable. We've done the heavy lifting on repositioning it. That being said, we're still going to generate same-property NOI growth out of that portfolio. It just won't necessarily be as high as certain other neighborhoods where they started in a different place and have different fundamentals, like a Yorkville. And so we sold a half interest there. It was a great capital recycling initiative. We stayed invested in the real estate, and so we will participate on the upside. And we've got a great partner. So as the properties mature, there will be other properties that maybe aren't suitable to bring in a partner today, but they will be down the road.

[Matt Kornack, Analyst]

Fair enough. And then I guess in terms of bringing up the yield on cost, I think that was something that you had mentioned earlier. I mean, is there anything other than selling air rights or bringing in partners that you can do to do that? I mean, do you think that there's a normalization in the cost market on construction or that rents are going to outstrip costs at some point? I'm just interested in how that progression takes place going forward.

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

Well, it's less of that for us in terms of what we're thinking and more of having a high degree of discipline. So if we're saying that we -- our objective is to invest in and around $200 million into development every year, we're fortunate that we have an opportunity set that is much larger than that. And we're also fortunate that, that opportunity set is in the form of pretty successful income-producing shopping centers. And so what we will do is perhaps do less development than we otherwise would, but we will pick the properties that are most prime for redevelopment, that have the most development profit margin, and we will shelve some of the others and let them continue to mature, continue to get more valuable, and then put those into active redevelopment at a later date when their profit margin expands. And so if you take -- if you look at Humbertown, for example, we could have been redeveloping Humbertown several years ago. It's for that exact reason that we pushed it out. It's a very successful shopping center. Technically, we never have to redevelop it, but we've been rezoned on the property for several years. We're now going to start our first phase, and this is another nuance. Our original plan was to redevelop the whole property at one time. We think it's now in our best interest, and we think we'll make more money by redeveloping in at least 2 phases. And so we're going to start the first phase likely inside of 24 months. And so those are the reasons why we expect it will generate a little more yield out of the redevelopments. Not so much related to rental rates and costs, more about being more selective and just applying a high degree of discipline to the program.

[Operator]

We have a question from Sam Damiani.

[Sam Damiani, Analyst]

I was just going to ask, what are your spreads on nonsecured financing right now?

[Kay Brekken, Executive VP & CFO]

So low 200s is where we would be on unsecured 10-year debentures right now.

[Sam Damiani, Analyst]

So about 150 unsecured?

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

A little lower than that.

[Operator]

There are no further questions. I'll turn the meeting back over to Mr. Adam Paul.

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

Okay. Thank you very much. Thank you, everyone, for your time this afternoon and your continued interest in First Capital. Have a great afternoon. Bye-bye.

[Operator]

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