First Capital Real Estate Investment Trust

TSX:FCR.UN

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the First Capital REIT Q2 2023 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to Alison. Please proceed with your presentation.

[Alison Harnick, Investor Relations]

Thank you, and good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today’s call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements.

A summary of these underlying assumptions, risks and uncertainties is contained in our securities filings, including our Q2 MD&A, our MD&A for the year ended December 31, 2022, and our current AIF, which are available on SEDAR and our website. These forward-looking statements are made as of today’s date, and except as required by securities law, we undertake no obligation to publicly update or revise any such statements.

During today’s call, we will also be referencing certain financial measures that are non-IFRS measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the 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 will now turn the call over to Adam.

[Adam Paul, President and Chief Executive Officer]

Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us for our conference call. Starting with the quarter; our results were in line with our expectations and were underpinned by continued strength in leasing across our high-quality grocery-anchored portfolio. Same-property NOI grew once again and lease renewal lifts were the second highest we have had on record. Now a quarter doesn’t make a trend, but the fundamentals underpinning leasing demand are very solid and poised to persist for the foreseeable future.

Significant population growth, a strong labor market, virtually no new supply, higher replacement costs, strong top line sales growth and margin protection from our tenant base have all reinforced these fundamentals. This is very beneficial as we look ahead with respect to demand and rental rate growth for our portfolio. Owning such high-quality assets helps us to attract the best people. Our leasing personnel have never been more talented, and they are with new tools from our technology investments.

We are working on some very exciting transactions in our leasing department that we look forward to sharing soon. This is particularly important given the tenant turnover opportunities we are working on as well, which is a normal part of our business and an important one for the growth that it provides. As we have communicated prior, after a nice increase in Q1, our occupancy dipped in Q2 as a result of two specific spaces: one with a Walmart location paying only a single-digit gross rent per square foot. And accordingly, the repositioning of this space is an opportunity for FCR.

Walmart vacated in June, and our leasing team was able to backfill half of the space during the same month with a short-term tenant that will allow us to collect a little bit of rent, while we work through several permanent prospective tenant options. The other contributor was our single Nordstrom Rack location at Yonge and Bloor in Toronto. Now there is several very exciting opportunities that play at this property. And I mentioned last quarter that we were surprised by the news of Nordstrom’s departure given the productivity of the single location we had.

I am pleased to report that leasing demand has been very strong. I will spend the balance of my remarks today on our top strategic priority, which is our enhanced capital allocation and portfolio optimization plan. Following the planned announcement in the latter part of last year, feedback was overwhelmingly positive that this is the right plan for FCR. Alongside that affirmative feedback was also a degree of skepticism related to whether the plan could be successfully executed given macro factors. We certainly recognize the environment at the time.

However, given the quality of our assets and the capability of our team, we have conviction in our ability to execute. We are now several months into the plan. And notwithstanding the macro environment has certainly not improved, we have made a lot of progress. Part of our plan is designed to surface unrecognized value that we have created in numerous low-yielding assets. None of the assets identified for sale are multi-tenant gross range with retail properties. Most of them represent density that has been zoned by FCR, and all of them have seen our short- to medium-term value-enhancing goals achieved.

The plan includes the sale of $1 billion of these assets by the end of 2024. The capital raise has been redeployed into more impactful uses. When we announced the plan, our expected allocation of the proceeds was roughly $400 million to reduce debt, $400 million into development and $200 million into other uses, including NCIB repurchases and near-term value-creating investments that are consistent with our real estate strategy. Today, we expect debt to be reduced by more than $400 million and development expenditures to come in less than $400 million.

In terms of the remaining $200 million, part of it has been redeployed to accretively buy back units, and we also made an exemplary acquisition in Q2 that Jordy will speak about. The sale of the properties under our plan has the rare and impactful effect of improving both our balance sheet and our earnings or FFO per unit at the same time. Over the last few months, we have made great progress with roughly $460 million of announced sales equal to 46% of our target. And pricing has been strong, representative of a 17% average premium to IFRS NAV. Our optimization plan remains well on track, which will continue to deliver higher FFO with less debt.

And with that, I will now pass things over to Neil.

[Neil Downey, Chief Financial Officer]

Thank you, Adam, and good afternoon to all of our call participants. As is customary with my remarks, I will be referencing the quarterly conference call presentation, which is available on our website at fcr.ca. So let’s start with Slide 6. Q2 funds from operations of $63.8 million increased by $2.6 million year-over-year. FFO per unit was $0.30 for the quarter. This was an increase of approximately 8% from $0.28 earned in Q2 of 2022. Excluding other gains, losses and expenses, second quarter FFO per unit was to be precise, $0.295. This is an increase of 1% relative to $0.291 generated in Q2 of last year. Overall, the results were very much in line with our internal expectations. Touching upon the key components of Q2 FFO to start with net operating income of $107.8 million increased slightly from $107.2 million in the prior year.

The key factors behind the NOI growth included. Firstly, higher base rents contributed $1.1 million. Secondly, higher variable revenue sources contributed an incremental $800,000. Offsetting these sources of growth was approximately $1.3 million of lost NOI related to dispositions from the past 12 months. And finally, I will note this NOI was adversely impacted by a $1.7 million straight-line rent write-off related to the early departure of Nordstrom Rack at One Bloor. This is a non-cash charge that flowed through to hurt FFO per unit by approximately $0.08. Q2 same-property NOI increased by $2.2 million year-over-year, equating to growth of 2.2%.

Again, for a bit of context, Nordstrom departed One Bloor in the first week of June. So the 25 days of lost rent in the quarter hurt same-property NOI growth by approximately 40 basis points. Bad debt expense for the quarter was nil. This was a $300,000 year-over-year improvement on a same asset basis. Moving further down the FFO statements; interest and other income of $5 million increased 14% year-over-year. Drivers were higher cash balances and higher interest rates and an increase in leasing fees. These factors were partially offset by lower interest income from lower loans receivable.

On that front, loans and mortgages receivables totaled approximately $116 million at June 30 and that carried a weighted average interest rate of 7.9%. Net loan receivable repayments during the quarter were $13 million. Corporate expenses were $9.9 million in the quarter. This was in line with the expectations that we provided with our Q1 conference call and a similar figure to the Q1 2023 expenses, excluding non-recurring costs. For additional information purposes, Slide 7 details FCR’s 6-month results and comparatives, and Slide 8 includes the components of other gains, losses and expenses.

So turning to Slide 9, let us touch upon operating performance metrics. The portfolio rounded out June 30 with an occupancy of 95.9%. This was 30 basis points lower than Q1’s 96.2%. Q2 activity included 144,000 square feet of tenant possessions set against 230,000 square feet of closures. And we indicated on our Q1 call that we had a 91,000 square foot Walmart lease expiry in Edmonton that was coming in Q2, and we expect that Nordstrom would vacate its 40,000 square foot store as well. So this accounted for almost 70 basis points of portfolio vacancy. And so occupancy was down in the quarter as we indicated it would be.

Yet it also exceeded our earlier expectations. This was due to generally strong leasing performance as well as the June 30 backfill of a portion of that former Walmart space with a 47,000 square foot temporary tenant. Moving to leasing on Slide 10, second quarter renewal volume of 510,000 square feet was consistent with the volume in Q2 of 2022. Including new leasing for future possession, total activity FCR’s share was 784,000 square feet. Q2 lease renewals were affected at an average increase of [indiscernible] when measuring the first year renewal rent of $20.49 per square foot relative to a rent of $17.98 per square foot in the final year of expiring leases.

As add a reference, this was the second highest leasing spread on record. Also, as referenced in Slide 10, the in-place portfolio net rent per square foot was $22.97 at June 30. This was a $0.09 decrease during the quarter. Now a decrease in portfolio net rent is very much a rarity in FCR’s business. In fact, this was the first since 2016. To provide a bit of context, the early closure of Yonge and Bloor adversely impacted net rental rate by $0.14 per square foot. The rent on the former Nordstrom Rack space was nearly 4x the FCR portfolio average. Moreover included with the Q2 hotel sales, there was a small amount of higher rent commercial space, and this disposition also trimmed $0.04 per square foot from the net rent on a portfolio basis.

Regardless, the key takeaways are simple. The small decrease in net rent per square foot is an anomaly, and it’s in contrast to strong leasing momentum across the business. We also expect it will prove temporary and that re-leasing efforts will yield an equal or greater future increase in net rent per square foot. On the trailing four quarter basis, Q2 net rents remained $0.25 per square foot or 1.1% higher. Rent escalations and renewal lifts generated more than $0.40 per square foot within that growth. Slides 11 and 12 provide distribution payout metrics on an FFO, AFFO and ACFO basis.

These are mostly for informational purposes. They provide an indication as to how we view and measure cash generation and sustaining CapEx within the business. For calendar 2023, we continue to expect approximately $40 million of sustaining CapEx, including leasing costs. The comparable figure in 2022, by the way, was $37 million. Advancing to Slide 13, the REIT’s net asset value per unit at June 30 was $23.13, representing a decline of 1.5% from $23.48 at March 31. During the quarter, FCR recorded net fair value decreases on investment properties of approximately $105 million.

The quarterly valuation process covered 96 individual assets with an aggregate value of $3.6 billion. These properties were subject to cash flow update, yield changes or a combination of both by our valuations team. The major components of the Q2 fair value change included the following: firstly, a $104 million loss on revisions to capitalization rates and discount rates. These covered 55 properties where yield changes were asset-specific based on market transactions and or assessments related to risks or potential liquidity in the context of current market conditions. Secondly, the net $12 million loss was recorded in relation to updated cash flow models for 39 properties.

And finally, regarding recent disposition announcements, there were two properties where fair values were marked higher by $12 million in order to reflect their contracted sales prices. Regarding the latter, our Q2 press release referenced $91 million of new dispositions. One of those two transactions is to occur on a structured two-stage basis and another was firmed up after our Q2 books had closed. Therefore, we expect to record additional fair value increases of approximately $14 million related to those announced dispositions. On a portfolio basis, FCR’s June 30 weighted average stabilized cap rate of 5.3% was approximately 10 basis points higher from March 31.

Now taking a step back as interest rates have risen and the investment environment has evolved over the past five calendar quarters, in particular – our valuation work has resulted in an increase of approximately 30 basis points in FCR’s weighted average portfolio cap rate. These changes have driven approximately $500 million of fair value markdowns. This equates to downward adjustments to the portfolios total value of slightly more than 5%, and I might add the impact translates to more than $2 per unit. Turning to Q2 capital deployment and as summarized on Slide 14, we invested a $50 million into property and residential developments and $14 million into portfolio CapEx and leasing costs in the quarter.

Our larger project level investments included Cedarbrae, Yonge & Roselawn and Stanley Park all located in Toronto and Kitchener, and 200 West Esplanade in North Vancouver, where this purpose-built rental property has recently been branded as Victor. We also invested $55 million in mid-May to purchase the land beneath Centre Commercial Maisonneuve in Montreal. This investment secured our long-term ownership of this highly productive open-air shopping center. And in a few minutes, Jordy will provide some added color on the investments. As we look at it over the balance of this year, we currently anticipate calendar 2023 development CapEx to be within the $140 million to $160 million range. Also for the year, we expect all other capital expenditures, including leasing costs to be approximately $70 million.

Turning to Slide 15, there were a couple of notable financing initiatives this quarter. Firstly, we arranged a new $183 million secured construction facility for our 138 Yorkville project. Including the LC facility, FCR’s 33% share of that loan amounts to approximately $63 million. During Q2, we drew $41 million on the facility primarily to repay our $33 million share of the existing land loan, which matured during the quarter. Secondly, in June, we extended the maturity of our $450 million unsecured revolving operating facility by 1-year to June 2028. This extension provides FCR with 5 years of access to this key source of liquidity.

And finishing up with some key debt metrics; during the quarter, we reduced net debt by more than $50 million to $4.2 billion. Q2’s primary sources of cash included $122 million from property dispositions, $41 million of retained FFO and working capital and $13 million of net loan receivable repayments. These sources were relative to $119 million invested into ongoing portfolio investments and the Maisonneuve acquisition. The REIT’s trailing four quarter EBITDA remained steady on a gross dollar basis and with the lower debt balance, the net-debt-to-EBITDA multiple decreased to 10.3x from 10.4x at the first quarter.

Within trailing EBITDA, FCR continues to bear the burden of activist-related costs, which we won’t fully lap until the second quarter of next year. Excluding these costs, net-debt-to-EBITDA was 10.1x for the 3 months ended June 30. The REIT’s unencumbered asset pool of $6.3 billion remained unchanged from Q1, while the liquidity position has continued to grow. At quarter end, FCR had undrawn revolving credit facilities of approximately $800 million and more than $130 million of cash. Moreover, through the month of August and September, we expect to close upon asset sales that will yield close to $100 million of additional cash.

This concludes my prepared remarks, and I’ll now turn our session to Jordy to provide commentary on our optimization plan and our entitlement program.

[Jordan Robins, Chief Operating Officer]

Thanks, Neil, and good afternoon. Today, I’m going to provide you with a brief update on our enhanced capital allocation and portfolio optimization plan and the advancements made on our entitlement ladder. Let’s begin with an update on dispositions as we’re really pleased with both the cadence of and the values that we’ve realized from our plan. This quarter, we sold $122 million from previously disclosed assets. We also entered into binding agreements to sell an additional $91 million of assets. The aggregate proceeds from all of these sales represent a meaningful premium to our Primark IFRS 9.

Included amongst these assets for which we have a binding agreement to sell is the remainder of our Place Panama lands. This property is a 4.6-acre residential development site on the South Shore Montreal in Brossard, Quebec that we recently resumed. The purchaser waived all of their conditions in late June and on closing, will pay us cash proceeds that equate to a 30% premium to our IFRS value. We had acquired Place Panama several years ago. It was a well-located but aging retail strip center situated adjacent to a key South Shore bus terminal in Brossard.

We saw the potential for intensification as freestanding retail was no longer the highest and best use for the property. In 2018, we submitted a master plan of rezoning application. On expiration of the last of the property’s leasing comments, we then demolished the single-story structure. You will recall, in Q4 2020, upon completion of the rezoning, we sold the first phase of Place Panama for $30 million. We retained the balance of the land until we completed the purchase of an adjacent parcel of land and finalize the required development approvals for the 989,000 square feet of remaining zone density.

With the assembly complete, the approvals in place and the adjacent recently completed REM station open, we are now able to realize on this residual value that we have created. In Q2, we also entered into an unconditional agreement to sell the Yonge-Davis Center for $31 million cash based upon a sub 4% going in cap rate. The purchaser of the property waived conditions at the end of June of ‘23. This unanchored retail properties located in the GTA in the northern half of York Region. It’s been a stable asset in our income-producing portfolio since being acquired nearly 2 decades ago.

Given its location along the North Yonge Street corridor and [indiscernible] plan designation, the property also possesses long-term intensification potential. In this regard, the property is currently classified as a long-term development site in the FCR pipeline. Limited supply in the GTA have escalated both demand and pricing for these hybrid type assets. The sale of this low-yielding non-core property serves to further advance our plan. As Adam mentioned, the use of proceeds being raised from our plan can be reinvested in a variety of ways that will be impactful in the immediate term.

This may include the acquisition of grocery-anchored shopping centers or other investments. Centre Commercial Maisonneuve an asset we purchased this past quarter is a prime example. While rare, given our deep relationships, our existing large market position and our industry knowledge, we can from time-to-time, source and execute on these impactful investments. For context, Maisonneuve is an 8.5 acre urban site located 20 minutes from Montreal’s Downtown Core. It’s improved with a single-story 114,000 square foot open-air shopping center leased to seven tenants, including Loblaws, Canadian Tire, TD Bank and Metro-owned Brunet pharmacy.

Collectively, these four tenants represent 97% of the center’s income. Maisonneuve is a center in which we have a long history and its acquisition is a result of an opportunity that we also created. FCR owned a leasehold interest in this site in September 2003, pursuant to a 65-year emphyteutic lease, this lease was set to expire without any further renewal rights in 2023. The tenant leases expired contemporaneously with the emphyteutic leases. Considering their pending expirations, the tenant leases were all meaningfully below market.

The owners of the pre-rolled interest believe that the property was more valuable as a residential site and they plan to sell it to a developer. Without tenure, the retailers will all be forced to give up their established extremely productive and very difficult to replace locations on the island of Montreal. We were highly confident that based on the retailers’ performance that the property’s highest and best use was that of an operating shopping center. So we negotiated an option to purchase the center based on its vacant land value. We then successfully negotiated revised lease terms at market rents with all the existing tenants, which tripled the average rent per square foot of the center.

As a result, the property value is meaningfully more than our purchase price, and we’re earning a commensurately attractive NOI yields. As part of our $1 billion portfolio optimization plan, we’ve identified 6 million square feet and $400 million of value that will generate from the sale of density in our portfolio. To-date, we’ve submitted for entitlements on over 16.7 million square feet of incremental density, representing 70% of our 24.2 million square foot pipeline. We expect to submit applications for an additional 1 million square feet of incremental density in 2023. In terms of our progress with respect to these applications our Zoning By-Law Amendment for [indiscernible] was recently approved.

The application contemplates over 500,000 square feet of incremental density on the property. Here in Toronto, our application for shops at King Liberty was also approved by Community Council in June and by City Council in July. Once the appeal period expires, this is only amendment approval that secures permission for 850,000 square feet of incremental predominantly residential density in Liberty Village. With these approvals in hand, there should be an opportunity to more fully reflect this as-of-right density in our future IFRS values.

We expect an additional 385,000 square feet of this pipeline could be entitled by year-end 2023. As set out in our disclosures, only 7.7 million square feet of our 24.2 million square foot pipeline is carried on our balance sheet at approximately $76 per square foot. As our entitlement program advances, it will translate into meaningful NAV growth on our balance sheet. And like Panama, a large portion of the zone density will be sold. However, even after the sale of this density set out in our plan, we will still possess over 17 million square feet of incremental density in our residual pipeline, leaving us with meaningful opportunities for future growth.

To conclude, we continue to execute on our entitlement ladder and on our enhanced capital allocation and portfolio optimization plan. As we sell these low and no yielding assets, the proceeds are being reallocated into nearer-term accretive opportunities, which should continue to positively impact our operating metrics and our business.

And with that, operator, we can now open it up to questions.

[Operator]

Thank you. [Operator Instructions] The first question is from Lorne Kalmar from Desjardins. Please go ahead.

[Lorne Kalmar, Desjardins]

Thank you. Good afternoon. You guys obviously had a pretty good showing on the rental lift side of things. I was just wondering was there anything kind of one-time in there that drove that or are we sort of looking at the new normal of high single-digit, low single-digit rent growth going forward?

[Adam Paul, President and Chief Executive Officer]

Lorne, it’s Adam. There was nothing out of the norm in this group of renewals. There was one or two larger fixed rate renewals that were flat, that kind of brought it down notwithstanding it was above average. But we do have those periodically. For clarity, the Maisonneuve leases that we entered into were treated as kind of new leases, not renewals. So those did not impacted, Jordy referenced the tripling of the rent. It was very much normal course leasing and a reflection of the current environment. I’d never get too hung up on any one quarter, which we’ve said many times. But what we’re seeing underlying those renewals are fundamentals that we would expect to generally remain in place for the foreseeable future.

[Lorne Kalmar, Desjardins]

Okay. And then are you guys seeing fundamentals get to the point where now with tenants that you had previously had fixed rate renewals, which I’m assuming typically are anchors that you can now flip those options to be market renewals or is it – are we still not there yet?

[Adam Paul, President and Chief Executive Officer]

We have not entered into a new lease with a fixed rate option in many, many years. So I think a function of the strength of our portfolio, the productivity potential of our spaces. And I would say also the sophistication of our leasing team has put us in that position many years ago. The fixed rate option, landlord’s best outcome is neutral on those, but it could be negative. And so as a result, we have not agreed to a fixed rate option for many, many years. The ones we have are generally ones we’ve inherited through the acquisition of properties and consequently, leases. So that has not been an issue for us for many years in terms of – we have not issued them or agreed to any fixed rate options for a long time.

[Lorne Kalmar, Desjardins]

Okay. And then just maybe flipping over to Nordstrom. I know I think as Neil mentioned a lot of exciting stuff going on over there. Is there a thought like to do it as a – to split it up to facilitate leasing a little bit quicker or would you rather do it as one single lease?

[Adam Paul, President and Chief Executive Officer]

Yes. So we’re in a very interesting time. I was the one that I commented that demand has been very strong, which is nice because I also mentioned last quarter, we were surprised to get the space back. We’ve got options for both. I’m going to reserve my opinion on where we think we land. We think it’s pretty close. But we do have an option for the full space. We do have options to put more than one tenant in the space. What’s very clear at this point is that if these materialize, it will have a material amount of value to the property. And that’s really what we’re most focused on versus getting a tenant in place in the quickest fashion. Obviously, time is a factor in understanding the value and NOI impact. But ultimately, we’re focused on putting the right tenants in from a qualitative perspective and also from a quantitative perspective, but with a more medium- and long-term view in mind.

[Lorne Kalmar, Desjardins]

Fair enough. And then maybe just lastly, are there any other large known no – non-renewals coming up or are we sort of through those now?

[Adam Paul, President and Chief Executive Officer]

Certainly nothing in 2023 that we’re aware of at this point.

[Lorne Kalmar, Desjardins]

Okay. Prefect. I will turn it back.

[Adam Paul, President and Chief Executive Officer]

Thank you very much, Lorne.

[Operator]

Thank you. The next question is from Dean Wilkinson from CIBC. Please go ahead.

[Dean Wilkinson, CIBC]

Thanks. Good afternoon, everyone. Maybe this could be, Neil, maybe Adam. Your cash balance is approaching – it’s near all-time high. We saw sort of when we all got sent home and put into lockdown. What are you guys thinking about $0.25 billion cash sort of sitting on the balance sheet? And where is the nearest use for that? I’m assuming it’s paying debt or is there something else you’ve got in mind?

[Neil Downey, Chief Financial Officer]

Hi, Dean. It’s Neil. The good news about cash today is there’s a very little penalty to carry it. So we’re earning between 5.5% and 5.9% generally on our cash. And in this environment, we obviously believe that more liquidity versus less is important. And it is important as it relates to, in particular, our debt maturity schedule. You’re probably going to ask the question. We do have a $300 million maturity at the end of October. And to-date, we really have been focused on maintaining a significant amount of liquidity to make sure that we have the appropriate flexibility to deal with that maturity. I would say having said this we’re also thinking about how we balance some longer-term considerations on that front. The first is that unsecured debentures are and we believe will continue to be a very important element of FCR’s overall capital structure. And the second is, candidly, that our debt ladder has become a little shorter than we’d like it to be. Now of course, that’s really a function of asset sales and debt repayments. As FCR’s net debt has been in a declining trend for 4 years now, albeit more pronounced over the last 2 years in particular. So on average, over 4 years, we’ve been not terming out as much new debt as there has been debt coming due. And so building the liquidity position is clearly to give us a lot of flexibility in advance of the October 31 maturity. But our current line of thinking is we may also choose to refinance a portion of that maturity with the new debenture offering.

[Dean Wilkinson, CIBC]

Okay. So I shouldn’t read that as a bet on directionality of interest rates though.

[Neil Downey, Chief Financial Officer]

We’re not that smart.

[Dean Wilkinson, CIBC]

You and I both. Q3 will be, I guess, the one where we really noticed the hotel sale. Can you just, Neil, remind me of what percentage of hotel NOI or EBITDA came in Q3 from a yearly basis?

[Neil Downey, Chief Financial Officer]

Yes. So directionally, you’re spot on, Dean. Great seasonality to that business. Everybody loves Yorkville and patio through the summertime and film festivals an important event into the fall. So between the hotel and the restaurants, they would earn roughly at our share, about half of their NOI last year in the third quarter.

[Dean Wilkinson, CIBC]

Okay. Well, maybe there’s no film festival this year, so you dodged that one. That’s it for me. I’ll hand it back. Thanks, guys.

[Adam Paul, President and Chief Executive Officer]

Thank you, Dean.

[Operator]

Thank you. The next question is from Sam Damiani from TD Cowen. Please go ahead.

[Sam Damiani, TD Cowen]

Thanks. And good afternoon, everyone. First question for me is just on the density values. Obviously, great to see the Panama sale and some other transactions over the last several months. But just when you look at the interest rate environment today, what is the market for density land here in the GTA? And do you expect to monetize more in the near-term?

[Adam Paul, President and Chief Executive Officer]

Hey Sam. Well, the short answer is it depends. It depends on the location. It depends on the size, and it depends how quickly a developer can be shovel-ready. And so size is not helpful so generally, the smaller, the better. Fortunately, the density we own is exceptionally well located on major transit routes, often at key intersections. And so that’s why we’ve had the success we’ve had thus far. And so there certainly continues to be a market for the types of properties we’re selling as we continue to demonstrate. It’s not a surprise that private capital has been the dominant buyer pool of everything we sold to-date under the plan.

And it’s also not a surprise given our description of the composition of the market that every single property that we sold has had a single buyer with no other property as part of those transactions so a single transaction for each property. The stuff we’re working on continues to be very reflective of that. And so we continue to find the right buyer for the right asset. And again, given the strength of the quality of the portfolio that we’re selling the lack of housing demand in the locations we’re in, notably Toronto. This is – clearly we’re the most immigration inflow is going to. And so everyone is familiar with the shortage of housing demand. And so the stuff we’re selling certainly falls into that vein.

[Sam Damiani, TD Cowen]

Okay. And then shifting on to Yonge and Roselawn. Maybe just clarify what is the status there? Are you guys proceeding full steam ahead or is it still kind of exploratory stage of the development on that project?

[Adam Paul, President and Chief Executive Officer]

Our intention is to go forward full steam ahead. As you know, we brought in an institutional Dutch investor relatively recently for a 25% interest, the pro forma works unlike many that we’ve looked at. Our intention though is to sell down our interest further prior to commencing full construction.

[Sam Damiani, TD Cowen]

And is that something we should expect in the short-term, Adam, or is that still to be determined?

[Adam Paul, President and Chief Executive Officer]

The property will be ready for full-on construction commencement over the next six months. You should expect that if we proceed and continue to do that, that we will sell down our interest further within that timeframe, Sam.

[Sam Damiani, TD Cowen]

Okay. And last question for me is on Cedarbrae redevelopment that’s underway. Just wondering what the status on backfilling the vacancy there is if you could update us there.

[Adam Paul, President and Chief Executive Officer]

Yes. We have had a number of tenants that have taken possession and that space that was under redevelopment, There was a big chunk of it that transferred to IPT this quarter. But if you want more specific details, we are going to have to get back to you.

[Neil Downey, Chief Financial Officer]

Yes. Sam, it’s Neil. Right at June 30th, we transferred roughly half the space. I believe it was...

[Adam Paul, President and Chief Executive Officer]

74,000, 73,000.

[Neil Downey, Chief Financial Officer]

73,000, I mean correct. So, 73,000 at roughly 140,000-ish. So, that will be an income generator through the back half of this year.

[Sam Damiani, TD Cowen]

Is there much space still left to lease at that project or you are pretty well through it?

[Adam Paul, President and Chief Executive Officer]

We are almost entirely through it.

[Sam Damiani, TD Cowen]

That’s great. Thank you. That’s it for me.

[Adam Paul, President and Chief Executive Officer]

Thank you very much.

[Operator]

Thank you. The next question is from Gaurav Mathur from iA Capital. Please go ahead.

[Gaurav Mathur, iA Capital]

Thank you and good afternoon everyone. I am just looking at the leasing activity and the net rental rate increases, could you talk to the tenants in the market that are currently looking for space? And any concerns in your current tenant profile that may cause any concerns?

[Adam Paul, President and Chief Executive Officer]

Yes. Certainly, from a location or geographic perspective, we cannot speak to any trends. We are seeing a lot of consistency across all of the markets that we are operating in. And in terms of where the demand is coming from, it is very broad-based, and it’s broad-based across virtually all of First Capital’s necessity-based tenant categories. So, we are doing new deals with grocery, pharmacy, various restaurant formats, fitness, medical, banks, personal service providers, I think nail salons and the like. So, it really is across the board. For some time now, the demand is strong even in larger space, but particularly small shop space, there is not only strong demand, but a lot of debt. In terms of watch categories, we haven’t seen any indication yet, but the small business tenant category is one that there has been a lot of certainly media coverage that would indicate some stress in that type of tenant profile. Again, we have not seen it at all as of yet, and we take great comfort in the fact that demand is deepest for that type of space in FCR’s portfolio. So, I would say at this point, it’s something to watch, but certainly not something we have seen evidence of at this point.

[Gaurav Mathur, iA Capital]

Okay. Great. And just one last question on that, you did highlight that you don’t see any major non-renewals in 2023. Would it be safe to say that it would be the same case for ‘24 as well?

[Adam Paul, President and Chief Executive Officer]

For the most part, it’s a bit early to make that statement across the board given it covers the next 18 months. And it’s not uncommon for us to have some non-renewals in any given year. And so I would say, as we get closer to ‘24, we will provide more of an indication. But at this stage, it would be very small in terms of number count.

[Gaurav Mathur, iA Capital]

Okay. Great. And just last question on your refinancings. We know that there is $7 million coming up. But Neil, just very curious to understand how you are thinking about refinancing versus repayments here under the current financing regime?

[Neil Downey, Chief Financial Officer]

Well, I think we have discussed our thoughts for the balance of this year already. I would say as we look out through 2024, in particular, based upon our asset disposition program and our liquidity position, again, we think we are going to be in a net debt repayment position and one of some consequence. So, certainly, the level of new financing that we anticipate initiating will be less than the amount of debt that’s maturing. I don’t think FCR is in a particularly different position than pretty much the entire sector in so far as. Obviously, when we are refinancing, we are doing it at higher rates than the debt that’s maturing. And so you can model that up in terms of it is a headwind to FFO growth.

[Gaurav Mathur, iA Capital]

Okay. Great. Thank you for the color gentlemen. I will turn it back.

[Adam Paul, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. The next question is from Tal Woolley from National Bank Financial. Please go ahead.

[Tal Woolley, National Bank Financial]

Hi. Good afternoon.

[Adam Paul, President and Chief Executive Officer]

Hi Tal.

[Tal Woolley, National Bank Financial]

Just a question on credit facility extensions versus cutting a new deal, is there anything changing in the way pricing is happening that would make you lean towards doing a 1-year extension or versus trying to get a new facility in place?

[Adam Paul, President and Chief Executive Officer]

So Tal, the short answer is there really isn’t anything that’s changing. Most of these pricing grids are effectively driven right off of your credit rating, and they have been pretty stable, so, yes, no real – nothing to talk about a consequence on that front.

[Tal Woolley, National Bank Financial]

Okay. Just thought I would ask. I wasn’t sure if it would change in this environment or not. With respect to the pace of dispositions, you have come out – you are almost halfway through. How do you sort of see the next tranche kind of unfolding? When should the market be expecting those?

[Adam Paul, President and Chief Executive Officer]

Well, there are two things that we would say about that. Number one, the composition of the assets being sold have started to shift, which we have been talking about quite some time. If you look at the, we will call it, the initial tranche, there was a slightly heavier weighting to low-yielding IPP assets. Think of the hotel, think of the apartments that we sold in Liberty Village. When you look at the most – the latest round, it’s more weighted to density sales. And that’s important because both types of assets drive our objectives forward, but we get more bang for our buck by selling density that typically has no yield in place. It’s a lot more impactful in terms of the FFO accretion and the debt-to-EBITDA impact for every dollar sold. Jordy kind of outlined some of the great progress that’s occurred in our entitlements program. And we are going to – that’s going to bear a lot of fruit and that fruit is going to flow through our disposition program. So, you should expect that the second half of the dispositions have a higher weighting of density in them, and you have started to see that transition, and that’s going to continue. We have been very clear that we have $1 billion to sell, and it’s going to take roughly 2 years. And we feel like we have gotten off to a very good start. We are looking for premium pricing that reflects the quality of the assets. So far, we have been able to achieve that. I mentioned it’s taken more transactions to get this done than one may think in the sense that every single property represents one and only one transaction. And so we are doing a lot of deals, and we are going to continue to do a lot of deals. We are going to spread this out to cover – we believe we will get more done this year. We believe we will get less done over the balance of this year than we will next year. So, it is a well-staggered program. But I think the pace you have seen is pretty indicative of how we are approaching it. And we are less than halfway through timeline, and we are roughly halfway through in terms of the total plan. So, we will get a little bit more done this year, and we expect to get, call it, plus or minus 40% done next year. And that was our indication as we headed into the year. We were fortunate that we got close to $200 million done before this year started, and we said people should expect the balance to be roughly split between 23% and 24%, and that remains our view today.

[Tal Woolley, National Bank Financial]

Okay. And then just on the Maisonneuve transactions, if I am thinking about how the accounting would move in my head for the land lease, you would maybe – you would expect a little bit more NOI and then a little bit more interest cost as an offset? And then when do the higher rents actually start flowing through the P&L?

[Adam Paul, President and Chief Executive Officer]

Yes. So, Tal, the simplest way to think of it is it was a depleting asset that disappeared off the balance sheet. So, the day before the land lease expired, we carried it at $10 kind of thing. And then we effectively purchased a fully stabilized existing shopping center for $55 million, including transaction costs. And it’s fully occupied. It’s paying rent the day we close, and it’s kind of as simple as that. So, Tal, at this point in terms of the renewal leasing spreads has nothing to do with Maisonneuve. We effectively treated Maisonneuve as if it was a fresh acquisition.

[Neil Downey, Chief Financial Officer]

But to your point about the – a big uptick in NOI, right, we referenced tripling of it. And obviously, we have got the interest expense to recognize. All of those came together at the exact same time, and it was towards the end of the second quarter, mid-second quarter.

[Tal Woolley, National Bank Financial]

Got it. And then I guess like my other question would be like if we look at your enhanced capital allocation program. One of the goals out of there was to turn sort of 4% kind of FFO growth ex-OGLE over the next couple of years. How – like how comfortable are you still feeling about that target in light of everything that’s come to pass in the economy?

[Adam Paul, President and Chief Executive Officer]

Yes. We are feeling like we are still going to deliver that. And we said that by come the end of 2024, our debt-to-EBITDA will be lower than 10%. At this stage, we are very comfortable with that. And we said that our FFO would be north of $1.20 and we are very comfortable with that. What’s changed since then as interest rates have increased to a level higher than we were expecting at the time. And our leasing activity has also been better than we expected. And so that’s largely offset the increase in rates.

[Tal Woolley, National Bank Financial]

Okay. Alright. That’s great. Thanks everybody. Appreciate it.

[Adam Paul, President and Chief Executive Officer]

Thank you very much.

[Operator]

Thank you. The next question is from Pammi Bir from RBC Capital Markets. Please go ahead.

[Pammi Bir, RBC Capital Markets]

Thanks. Hi everyone. Maybe just coming back to the Nordstrom Rack space, you alluded to [Technical Difficulty] what sort of rents do you think you could achieve on that space, maybe, I don’t know, either absolute or maybe relative to what Nordstrom was paying? And over what timeframe do you expect that space will get backfilled?

[Adam Paul, President and Chief Executive Officer]

Yes. So, we repaired at the time what Nordstrom was paying, which is roughly $85 a square foot on a blended basis over 40,000 square feet. We said that that lease has been signed close to a decade ago and that we felt market was much higher, what we said it was higher. Right now, we have been trading paper with multiple tenants. It is very clear that market rent today for that space is meaningfully higher. And so we will reserve any further comment on that until we get transactions fully completed. And hopefully, that’s what we are talking about next quarter, and we can give you a little more color. Timing is dependent on a couple of things. It appears that we will likely have to prepare some of the space for the new tenants. We think there is a decent chance that tenants take possession sometime towards the end of this year, early next year when they commence rent will be a period after that. So, there will be some continued downtime from a tax renting perspective. We are very encouraged at this point with respect to what rental rates are from a market perspective. And certainly, we have seen evidence today that they are higher than we would have initially thought. But again, we were surprised to get the space back, as we noted. And so it’s not like we were out there trying to find tenants for that space before. That’s where things stand out. We will reserve further commentary until we are fully complete on the leases we are negotiate.

[Pammi Bir, RBC Capital Markets]

Okay. To the extent you can maybe add any color, just on the tenants that you are talking to, are these more Bloor Street type tenants or more FCR bread-and-butter type tenants?

[Adam Paul, President and Chief Executive Officer]

We are talking to both. I would say at this stage, the likelihood of who ends up in this space would be more similar to FCR-type tenants across our broader portfolio versus that particular note.

[Pammi Bir, RBC Capital Markets]

Okay. And then just lastly, one maybe on the Walmart space that I think it was Westmount, how long is that tenant – that short-term tenant in place for? And can you maybe talk about the re-leasing prospects there?

[Adam Paul, President and Chief Executive Officer]

Yes. We have met the tenant in place for roughly a year. We think that’s an adequate timeframe for us to solidify the longer term plan. Yes, that’s all I have to say. And unless you have any other questions about that Pammi.

[Pammi Bir, RBC Capital Markets]

No. That’s it. Thanks very much.

[Adam Paul, President and Chief Executive Officer]

Okay. Thank you.

[Operator]

[Operator Instructions] The next question is from Jenny Ma from BMO Capital Markets. Please go ahead.

[Jenny Ma, BMO Capital Markets]

Hi. Thanks. Good afternoon.

[Adam Paul, President and Chief Executive Officer]

Hi Jenny, it’s fine that you are back.

[Jenny Ma, BMO Capital Markets]

Thank you. It’s great to be back. I want to touch on the disposition activity that Adam, you talked about earlier. You mentioned that the timing may have slowed down a bit. But I am wondering in light of the very recent interest rate moves we have seen, have you seen any impact on the pricing of density and development land or are the assets that you are selling sort of close enough to shovel-ready that ends less of an issue?

[Adam Paul, President and Chief Executive Officer]

Well, I really appreciate your question particularly because it provides evidence I wasn’t totally clear. So, we have not slowed down. Things have gone at least as well as we had hoped. And so all I was referencing is we have said from day one, this is going to be a staggered 2-year program, and that remains the case to-date. It’s not only the comments I referenced earlier as to why, but we have assets identified in the plan, for example, that are density assets that we have not secured full zoning yet. Jordy referenced one that we just got with Staples Lougheed. There are others that are imminent that we will get this year. We will not sell those assets until we secure the zoning to ensure the zoning risk is entirely phased out of the property. And so that’s part of why some of the assets will be sold next year. But the pace is right on track. We don’t feel like it’s slowing down. We have gotten off to a good start, but it will span well into next year, which we always anticipated. So, what I would say is the June Bank of Canada increase, and this is very much on the margin, but I would say that added a tinge of negative sentiment to the property markets. Not enough of a negative tinge to have any assets that we have tried to sell in offshore. In fact, so far, every single asset we have tried to sell we have sold. And I cannot tell you that we would have gotten $1 more in purchase price for the things that weighed more recently. We think it’s the same price. But as an overall sentiment, it probably, in our view, that again, on the margin, a bit more negative after the June increase, not the July increase. And again, we have negotiations underway today with other potential dispositions, and it feels similar in terms of the depth of pricing as to what it would have been even a few months ago.

[Jenny Ma, BMO Capital Markets]

Okay. And the buyer profile, is that typically domestic developers, the usual suspects or is there anything interesting from that group?

[Adam Paul, President and Chief Executive Officer]

No. It is almost all domestic with the exception of the Dutch investor that came into our Yonge & Roselawn project to balance our domestic. It’s been private capital. One of the transactions that we more recently entered into has a private capital developer that’s got pension, a large Canadian pension fund financial capital behind them. But yes, the buyer pool for the stuff we are selling has been dominated by private investors. Lots of equity that they are putting in to well-capitalized, very experienced amongst the higher-quality names of the developers in the various markets that we are operating in.

[Jenny Ma, BMO Capital Markets]

Okay, great. That’s helpful. Just switching over on to the debt side, maybe, Neil, you can comment on what kind of spreads you are seeing on secured versus unsecured debt? And where along the curve you might see some interesting opportunities? Are you inclined to keep it short for the time being or are there opportunities to maybe turn up some debt longer?

[Neil Downey, Chief Financial Officer]

Hi Jenny. As you know, the curve is inverted in terms of Government of Canada rates, but spreads tend to widen out as you go up the curve. So, in that 5-year, 7-year, 8-year range, there is actually not a great deal of difference in the nominal cost of financing in the unsecured market. Certainly, in our bond spreads, once you get out to 10-year indicated terms, the spread does widen at that level to the point where the nominal cost also goes up. So – and in very round numbers, I would say, the cost for us in terms of the differential between unsecured and secured spread is about 100 basis points today.

[Jenny Ma, BMO Capital Markets]

Okay. So, it hasn’t moved much in the last while then – pretty widespread still?

[Neil Downey, Chief Financial Officer]

So, the short answer to that is yes. I would say, if it’s any consolation, we have seen some, I would say relative spread gains vis-à-vis our peers, in particular in the last three months to four months. I am optimistic that, that is a function of us leaning into our commitments on a number of fronts that we have made. We all – our optimization plan debt objectives, we call them objectives, but we really see them as commitments to our bond holders and our equity holders. And I think we have got a good path of progress established that we intend to continue along.

[Jenny Ma, BMO Capital Markets]

Okay. Great. That was very helpful. I will turn it back.

[Operator]

Thank you. This concludes today’s question-and-answer session. I would like to turn the meeting back over to Adam.

[Adam Paul, President and Chief Executive Officer]

Okay. Thank you very much. Thank you everyone for your interest in First Capital and your attendance for our second quarter conference call. We look forward to providing you with more progress and updates on our business in the future. Have a great afternoon. Thank you.

[Operator]

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