First Capital Real Estate Investment Trust

TSX:FCR.UN

Earnings Call Analysis

Solid Q2 Results and Positive Outlook

In Q2 2024, net operating income (NOI) increased by CAD 6 million YoY to CAD 113.8 million, driven by higher base rents and occupancy. Total same-property NOI grew 4.6% to CAD 106 million. The FFO per unit rose to CAD 0.32, an 8% increase. The company anticipates continued growth with expected full-year 2024 same-property NOI growth of 2.5%-3.0%, surpassing the previous range of 2%-2.5%. Supported by leasing activities, cash from operations reached CAD 64 million. In the first half of 2024, FCR issued CAD 300 million in bonds and paid off CAD 342 million in debt, improving the balance sheet and extending the debt maturity profile.

Strong Performance in Q2 2024

In the second quarter of 2024, First Capital Realty (FCR) reported operating funds from operations (OFFO) of CAD 68.4 million, an 8% increase from CAD 63 million in the same period last year. This translates to an OFFO per unit of CAD 0.32, showcasing solid financial health driven by increased net operating income (NOI) and interest income. Total NOI reached CAD 113.8 million, a year-over-year growth of CAD 6 million, largely attributed to improved performance in same-property assets.

Leasing Activity and NOI Growth

FCR's leasing activity was notably robust, completing 231 lease transactions comprising over 1 million square feet, marking a 50% increase from Q1 and a 15% year-over-year growth. The average in-place net rental rate rose to an all-time high of CAD 23.73. The same-property NOI improved by 4.6%, equating to CAD 106 million, with higher base rents and increased occupancy rates being the primary driving factors. Looking ahead, the forecast for full-year 2024 same-property NOI growth is adjusted to between 2.5% and 3.0%, up from prior expectations of 2% to 2.5%.

Financial Metrics and Expense Management

FCR continues to demonstrate strong cost management, with corporate expenses of CAD 11.4 million reflecting a controlled increase. Interest expenses were CAD 41.4 million, up approximately 7% year-over-year, driven by rising interest rates. The company's proactive approach in managing G&A ensures that each saved dollar contributes to FFO growth, a key corporate objective. Furthermore, FCR generated CAD 64 million in adjusted cash flow from operations, leading to a trailing twelve-month payout ratio of 79% against CAD 183 million of total distributions.

Liquidity and Financing Strategy

The liquidity position remains strong with CAD 1.16 billion, which includes CAD 700 million of undrawn revolving credit and CAD 455 million cash. In Q2, FCR executed significant financing, issuing CAD 300 million in unsecured debentures at a rate of 5.455%, successfully addressing their funding requirements while extending the average maturity to four years. Notably, the debt to EBITDA ratio improved to 9.2x down from 10.3x a year ago, reflecting reduced financial leverage.

Net Asset Value and Capital Deployment

FCR’s net asset value per unit was CAD 21.82, relatively stable compared to previous quarters but down 6% year-over-year due primarily to rising cap rates. Notably, the weighted average cap rate remained at 5.5%, suggesting stability in property values. Despite challenges, FCR is focused on capital deployment with CAD 37 million invested in development activities during Q2, and the expectation for 2024 expenditures within CAD 100 million to CAD 125 million, down from earlier expectations.

Forward-Looking Guidance and Investor Confidence

Looking ahead, FCR has set aggressive targets for the next three years, aiming for an average annual same-property NOI growth of at least 3% and FFO per unit growth of at least 3%. Furthermore, the management is optimistic about achieving a unit price range of CAD 21 to CAD 24 over this period, fueled by strong fundamentals in grocery-anchored retail and a resilient leasing pipeline. The positive trajectory evidenced in the first half of 2024 positions FCR well within the Canadian REIT landscape for continued outperformance.

Risks and Market Conditions

FCR continues to navigate external pressures, chiefly from rising interest rates which initially impacted property valuations negatively. The management highlighted the importance of maintaining a resilient balance sheet, which should buffer against economic variability. As macroeconomic conditions gradually transition from a headwind to a potential tailwind, the board remains focused on enhancing operational efficiencies and rental growth.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. Thank you for standing by. Welcome to the Q2 2024 Conference Call. [Operator Instructions]

I would now like to turn the conference over to Alison.

[Alison Harnick, executive]

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

A summary of these underlying assumptions, risks and uncertainties is contained in our various securities filings, including our Q2 MD&A, our MD&A for the year ended December 31, 2023 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 call.

I'll now turn the call over to Adam.

[Adam Paul, executive]

Okay. Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today for our quarterly conference call.

I'll start by commenting on the successful execution of our strategy and the strong fundamentals for grocery-anchored retail. Together, these have been the driving forces behind FCR's very good operating and financial performance. Of course, none of this would be possible without the tireless efforts of my talented colleagues who I'd like to thank for your dedication and commitment to the business.

Moving to our Q2 results. They were solid across the board with a major theme once again being strength in leasing. It was a busy quarter. We completed 231 lease transactions involving just over 1 million square feet of space or just over 900,000 square feet at FCR's share. This is a 50% increase over Q1 and a 15% increase over last year's busy second quarter. These volumes are very healthy and so are the rents we're achieving with our average in-place net rental rate of CAD 23.73, setting yet another all-time high.

Included in our second quarter volume were 160 lease renewals totaling 720,000 square feet of space at FCR's share. Our renewals this quarter were fairly typical in terms of tenant mix. It included grocery, a couple of Canadian Tires, banks, restaurants and the like. What was a bit different this quarter was that we achieved slightly higher contractual rent steps throughout the renewal terms as demonstrated by the 570 basis points spread between the lift on year 1 rent during the renewal term versus the lift on the average rent throughout the renewal term.

We continue to be active across all of FCR's core tenant categories, including grocery, pharmacy, fitness, restaurants, medical, daycares, banks, pet stores and value-oriented retailers such as Dollarama and the [ TGX ] banners. Our leasing pipeline remains deep and robust, which gives us confidence as we look ahead. At our Investor Day earlier this year, we highlighted several of FCR's core competencies and competitive advantages. A major part of these relate to our capabilities, our relationships, and most importantly, our portfolio of grocery-anchored shopping centers, core part of our business that we continue to invest in and grow. The supply-demand imbalance for grocery-anchored shopping centers is the largest contributor to the sound fundamentals for our asset class.

At our Investor Day, we also reiterated the key objectives our strategy is designed to deliver. One of those is consistent growth in FFO per unit. We noted that an important part of delivering FFO growth, particularly in the near-term, is an even stronger balance sheet. While 2024 has been a monumental period in that regard, over the last year, our unsecured credit spreads have compressed by approximately 115 basis points, which is roughly double the compression experienced by our peer group. This put us in a competitive position to access the unsecured market.

In Q1, we issued CAD 300 million of 7-year bonds. Last month, with further tightening in our spreads coupled with lower government bond yields and a positive outlook for our credit by DBRS, we issued another CAD 300 million of unsecured bonds in a series that has an 8-year term. Both issuances carry a coupon in the 5.5% range. And this most recent bond issue accomplished 2 important things. The first is it satisfy our entire anticipated financing needs for the rest of the year. And second, with the proceeds earmarked to repay our bond maturity in August, it extends our average term to maturity to 4 years. As Neil laid out at our Investor Day, we will continue to extend our ladder on a measured basis as appropriate and our Q2 bond issuance was another step in that direction. Overall, we're very pleased with the success of our financing strategy, the benefits of which will continue to accrue directly to our unitholders.

One of the most important parts of our Investor Day were the key metrics that we laid out for investors that we expect to deliver over the next 3 years. They included same-property NOI growth averaging at least 3% annually. Similarly, average annual FFO per unit growth of at least 3%, all while continuing to reduce our debt to EBITDA. We continue to be confident that the combination of above-average earnings growth coupled with an even stronger balance sheet will be a unique and compelling offering across the Canadian REIT landscape. And we believe this positions us well, particularly as the REIT market recovers for a continued outperformance as it relates to total unitholder returns.

We summarized the 3-year opportunity for investors, which included unit price in the range of CAD 21 to CAD 24 as we continue to execute. We're now 2 quarters into our 3-year plan. Our results for the first half of 2024 have been slightly better than we expected. So while still early, I'm pleased to say that we are firmly on track to deliver what we presented. A big part of this was our progress and results in Q2, which Neil will now expand on.

So Neil, over to you.

[Neil Downey, executive]

Thanks, Adam, and good afternoon, everyone. Consistent with our usual practice, we have a slide deck available on our website at fcr.ca. And in my remarks today, I will make references to that presentation. Overall, we are again very pleased with the performance of the business through the most recent quarter. In fact, our operating results and our FFO per unit exceeded our internal expectations and they appear to have exceeded Street consensus as well.

Turning to Slide 6 of the presentation. Second quarter operating FFO was CAD 68.4 million. This was an increase of CAD 5.3 million from CAD 63 million earned in Q2 last year. The results translated into OFFO per unit of CAD 0.32, an increase of 8% relative to CAD 0.29 in Q2 2023. The improvement in the results was driven by a sizable increase in net operating income and interest and other income, partially offset by higher year-over-year corporate and interest expenses.

To examine the numbers in more detail, let's turn to some of the components of FFO, focusing first on net operating income. Q2 total NOI of CAD 113.8 million increased by CAD 6 million year-over-year. The growth included an increase of CAD 4.7 million from the same-property assets and the net CAD 1.3 million increase from [Technical Difficulty] properties. In this regard, total Q2 same-property NOI was CAD 106 million, equating to a growth of 4.6%. Axing out lease termination fees and a bad debt recovery, same-property NOI was CAD 105.2 million, an increase of CAD 3.8 million or 3.7%. Higher base rents, higher occupancy and improved recoveries were the key drivers.

As it relates to the former Nordstrom space at One Bloor East, this had a detrimental impact of approximately 100 basis points on the Q2 growth rate. But this should also be the final quarter of drag on NOI growth related to this space. Of note, there were contributions of approximately CAD 1.8 million in same-property NOI and close to CAD 3 million in total Q2 NOI that are not necessarily repeatable in subsequent quarters, at least not on a recurring basis. This includes certain current and prior year CAM tax adjustments and some other revenue contributions.

With the half year results now delivered, and these are summarized for you and referenced on Slide 7, FCR's year-to-date same-property NOI growth, again excluding lease termination fees and bad debt, was 3.0%. So with the solid first half, we now expect full year 2024 SPNOI growth to be within a range of 2.5% to 3.0%. This is higher than our former expectations of 2% to 2.5% growth for the year. Supported in large part by leasing that's already been completed, we continue to have good visibility into the potential for notably stronger same-property NOI growth as we look to 2025 and our disclosure materials provide insight in this regard.

Straight-line rent totaled CAD 2.5 million in Q2. This annualizes to a CAD 10 million figure. Most of this straight-line rent relates to tenants that are currently fixturing. Therefore, through 2025, we expect at least CAD 6 million of this CAD 10 million run rate to convert to cash rent. And cash rent is the basis from which we calculate same-property NOI growth. This is also notable for those who derive their own net asset value per unit estimate for FCR as most of this straight-line rent should be included in your capitalized income approach.

So turning back to Q2 for a moment. As we look to the other components of NOI, property acquisition activity resulted in approximately CAD 800,000 of incremental NOI on a year-over-year basis, while disposition activity has the effect of reducing NOI growth by CAD 2.8 million. For some context, over the past 4 quarters, FCR completed property acquisitions totaling CAD 93 million and this is relative to total disposition activity of approximately CAD 325 million.

Finally, other non-same-property NOI of CAD 6 million improved by CAD 3.3 million year-over-year. The increase relates mostly to straight-line rent, specifically a number of new tenant possessions at our One Bloor East property as well as redevelopment coming online, including the likes of our Cedarbrae project, which was completed in the back half of last year and into Q1 of this year.

Moving further down the FFO statement. Interest and other income was CAD 7.9 million for the quarter. This is a CAD 2.9 million increase year-over-year. Most of this increase relates to FCR's sizable cash balances where we've been earning a yield of more than 5%. Q2 corporate expenses were CAD 11.4 million. Sequentially, this was up slightly from CAD 10.8 million in Q1 of 2024. There's almost always some variability in G&A from quarter-to-quarter due to accruals and the timing of certain expenses and invoices.

At a high level, we remain on track with our previously stated expectations for 2024 and we remain proactive in G&A management. We know that every dollar saved flows to FFO and FFO growth is a key corporate objective for FCR. Interest expense was CAD 41.4 million in Q2. It's approximately 7% higher on a year-over-year basis and 6% higher on a quarter-over-quarter basis. The increases of course are the product of higher interest rates gradually working their way through FCR's debt capital stack, but timing is also a material factor. On June 12, FCR issued senior unsecured debentures in the amount of CAD 300 million. This 8-year fixed rate financing raised capital well in advance of our requirement for the funds, which I'll talk more about in a few minutes.

Advancing to Slide 8 and 9, which succinctly cover FCR's key operating metrics, some of which Adam already touched upon. So I won't go into detail on these, but I will note that the general theme with strength across these metrics, which materialized at slightly better than our internal business plan.

Slides 10 and 11 provide distribution payout ratio metrics. These 2 are mostly for informational purposes and they show how we view and measure the cash generation and sustaining CapEx requirements within the business. The key takeaways. During Q2, FCR generated CAD 64 million of adjusted cash flow from operations, bringing the trailing 12-month figure to CAD 231 million. Relative to CAD 183 million of [ TTM distributions ], this equates to an ACFO payout ratio of 79% and retained cash flow of CAD 48 million.

Advancing to Slide 12. FCR's net asset value per unit at June 30 was CAD 21.82. This compares to CAD 22.10 at March 31, CAD 21.95 at year-end last year and CAD 23.13 1 year prior. So on this basis, FCR's NAV was little changed through the first half of 2024, while the NAV decreased by about CAD 1.30 per unit or 6% on a trailing 12-month basis. This year's theme has been a resiliency in portfolio level cash flow models and general stability in cap rates and discount rates. In this regard, the Q2 2024 weighted average portfolio cap rate was 5.5%, unchanged from both Q1 of this year and December 31 of last year. Therefore, the year-over-year NAV decline relates principally to an increase of approximately 20 basis points in the portfolio's weighted average cap rate.

During the second quarter, FCR booked a net fair value loss on investment properties totaling CAD 74 million. A material component within this Q2 loss were fair value markdowns totaling CAD 50 million related to density and development land where we have seen reduced overall marketplace transaction volumes and [ coincident ] with this indications of lower density values.

Turning to an update on capital deployment as summarized on Slide 13. Capital investment into the business was relatively modest in the quarter, totaling CAD 37 million into the operating portfolio and development activities. Due to timing, we now expect 2024 development expenditures to be within a range of CAD 100 million to CAD 125 million, whereas earlier in the year, we had indicated a range of CAD 125 million to CAD 150 million for development CapEx.

Slide 14 summarizes key financing activities over the course of the last 3 months and the first half of the year. During the quarter, we repaid or repurchased and canceled debt instruments having a face value of CAD 84 million, while we completed new financings totaling CAD 355 million. The first of the 2 major financings included our May 9 mortgage financing on 2 50% owned shopping centers. These were 10-year mortgages, which totaled CAD 110 million on a 100% basis or CAD 55 million of FCR's share. The loan spread was approximately 185 basis points and the all-in rate was 5.5%. The maturing mortgages totaled CAD 94 million on a 100% basis or CAD 47 million at FCR's share. And the interest rate on those maturing mortgages was approximately 3.4%.

The second financing was the issuance of the Series C unsecured debentures on June 12. The CAD 300 million offering carries a coupon of 5.455%, an 8-year term and the June 2032 maturity. The offering spread was 195 basis points over the equivalent term Government of Canada bond yields. And at the time, this was a negative 5 basis point new issue concession relative to FCR's credit curve, thus continuing the significant narrowing in FCR's unsecured credit spread this year.

Turning to Slide 15 where I'll make 3 key points on liquidity and leverage. Firstly, the REIT's liquidity and financial strength remains excellent. The mid-year liquidity position was CAD 1.16 billion. It was elevated and it included CAD 700 million of authorized but undrawn capacity on our revolving credit facilities and CAD 455 million of cash. Moreover, the unencumbered asset pool remains sizable at more than CAD 6 billion.

Secondly, Q2 net debt was CAD 4.1 billion. This figure has been generally consistent over the past 2 quarters. However, it's approximately CAD 125 million lower year-over-year. Thirdly, FCR's trailing four quarter EBITDA of CAD 444 million was CAD 38 million or 9% higher year-over-year. Therefore, the net debt to EBITDA multiple decreased to 9.2x from 10.3x 1 year ago and 9.9x at year-end 2023.

Finally, for your reference, details related to the recent debt maturities are provided on Slides 16 and 17. Through the first half of 2024, we took decisive steps to further strengthen FCR's credit profile, most notably by issuing CAD 600 million of longer-dated unsecured debentures, but also through terming out a modest amount of mortgage debt and generating cash from selected property dispositions.

And so the key point to make is that as of today, we potentially address all of 2024 debt maturities. Let me elaborate just a bit. The June 30 disclosures show remaining maturities of CAD 342 million. This includes CAD 281 million of principal balance of the Series R unsecured debentures and CAD 61 million of mortgages. The debentures have an effective interest rate of 4.7% and the mortgages are at 4.0%.

During the last week of July and through to August 1, which is tomorrow already, we will have paid out all the mortgages. And at the end of August, we'll also pay out the balance on the Series R debentures, all from existing cash balances. Therefore, FCR's next notable debt maturity is not until April of 2025 and that's a relatively small CAD 75 million term loan. And FCR's pro forma liquidity remains a sizable CAD 800 million and the pro forma debt ladder extends to a weighted average term to maturity of 4 years, up from 3.6 years at June 30.

So this concludes my remarks, and I'll now turn the session to Jordie to provide an update on investments and other activities.

[Jordan Robins, executive]

Thanks, Neil, and good afternoon. Today, I'm going to provide you with a brief update on our investment, development and entitlement activities and the progress that we've made this quarter. We closed on the sale of 2 small non-core assets and we received a density bonus payment from our 50% partners for securing 50,000 square feet of additional density at our Yonge & Roselawn development side. The aggregate proceeds from these activities were approximately CAD 10 million.

Despite the limited number of closings this past quarter, we were still really busy with several active transactions in our pipeline. In June, we entered in combining agreement to sell our Queensway asset located in Toronto. This property is [ epic ] to a long-term fixed rent lease with the Zanchin Automotive Group, who operate Queensway Mercedes Benz. Closing of this transaction will occur in Q4 2024.

This past month, post quarter end, we entered into a binding agreement to sell 895 Lawrence Avenue East, a 30,000 square foot unanchored income-producing retail center, which is also located here in Toronto. While not transit-adjacent, this 1.9 acre property does possess residential intensification potential over the long-term. However, existing lease incomes is precluded from being redeveloped until 2035. As such, we classify the potential density at this site as part of our long-term development pipeline.

Properties with this combination of long-term development potential and modest holding income are still garnering a strong bid as demonstrated by this sale. We have received several offers for this property from investors in search of quality hybrid assets that offer both interim holding income and future development upside. Consistent with the objectives we've set out, the CAD 66 million in aggregate proceeds from these 2 firm transactions is 34% above our pre-mark IFRS value and equates to a low 3% yield based on in-place incomes. We continue to advance several files and remain on track for our disposition targets with just over CAD 200 million completed [Technical Difficulty] under contract year-to-date.

Turning to our development and construction program. The redevelopment of our Humbertown property is progressing on schedule and we've just commenced preliminary work for our redevelopment of Westmount Center in Edmonton. In Q2, we also began construction of our 1071 King Street West development project. We own 25% of this 252 units, 250,000 square foot residential rental project, which includes 6,000 square feet of at grade retail space. Geothermal drilling for the project has been completed and shoring is currently underway. The project has a total development budget of approximately CAD 200 million on a 100% basis and a scheduled construction period of approximately 30 months. Upon completion, this unique flat iron building design will be a fantastic architectural complement, both to the Liberty Village neighborhood and to the FCR portfolio.

With respect to entitlements, this past quarter, we were successful in securing approval for 250,000 square feet of residential density at our Montgomery property located at Yonge and Eglinton, also here in Toronto. To date, we've submitted for entitlements on over 16.4 million square feet of incremental density, netting out what we've already sold. This represents 71% of our 23 million square foot pipeline. This year, we expect to receive approvals for a further 1.3 million square feet and we plan to submit for an additional 1 million square feet of density. As you can tell by our results and the additional color you've heard on the call today, we remain focused on the objectives we've set out. We expect the balance of 2024 to remain busy, and we look forward to updating you with our progress.

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

[Operator]

[Operator Instructions] The first question is from Lorne Kalmar from Desjardin.

[Lorne Kalmar, analyst]

Maybe firstly, Neil, can you give a little bit more color on the CAD 3 million of non-repeatable items in NOI and if that's something that we should strip out moving forward?

[Neil Downey, executive]

Since I've described it as non-repeatable, I think the short answer is, yes, you should generally strip them out. Having said that, things such as lease termination fees do happen from time to time. We do continue to have some reserves for receivables. So this is not a forecast, this is the statement. Possible, there could be additional recoveries of bad debt expense. And so I mentioned the amount in the same-property pool is about CAD 1.8 million. And that's, as I indicated, roughly -- mostly related to prior year CAM and tax recoveries and some other adjustments. And then on top of that, the close to CAD 3 million amount you would simply add in about CAD 800,000 of lease termination fees and the bad debt recovery. That's really what I'm referencing.

[Lorne Kalmar, analyst]

Okay, perfect. And then maybe just flipping over to the disposition side. It seems that you guys got back to business this quarter. I was wondering, outside of the Queensway property, is there an expectation to close any additional dispositions in 2024 or will that sort of be it?

[Adam Paul, executive]

Yes. Thanks for the question, Lorne. At this stage, we're almost at the beginning of August. We do have an expectation we'll close more. We'll see how the balance of the year unfolds. We don't have more detail to provide you today in that regard. But I'll certainly be surprised if we get to the end of the year and Queensway is the only other disposition we end up closing.

[Lorne Kalmar, analyst]

Okay. Fair enough. I'll take that. And then maybe just lastly, for those of us who aren't as good as Math as Neil is, can you maybe provide just the rent escalators you would have gotten on the 2Q leasing? And how that kind of compares to what you've done historically?

[Adam Paul, executive]

Yes. Even though Neil is better in math than I am, I'm going to answer the question. So if you look at our long-term track record, generally, contractual rent escalators range between 1% and 1.5%. That's kind of been the long-term norm in the business. And in the old days, when you did a typical lease renewal, it's often a 5-year term and the rent negotiation was simply a negotiation on one number, what's the new rent and typically it would be flat throughout the renewal term.

And then going back a number of years ago, as part of our leasing strategy, we had -- we were proactive in trying to address a number of things during the renewal negotiation. One was improving cost recovery. So as you know, particularly with larger tenants, getting a full recovery of CAM can often be a challenge. So we felt there was a big opportunity, particularly in leases that we didn't write ourselves that we had acquired through acquisition. We put a heightened emphasis on improving the recoverability of CAM costs, which don't come through the renewal numbers, but certainly help contribute to NOI growth.

The second was instead of negotiating these flat renewals, we've made a concerted effort to start negotiating renewals that had contractual rent growth throughout that typical 5-year term. And so that's not new over the last few years. But the difference is, going back to that 1% to 1.5% contractual lift this quarter. And I'll caution everyone on looking at any given quarter, a quarter doesn't make a trend. This was a super strong quarter. Again, our focus is on a long-term track record of steady results and that's what we're focused on. But this particular quarter, the contractual rent growth would have been roughly double what we would have done historically.

[Operator]

The next question is from Sam Damiani from TD Cowen.

[Sam Damiani, analyst]

Maybe I'll just start by kind of finishing off where Lorne left off. Just on the contractual steps that you did get this quarter, they were quite large, maybe 2% to 3%. And you said the leasing -- sort of the tenants that were with leases in Q2, they are pretty representative of typical leasing activity for the REIT. But there must have been something that was anomalous, I guess, just with this -- with the activity this quarter to give rise to that -- it sounds like not a sustainable level of contractual steps being negotiated. So is there something there, be it geographic or a specific tenant mix or something that sort of led to this being a little bit anomalous on high side?

[Adam Paul, executive]

Generally, Sam, no. But I guess, I'll point out, we had a couple of larger anchor tenants where the renewal term was a little longer than our average. So when you kind of model that out, your contractual rent growth over a longer period of time ends up bumping up that spread between the year 1 rent and the average rent. But generally, it just really was larger contractual escalators during the renewal term.

I'm not telling you it's impossible that it's going to continue, we actually hope and expect it to continue. But I just want to ground everyone in the fact that we were cognizant that a quarter doesn't represent a trend. And we feel like leverage over the last year or 2 has shifted in our favor; not in a way that I would describe as overwhelming where we can call all the shots, but it's shifted a little bit. And so we're cognizant of the supply-demand imbalance that exists and the quality of our space and the store expansion plans that many of our retailers and potential tenants have.

And so we're going to use that as part of our negotiating tactics when we extend term. And we're very focused on continuing to grow our NOI on a regular basis. So we're going to continue to do the best we can. And I think we'll be better than we have historically, whether every quarter averages out to what we did this quarter and that may be a bit ambitious at this point.

[Sam Damiani, analyst]

That's helpful. I mean, also your comments on sort of the historical norms over the last, whatever, 10, 20 years, 1% to 1.5%. I mean, if that baseline of 1% is the old pattern, would the new go-forward expectation have a baseline of maybe 1.5%, 2%? How would you characterize kind of the pick-up on pace on those steps?

[Adam Paul, executive]

Yes, we're targeting a little bit higher than that. But keep in mind, we're still saddled with a handful of leases where tenants have fixed rate options. Sometimes they're flat. As you know, we report this number on a [indiscernible] basis. So we don't strip out those lease renewals. So that will -- to the extent we continue to have those all pull back, obviously, the more market deals that we do that have better brand growth. But yes, we're targeting more than 2%. We're getting better than that in a lot of cases, but we're not getting it in every case.

And obviously, your starting rent, it's a bit of a push and pull because your year 1 rents of 13% -- north of a 13% lift, we've been clear and our view on the world is double-digits is the new norm for us. And so you're dealing with tenants that you're managing relationships with, they've got sticker shock in some cases. So there is some correlation as well between how much you grow rent in year 1. There's some correlation to that versus your rent growth from that point forward during the contractual renewals here. So it's a bit of a balancing act. But said differently, we would accept a lower contractual growth rate if we had a higher going in renewal rent.

[Sam Damiani, analyst]

Understood. Yes. Last question for me, and Adam, probably again for you, maybe Neil, is just on the sort of expectation for growth going forward? I mean, the guidance in the Investor Day and everything has been very helpful and you guys are generally meeting and exceeding expectations on NOI and FFO, et cetera. But how do you think about NAV growth? And I know there's obviously external factors at play that are outside everyone's control. But assuming a static interest rate environment, how do you view FCR's NAV growth potential over the next 3 years?

[Adam Paul, executive]

Well, I'll break it into 2 parts. The elements of NAV that are in our control, we feel very confident. And we've been delivering now for many quarters in a row on the strategy we've outlined. And more recently, we've seen some green shoots that would indicate the macro starting to kind of become a tailwind versus the headwind. So -- but the stuff that's within our control, we're feeling very good about.

The reason our NAV is down from a year ago, 2 years ago is exclusively related to things outside of our control. And we've been proactive across our peer group on average in terms of recognizing that. Obviously, interest rates has been the biggest factor. And we've taken roughly CAD 900 million of property write-downs, which is over CAD 4 a unit to reflect us utilizing higher cap rates as a result of higher interest rates.

Interestingly, against that backdrop, the most significant offsetting factor to the cap rate adjustments is more than CAD 100 million of fair value increases from assets we've sold and simply marking those assets to the sale price. But we do feel like it started to feel like we're at an inflection point where the macro is transitioning from a headwind to a tailwind. And so that would give us more confidence that our NAV will be on the rise. But at the end of the day, we're most focused on the things within our control and we're feeling very good about that part. Depending on your views on the macro, we think that that could contribute to it as well. And we're hopeful it does, we believe it will, but time will tell.

[Operator]

And the last question is from Mike Markidis from BMO Capital Markets.

[Michael Markidis, analyst]

A few questions on my end. I guess, just following up on that gap up between the average rent on the leasing that you did in the step rent, I guess, from the exit rates have been initially. I think you mentioned, Adam, that part of that was due to an increase in term on some longer term anchor leases. So how would you think about sort of the split, the contribution between the pushing for higher increases versus just the current?

[Adam Paul, executive]

Sure. Mike, you broke up right at the end there. So how do we think about and I missed the last part.

[Michael Markidis, analyst]

Well, just in terms of the quarter-over-quarter uptick that we saw, you mentioned 2 competing factors or I guess not competing, but 2 factors. One being the longer term on some leases, but also the push to push higher on getting contractual rents. I'm just trying to get a sense that would be a roughly 50-50 impact, if one was more material than the other?

[Adam Paul, executive]

Yes. Just higher growth was much more of an impact than a couple of leases where we had renewals or if that extended beyond what the typical renewal term would be.

[Michael Markidis, analyst]

Okay. And then just like you mentioned things are more in your favor, and obviously, that's clear from what the fundamental picture has been like. So with -- like is this something you've been pushing on for several quarters and you finally broke through or is it something where you just decided, okay, team FCR or leasing team, it's Q2, let's push a little harder now in terms of sort of that initiative and how they'll kind of came together?

[Adam Paul, executive]

No, we've been touching for much longer than the last quarter or 2, but these renewal negotiations have a lot of unique elements. It starts from our perspective with merchandising mix and a lot of qualitative factors. So [Technical Difficulty] in the rate space in the specific property and do we have the right operator with the uses we're looking for. And then our leasing team does a lot of work before they show up at their renewal negotiating table. And based on all of that intel and all the chips they have to work with utilizing to the best of their ability and to come up with the best deal we can, assuming we've got the right tenant.

So I think if you -- and this is the reason we started disclosing this. It's only in the last probably 2 or 3 years where we started disclosing not just the step from the expired terms of the year 1 rental rate, but the average rate during the term because we know that it has changed. And so we just thought it was important to provide that visibility. But I don't think anything kind of turned the corner or light bulb went on that was unique to this quarter other than a set of renewals that have better contractual list than others. We think the ingredients are there that happen more times than not. Again, we caution everyone to not put too much weight into any metric in any one given quarter. But we do feel like the trend is better contractual rent growth than we've achieved historically.

[Michael Markidis, analyst]

Okay. That's very helpful. Just on following up on Lorne's question just with regards to the amount of closings you expect this year. And I guess, if we -- you expect some more closings. But I think at the beginning of the year, at the Investor Day, the mention was there about at least CAD 400 million of dispose this year. So would it be safe to say that you think you'll come out -- I guess, 2-part question. Would it be safe to say that you're going to come in lower than that is Part A? And then Part B is, part of that driven by the fact that you've been so successful raising debt in the unsecured market that somewhat the cadence is maybe somewhat dictated by the amount of liquidity that you have today?

[Adam Paul, executive]

Yes. So I'll answer the first part of your question first -- the last part of your question first. So no, our success in debt raising is not going to drive or having a meaningful impact on our disposition activity. These dispositions are really unique in the sense that they not only improve our balance sheet, but they're also earnings accretive because of how low the yields are and the profile.

The other element that's not lost on us is that we feel that many of the assets we're selling are assets that are most likely to be undervalued by typical REIT investors given the asset profile. And so we feel, regardless of our success on debt and capital raising, this business will be a higher quality business better suited for investors and better suited to deliver on the key metrics that our strategy is designed to deliver that we outlined at our Investor Day. So generally, continuing to do them will be beneficial regardless of our success on the debt fund raising side.

On the first part, yes, we laid out a 3-year set of objectives. And one thing I do want to take the opportunity to comment on is we know that the disposition volume garners a lot of attention and we agree it should. But what we don't -- we want to make sure people don't lose sight of is why we have those disposition objectives. And there are means to an end. And the means to the end, it relates to our FFO growth objectives, which again needs to have a contribution to given I mentioned they are accretive to FFO. And they also have a debt credit profile impact, which are a set of objectives. But our priority is delivering on our FFO objectives and our credit profile objectives. And dispositions is an important part of doing that.

And now our operations are performing exceptionally well, so we're tracking ahead on those metrics, which is great. But at the end of the day, the disposition target is intended to serve a bigger set of metrics from our perspective. We said we'd do CAD 1 billion over 3 years. We broke it down so investors can kind of monitor the 2024 progress, which you rightly said it's CAD 400 million or greater. We're halfway through the year. We're a little over CAD 200 million. At this stage, we believe we will come in around CAD 400 million. And in terms of which properties and which transactions, stay tuned, Jordie and his team are working on a bunch of things that we expect it will materialize.

[Michael Markidis, analyst]

Okay, and that's very helpful. And then the CAD 400 million that would be announced not necessarily closed, like some of that could spill into 2025 just in terms of the transaction completion perspective?

[Adam Paul, executive]

Yes, that's possible. I mean, look, we're not too fussed about that. One of the things we focused on is we're not running a fire sale here. This has not been the best market we've had tremendous success. We've sold assets at huge prices. The asset composition has been a big part of that [Technical Difficulty] smaller in size. So we've been able to do that, but we're not prepared to sell great assets at low prices.

And so if that means closings extend a little into January, February, like we're not so fussed about that. We're running a long-term business here. But we give general parameters, general targets. And so we'll have more clarity towards the end of the year whether what we achieve and what year they technically close in. Again, we're not overly fussed about that. We want to continue to make meaningful progress and benefit from the momentum that we currently got.

[Michael Markidis, analyst]

Yes. Absolutely, it's just more of a function from a modeling perspective in terms of timing. So I appreciate that color. And at the risk of overstaying my welcome, I've got one more, maybe making up for the last couple of quarters where I haven't asked the question. But just on the CAD 1 billion over the 3 years, I've always gone under the understanding that that did not include proceeds from condo sales as you've got 2 condo projects coming in on 2026. Is that the case or did the CAD 1 billion include proceeds from the condos?

[Neil Downey, executive]

Mike, it's Neil. You're correct. And I think as we laid out in the Investor Day fairly specifically, it's CAD 1 billion roughly of property dispositions. And then in 2026, in very round numbers, we currently have CAD 100 million of proceeds from condo sales, and that's one of our 3 currently active projects closing.

[Operator]

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

[Adam Paul, executive]

Okay. Well, unfortunately, you got Mr. Paul, but I just want to -- on behalf of Mr. Robins and Neil and the rest of the team here, I want to thank everyone for their continued interest in First Capital and we look forward to updating you on our progress in the quarters ahead. Thank you very much. Have a great afternoon.

[Operator]

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