First Capital Real Estate Investment Trust

TSX:FCR.UN

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the First Capital REIT's Q3 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Alison. Please proceed with your presentation.

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

Thank you, and good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today's call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in our various securities filings, including our Q3 MD&A, our MD&A for the year ended December 31, 2020, and our current AIF, which are available on SEDAR and on our website. These forward-looking statements are made as of today's date. And except as required by securities law, we undertake no obligation to publicly update or revise any such statements. During today's call, we will also be referencing certain financial measures that are non-IFRS measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the REIT's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this conference call.I'll now turn the call over to Adam.

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

Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today for our third quarter conference call. In addition to Alison with me today are several members of the FCR team, including Jordy Robins and Neil Downey, both of who you will hear from shortly.Our third quarter results are reflective of the momentum that we discussed last quarter when we said that it feels as if we're at a major turning point in terms of the pandemic's impact on our business and the related economic recovery. Our leasing statistics were consistently robust and continue to demonstrate the outcome of pairing high-quality real estate with a passionate team.Occupancy was a solid 95.9%, the same level as Q2. Notwithstanding occupancy was consistent year-over-year as well or down 10 basis points to be exact, same property NOI was up a healthy 4.2%, primarily owing to growth in rental rates. As we continue to gravitate towards a more normal environment, we saw improvements in our variable revenues such as parking and income from our hotel in Yorkville.While these variable items are well off their pandemic bottoms, they are not yet back to full income-generating capacity. However, the current trend is indicative that we are well on our way. Our bad debt expense also continued to shrink towards more normal levels. We also talked about the strength and value of real estate assets of FCR's caliber in the private markets. This has only been further validated since our last quarterly call.In 2021, we have sold or are under firm agreement to sell roughly $480 million of real estate. Several of these are non-core income-producing properties such as Langley Mall and our properties in Airdrie, Alberta; and the balance are mixed-use developments in Toronto, namely Station Place, King High Line and Christie Cookie. In these properties, we chose to sell a partial interest to residential-focused partners being Centurion REIT, Woodbourne and Pemberton Group, a recognition of both the future value of these properties and the importance we attribute to aligned strategic partners.To put our NAV and property sales into context, let's go back to when the pandemic started. Our NAV was $23.39 at the end of 2019, our highest NAV ever up to that point. Then, the pandemic struck early in 2020. We were proactive and wrote several of our assets down to reflect what was going on.During 2020, our NAV hit a low point of $22.24 which is a similar level to where we started this year, but a lot has happened since then. Excluding Christie Cookie, the aggregate IFRS value of this year's property sales, including some that are subject to firm agreements with imminent closings is $257 million. This is relative to a total sale price of those same assets of $330 million. This creates $0.35 per unit of NAV. Christie Cookie added an additional $0.80 per unit of NAV, taking the total NAV creation to $1.15 per unit from property sales alone. That's a lot of annual NAV creation from a pretty small subset of the portfolio. Christie Cookie certainly sways this metric. But even excluding it, the premium to NAV is significant at nearly 30%.Many view these dispositions as a means to lower the debt impact on our balance sheet, which they did, but our view is somewhat more strategic. Since 2019, we have been consistently working to improve the quality of our portfolio and setting FCR up for an even brighter future. The result of which has seen FCR exit virtually all secondary markets such as Quebec City, Windsor, Trois-Rivieres, Sherbrooke and Red Deer to provide some examples.In Ottawa, we reduced our invested capital without compromising our operating scale by bringing in non-managing partners on assets we owned 100% of. We also sold a number of suburban properties where we believe that the future upside was more limited, such as Halton Hills Village and McLaughlin Corners in Brampton.At the same time, we worked diligently to add to our urban portfolio in order to create even stronger positions in these thriving neighborhoods, with tuck-in acquisitions such as 1855 Leslie at Leslie and York Mills as well as 138 and 121 Scollard, both of which Jordy will provide an update on.During this relatively short period of time between 2019 and to-date, we have disposed of roughly 15% of our portfolio with all of our IPP dispositions being off the very bottom. At the same time, we invested and expanded our portfolio by roughly 10% during that time, with all of that capital invested into the top portion of our asset base. The cumulative impact of these activities resulted in a 25% churn of the portfolio. This is very significant and has effectively converted the bottom of our portfolio into a position of strength, both demographically and ultimately financially.Furthermore, our alliances with strategic partners brings both capital and pertinent expertise to our projects. Finally, the majority of this transition was completed quietly during the pandemic. Yes, we sold numerous assets. But more importantly, we improved our asset base, so that it has even more powerful long-term earnings potential in Canada's most sought after-markets and neighborhoods. This is one of the biggest differences between FCR and our peers.There are 2 main components of our portfolio today, exceptionally strong, stable, grocery-anchored centers in primary markets. These are typically situated in top-tier suburbs such as Vaughn, Mississauga and Oakville to use GTA examples. While the urban boundaries haven't changed, markets like these have demonstrated resiliency and became stronger as lifestyles adjusted as a result of the pandemic. While we believe some of this phenomenon is dissipating, we also believe some of the more permanent societal changes will result in a strengthening of the suburban markets within our portfolio today. This increase is the opportunity set for FCR given roughly 70% of our portfolio is situated in these top-tier neighborhoods.We will look to continuously improve the value of our existing centers, whether it'd be through merchandising mix enhancements, property improvements or redevelopment. It's our intent to add more of these centers to the portfolio as well. The other part of our business is generally grocery-anchored, primarily mixed-use properties in Canada's super urban neighborhoods.Examples include Yorkville and Liberty Village, 2 large ones that alone represent 15% of FCR's total portfolio. Pandemic restrictions and remote work impacted our super urban assets more than our top-tier suburban grocery-anchored portfolio. However, we are clearly seeing even more recovery momentum in these super urban assets, especially our residential rental properties. We also believe for the same reasons pre-pandemic that these markets will be the most popular in terms of where people want to live, work and socialize. And we remain exceptionally well positioned in that regard as well.It's clear that FCR's properties, whether top-tier grocery anchored centers or mixed-use super urban assets have never been worth more than they are today. With the world's attention focused on Glasgow this week at the COP26 Climate Summit, it is clear that our collective efforts related to ESG and the actions we take over the next decade are vital.In Q3, we continued to advance our own ESG goals. In particular, we have made significant progress on our GRES score. I'm pleased to announce that we ranked #1 in our retail peer group. We continue to make steady progress year-over-year. And I'd like to call out a special thanks to our sustainability and operations teams for their excellent work in driving this achievement.Our Equity, Diversity & Inclusion Council continues to be very busy with a focus on increasing knowledge, awareness and sharing within our team and recently hosted 2 important keynote speakers. One on raising awareness to living with invisible disabilities and the other on indigenous inclusion. In recognition of Canada's National Truth and Reconciliation Day on September 30th, First Capital employees were offered a special learning certificate program provided by the First Nations University of Canada to promote a renewed understanding between Canadians and First Nations. And a final note today, our Public Art Program.This quarter, we revealed 2 new installations in Toronto. At our Yonge & Roselawn site, FCR engaged 3 young student illustrators from the Ontario College of Art and Design to paint a mural depicting a positive message of inclusion, diversity and hope. This piece has brought a dynamic vibrancy to the corner, which is formerly a vacant lot, but has now become a community gathering place with local food trucks and pop-up entertainment while we await redevelopment.At 30-80 Yonge, our Loblaw City Market grocery-anchored mixed-use property at the corner of Yonge and Lawrence in Toronto, lightened up our most recent Public Art Commission, depicts massive eye-catching steel balloons suspended above the entrance of the property. These 2 installations bring our total to 30 public art installations across FCR's portfolio. We look forward to providing more updates on ESG in the future. And in the meantime, we encourage you to please visit our enhanced public art and ESG pages on our website.And with that, I will now turn things over to Neil.

[Neil William Edward Downey, Executive VP of Enterprise Strategies & CFO]

Thanks, Adam, and good afternoon, everyone. For my prepared remarks today, I will begin by referring to Slide 6 of the quarterly conference call presentation. Now, this presentation is of course available on our website at fcr.ca. Q3 2021 funds from operations was $59.0 million or $0.27 a unit. This represented an increase of 1% over Q3 2020's $58.1 million, which was $0.26 on a per unit basis.As detailed on Slide 6, Q3 net operating income of $104 million increased by $2 million from the prior year. The NOI increase was comprised of approximately $4 million of same-property growth, offset by $1.3 million of lost NOI related to disposition activity and a year-over-year decline of $700,000 in straight-line rent.In this regard, we did write-off a straight-line rent balance during the third quarter of 2021 to the tune of $1.6 million. Notably, if one is to exclude this non-cash charge-offs, then FFO and FFO per -- growth was otherwise plus 4%. Q3 interest and other income of $2.7 million declined by approximately $400,000 year-over-year. This was primarily due to reduced interest income owing to lower loans receivables, offset by a small increase in other income.Q3 G&A expenses of $7.8 million increased by $1.2 million year-over-year. This is a sizable increase in percentage terms. But as we've previously indicated, $8 million per quarter is a good near-term run-rate as we returned to a more normalized business cadence and we returned to office.Collectively, our other gained losses and expenses or OGLE for short, these tend to cause some periodic variability in our reported FFO. As detailed on Slide 8, OGLE amounts were not material in either Q3 of 2021 or the comparable 2020 period. As such, there were really a little to no consequence to reported FFO or the year-over-year growth rate in FFO. We'll not detail specifically in the conference call deck, I will make a few comments about the sequential results from Q2 to Q3.In short, the underlying results were very steady. Excluding OGLE amounts, Q2 2021 FFO was $800,000 lower than the Q3 results. Quarter-to-quarter NOI was steady at $104 million in both quarters. Interest and other income was up slightly quarter-over-quarter and corporate expenses were down slightly. Again, were not for the one-off charge off of straight-line rent, FFO would otherwise have been $61 million this quarter, a 4% sequential increase.Moving to some of our operating metrics performance, beginning with Slide 9. As mentioned, Q3 same-property NOI growth was approximately $4 million or plus 4.2%. Same-property lease termination fees were modest at approximately $500,000 in each of Q3 of this year and Q3 of last. Thus, the termination fees had no real impact on same-property NOI growth. Same-property bad debt expense was $1.3 million in Q3 of 2021, which was $1.5 million lower year-over-year. Therefore, Q3 same-property NOI growth, excluding lease termination receipts and bad debt expense was plus 2.6%. This core organic growth rate was driven largely by growth in rents given that occupancy was stable. You can see this by turning to Slide 10. FCR's Q3 period end and period average occupancy were both 95.9%. This occupancy is within 10 to 20 basis points of the Q3 2020 statistics and is very steady versus Q2 of this year.Turning to Slide 11 and extending a theme that has been consistently positive. Q3 leasing velocity remains strong. Renewal leasing volumes were 466,000 square feet in the quarter, and these were affected at an average rent of $23.16 per square foot. This equated to an increase of 8.8% when measuring the first year renewal rent relative to the rent in the final year of the expiring lease. As referenced on Slide 10, during the third quarter, we transferred $67 million of properties from development to income-producing status. This included 22,000 square feet of commercial area plus approximately one half of the 333 residential suites at our Station Place mixed-use project in the Tobago, which remains early on in its lease-up phase.On September 1st, we did crystallize a significant development profit and as we brought in a residential managing partner by selling half of our interest in Station Place.Turning to Slide 13, where we provide some data on our rent collections. With restrictions easing and our tenants operating more broadly, we are seeing positive trends in rent collections and accounts receivables. We collected 97% of our Q3 gross billed rent. This collection rate is 160 basis points higher than the 95.4% statistics that we provided with respect to Q2 rent collection in our early August conference call.If we look back at Q2 today, we also note that collections for that quarter have increased to above 96%. And just as notably, we continue to make progress on other prior period rent collections. This can be seen in our accounts receivables. In Note 7 to the Q3 financial statements, you can see that our September 30, 2021 tenant receivable balance is $32.5 million. This AR balance has declined by $8.8 million or 21% from $41 million at June 30th. For information purposes, Slide 14 outlines our ACFO Derivative payout metrics. In Q3 and on a year-to-date basis for 2021, our FFO payout ratio is running at approximately 40%. Our ACFO payout ratio, which is derived from results for the 4 quarters ended September of '21 is at 52%.In gross dollar terms, this equates to $242 million of ACFO relative to $126 million of cash distributions, thus equating to $116 million of retained cash. To provide some context on capital deployment, we've summarized some numbers for you on Slide 15. We invested $46 million into development, leasing and residential development during the third quarter. Most of this capital was invested into assets located in Toronto and Montreal.Turning to financing activities. On August 1st, we paid off a $37 million mortgage on our Meadowlark shopping center in Edmonton. This mortgage carried an interest rate of 4.4%. And along with $7 million of principal amortization, this brought our 9-months debt repayment to $259 million.Slides 17 and 18 of the conference call deck summarize some of our debt and liquidity metrics. During Q3, we extended our primary unsecured operating facility for an additional 3 years, and we incorporated sustainability linked features into that line of credit. This $450 million revolver now matures in mid-2026 versus mid-2023 previously. The cost of funding for the extended term remains unchanged from prior.We also secured a new $100 million bilateral 3-year revolving credit facility at a lower cost of funds. This facility matures on August 31, 2024. Overall, our September 30 liquidity position was $725 million, and this included $45 million of cash and $680 million of availability on our $800 million of unsecured revolving credit facilities. At the end of Q3, the REIT had $7.3 billion of unencumbered assets, representing 72% of the balance sheet. Notably, that unencumbered asset pool increased from $7.0 billion at June 30th. On the disposition front, held-for-sale assets had a value of $279 million at September 30th. This is $98 million lower than June 30th. However, during the quarter, we sold assets having an aggregate value of $171 million.In wrapping up my remarks, I will also note that since quarter-end, we have completed income property sales with an aggregate value of $73 million. And by the end of this month, we anticipate completing additional sales at a value of $72 million. Moreover, with cash coming in the door, just this week, we prepaid $84 million of mortgages that formerly had 2022 maturity dates.Along with reducing our debt, this further increases our unencumbered asset pool and lowers our secured debt to total assets ratio. That concludes my remarks.And I will now turn the call to FCR's Chief Operating Officer, Jordy Robins to provide some additional comments on the leasing environment and our investment and development activities. Jordy?

[Jordan Robins, Executive VP & COO]

Thanks, Neil, and good afternoon. Q3 was what I would describe as a very positive quarter. As you've heard from Neil and Adam, operationally, our assets continue to perform well based on all measurable KPIs. Specifically, this past quarter, we made meaningful strides advancing our leasing program, our development program and our disposition program, demonstrating the strength of our real estate and the depth of the demand for our assets.Let me start with leasing as it's one of the most significant drivers of organic growth and is an important leading indicator for our business. In Q3, we completed approximately 700,000 square feet of lease deals, made up of 215,000 square feet of new deals and 466,000 square feet of renewals at an average rent of $23.16 per square foot.We also have a very robust pipeline of leases under negotiation, including over 1 million square feet of renewals, 360,000 square feet of new deals and 130,000 square feet of executed deals with possession dates outside of this quarter. In total, over 1.5 million square feet of lease deals in the pipeline, which is consistent with our pre-pandemic statistics. This positive impact on our leasing pipeline is correlated to the easing of the pandemic-related restrictions across the country.Simply put, tenants perform better when they're open. Less obvious perhaps is that travel restrictions that were in place during the last 18 months recruited representatives of international tenants from touring our assets or the neighborhoods in which we operate. Without access to the premises, leasing velocity in some of our neighborhoods was impacted. With those restrictions now minimized, we are once again able to showcase our space to those same tenants and the interest for it appears to be deeper now than ever before.In Yorkville, for example, this past week, we opened a Miami-based multi-brand luxury retailer a Webster and a 6,500 square foot heritage building that we own located at 121 Scollard. The Webster has quickly emerged as one of the most prestigious and coveted luxury concepts in the world. They are committed to delivering unique and curated experiences for their clients. This philosophy is reminiscent of our own with respect to the neighborhoods in which we invest.What's more, given the brand's prominence amongst its peers, the addition of the Webster has served as a catalyst for other luxury brand retailers to locate in Yorkville. Many of these international retailers have Toronto on their radar, but have been prohibited from visiting and from doing business here. So the impact from the recent change to travel restrictions was immediate.This past quarter, we entered into a deal with a to-be-announced major international fashion house, who owns one of the hottest luxury brands in the world today. Opening in Q4, this brand will occupy the 7,000 square feet of space formerly leased to diesel that sits adjacent to Chanel on Yorkville Avenue. It will start with an exclusive holiday activation and then transform the space into their flagship location in Canada.Next quarter, we'll be able to share more on this tenant on and several other exciting luxury retailers we're working with in Yorkville. While the pandemic has caused tremendous individual and economic pain for all around the globe, we have seen some silver lining as it relates to our business and the tenant mix of our portfolio in particular. Specifically, we lost a number of tenants in the initial months of the pandemic. But we've since been able to remerchandise most of this space with tenants of similar use but with stronger covenants.The result for FCR is more resilient retail centers with the same necessity-based merchandising. We're able to drive this demand as opportunities for retailers to lease space in the neighborhoods that we are invested is rare, given the scarcity of product. Here in Liberty Village, for example, we're replacing a 3,000 square foot independent restaurant with a Chipotle, who took possession of their premises in Q3 and who will pay meaningfully more in rent than the tenant they're replacing.Other tenants capitalizing on this opportunity to locate in Liberty Village include Noto restaurant who will take possession of a 6,300 square foot unit in Q4 and another to be announced exceptionally well-known quick service restaurant who have leased a 3,300-square-foot unit, and who will take possession of their premises in Q1 2022.When you step back and reflect in Liberty Village alone, we've upgraded the use and the quality of the covenant in 3 spaces, all at higher rents. This opportunity for FCR would not have been possible but for the extraordinary circumstances experienced over the last 1.5 years.During this past quarter, we made great strides addressing one of our largest opportunities as well. At Fairview Mall in St. Catharines, we finalized leases with 3 national retailers, Staples, PetSmart and Winners to occupy the majority of the former 100,000 square foot Walmart box. In addition to improving the center's offering with these high-demand uses, the new tenants will pay market gross rents that are almost 2x greater than the rent Walmart pay.PetSmart and Staples took possession of their respective premise in Q3, and we expect all 3 tenants will open in 2022. This past quarter, we made exciting progress with our active development projects as well. At Wilderton, our mixed-use project located in Cotanege Montreal continues to progress. Metro and Pharma Pretook possession of their premises in Q2 of this year, and SAQ and Dollarama took possession of their space in Q3. All these tenants will be open to the public in the first quarter of 2022.Once open in their new space, we will commence demolition of their former premises, which will then allow us to begin the development of the 200,000 square foot final phase. Here in Toronto, Shoppers Drug Mart and PetSmart both opened in the third quarter in a recently constructed 60,000 square foot addition to our Leaside Village Center. 98% of this space in the building is now leased. An adjacent pad is 75% leased and under construction. Possession for these tenants in this new pad will occur in Q4 of this year. We received our demolition for 138 Yorkville in the third quarter as well.Demolition of the interior of the existing structure is currently underway, and we aim to commence shoring and excavation for the approved 313,000 square foot luxury residential and retail development in the first half of 2022. We continue to maintain a high conviction in this neighborhood and in this investment specifically as the property is one of, if not the best, luxury condominium sites in the country.In addition to the projected profitability of the investment, 138 Yorkville will serve to improve the functionality of our already significant ownership position in the neighborhood, which includes Yorkville Village, the Hazelton Hotel and the street front retail along Yorkville Avenue. We have designed 138 so that it will integrate with Yorkville Village and the hotel, adding potentially a new anchored tenant to our mall and several new exterior points of ingress and egress, which will improve circulation, visibility and accessibility.In short, consistent with our strategy, we are realizing significant efficiencies and are making meaningful improvements to our assets as a result of our aggregated ownership position in Yorkville.Turning to investments. You will recall we had secured an option to purchase our former partner's 50% interest in 2150 Lake Shore for approximately $56 million. In Q3, we closed on the sale of this 50% interest to Pemberton for $156 million. Pemberton's deep residential development, community building and large-scale construction expertise will be a critical asset for the expected 7.5 million square feet of residential, retail, commercial and the significant community uses contemplated.Pemberton is now fully engaged and aligned as our 50% partner and as our development manager. As expected, they've already proven to be an incredible addition to our team and will be an important part of the transformation of the properties into a sustainable and inclusive master-planned, mixed-use transit-oriented neighborhood.In Q3, we closed the sale of a 50% interest in Station Place to Centurion apartment REIT. Station Place is a purpose-built rental property located in Toronto at Dundas Street West and Aukland Road. The sale price for Station Place was well in excess of our costs, allowing us to crystallize significant development profit. What's more, with Centurion as manager, we were able to add residential expertise to manage the property and a partner to share the initial lease-up risk.The building houses 333 rental apartment units and 43,000 square feet of retail anchored by a Farm Boy who opened last month. As a result of the transaction, First Capital's effective stake in that property was reduced from 70.8% to 35.4%.During the quarter, we sold a 16.66% interest in our King High Line project, the Woodbourne, a Canadian developer, operator and investor in newly constructed residential rental properties. King High Line consists of 506 residential suites at top a 3-story podium. In current with our closing, Woodborn purchased Cap REIT's 33.25% interest. So today, Woodborn and First Capital each own 50% of the residential component. We wish to thank CAP REIT for their partnership and want to welcome Woodborn and the expertise they will provide as we move forward. The property also consists of approximately 160,000 square feet of retail space in which FCR retained 100% interest.The retail commercial portion of the development is 100% leased to a variety of necessity and service-based retailers, including Longos, Canadian Tire, Shoppers Drug Mart, Winners, WeWork, Kids & Co, McDonald's and PetSmart. Moving west to Alberta. During Q3, First Capital sold 100% interest in our assets in Airdrie. The properties have 250,000 square feet of net rentable area and are currently 95% leased. Last, during Q3, First Capital entered into a binding agreement to sell 100% interest in Langley Mall located in Langley, British Columbia.The current demographic statistics surrounding Langley Mall are notably inferior to First Capital's overall demographic profile. Early in 2020, one of the properties former anchors failed due to the pandemic. Given the below-market rental rate of this tenant, the removal of their encumbrance provided for an opportunity to sell this asset for a very significant premium to its IFRS value, another unexpected silver lining.Closing of this sale is scheduled to occur by year-end 2021. Based on the work we've done and the pipeline of activity underway, we remain excited and engaged about the trajectory of our business and the opportunity that exists to grow FFO both organically and through the continued intensification of our assets.And with that, operator, we can now open it up to questions.

[Operator]

[Operator Instructions] Our first question, please go ahead.

[Analyst]

Hello?

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

Hi, Victor.

[Analyst]

I have a question regarding governmental programs. So do you have a sense of what percentage of your GLA still qualified for sales upon expiry last month? And what percentage may qualify for the 2 new governmental programs you highlighted in your MD&A that will replace shares through the May 2022?

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

Yes. Thanks, Victor. It's a question we've been asked many times. As you know, the new programs provide a little less transparency for the property owner. So it's all anecdotal and a function of direct discussions that we've had with our tenants, which has been in depth.At this point in the pandemic, based on what we know, very, very few of our tenants are recipients of government support under that program. And with the easing of restrictions in the second half of this year in our largest market, which is Toronto/Ontario, we -- our view on the change or ending of the government subsidy program is something we expect to have a very immaterial impact on our business, if any.So we -- our understanding is very few of our tenants, if any are still participating in that program and certainly looking forward, that would be the view as well.

[Analyst]

And probably as a quick follow-up. So historically, your Q1 occupancy on average has been 20 basis points below your Q4 occupancy going back to 15 years or so, which is interesting is that then it recovered from Q2 to Q4 of that year. So -- I understand that you don't have a crystal ball. But based on what you are seeing in your portfolio today, how comfortable are you in commenting on what this season Q1 versus Q4 occupancy change maybe here relative to historical precedent?

[Neil William Edward Downey, Executive VP of Enterprise Strategies & CFO]

Victor, it's Neil Downey speaking. That 20 basis points is an interesting, I guess, statistic that you raised and possibly one that we're not even aware of. We have not seen by our numbers any meaningful seasonality in the occupancy rate to our business. Our business is not one in which there is a seasonal sales build or historically a Q1 season in which there's an abnormal amount of tenant failures. And if you look at simply the top 40 list of our tenants, I think you will only see 2 retailers in that top 40 list that could even be classified as fashion in any way, and that would be Nordstrom and Williams Sonoma. And that top 40 list is in many ways a proxy for what the entire business looks like in terms of one that is really focused on everyday essentials, everyday needs and regular weekly visits.So we don't see a seasonal effect. What we have articulated, however, is that we've spoken about a couple of Walmarts in the portfolio where they will be not in occupancy, one in Calgary that is out of occupancy as of today. And so, that's something that we're dealing with, and we're feeling overall pretty good about our ability to not suffer too much diminution in our Q4 occupancy rate, notwithstanding that Walmart vacancy. And then, we do have another one that's effective January 1st as well. It is less obvious that, that will actually impact our occupancy rate because we're more than likely to demolish the entire building and build something brand new for a new tenant.

[Analyst]

Yes. That was helpful. And probably just a quick question on the balance sheet. So in general, so completing the assets held for sale would mean that you achieved more than 100% of your $1.5 billion goal. But leverage remains still above your goal levels. So how important it is internally to maintain your existing credit ratings across each of your 3 providers, what's your strategy on that?

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

Yes. So you're right. The initial disposition, I guess, we'll call it target has been achieved. I mentioned in the prepared remarks, what a massive transition has taken place in the portfolio. And inherently, we have a different portfolio today than when we started that. And so, we've been clear that as that transition has unfolded, that, we've said that when we get to assets, whatever that number is going to be, inherently, the debt-to-EBITDA number will be slightly higher than it previously was because we have called a lower quality/higher yielding assets in favor of higher growth assets.And so, inherently, that's what happens. We've gone through the worst 18 months the business has ever faced. There was not one second during that time period where anyone on the management team or Board was concerned about liquidity, solvency, meeting our obligations even early on when many tenants were unfortunately opportunistic in holding back rent. No one got paid late from FCR. And so, that spoke volumes to us. So very comfortable from certainly a solvency, liquidity perspective.And today, we're sitting here with a portfolio that we're much happier with. And so, our approach to dispositions is shifting to be more opportunistic. One of the things that means is that there will be an even greater discipline around securing premium pricing for the right assets to sell. And when I look at some of the asset sales we did this year like Langley Mall and Airdrie, when you look at the real estate, the strategic fit or lack thereof and specifically the pricing, we would have sold those no matter what. If we had no leverage on our balance sheet, we would have sold those assets at those prices. So that's a bit around how we're viewing it. And so, I hope that answers your question?

[Analyst]

Yes, sure, sure. Clear, helpful. Thank you very much. And I turn it over to others. Thank you.

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

Thank you very much, Victor.

[Operator]

Thank you. The next question, please go ahead.

[Jenny Ma, Analyst]

Jenny Ma. I just wanted to ask about your outlook for the redevelopment portfolio. You guys completed a pretty big amount throughout 2020 and 2021. So that pipeline on the active development is looking a little bit thinner. Can you give us some outlook on what you're seeing within the portfolio and maybe quantum and timing of what you expect on the redevelopment front?

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

Yes. Jordy will give you some specifics because obviously, it's a very dynamic part of our business, and we have a bunch of things being completed. And we're on the verge of starting a bunch of others while there are some that continue to progress that have been active both over the past year and into next year.But in terms of the quantum, the short term, call it in the next 1 to 2 years, the investment in our development program is likely to be in the range of $150 million to $200 million, depending on a number of factors, but that's kind of a decent set of goalposts for you to work with. And on the assumption part of your question, which, if you can just confirm this, Jenny, as part of your question, what are the next series of properties that will undergo redevelopment in the near term? Is that -- was that part of your question?

[Jenny Ma, Analyst]

You know what, I don't think there's a specific properties. The quantum is helpful. Maybe if you can elaborate on what your expected returns might be? I know in the past, it kind of hovered in an around 5%. Of course, it varies by property. But is that still something that you think you can achieve for future redevelopment and development projects?

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

Yes. In general, we do. Obviously, we're seeing a different return profile for assets that are more heavily weighted to residential rental where the expected going-in unlevered returns on day 1 of completion is lower than that. We're also of the view that even if the yields are thin initially, we have proven -- I mean our first residential development was over a decade ago and the rents in place today are more than double what they were then. So we've made a lot of money on residential rental beyond the point of completion of the development. And in today's environment, clearly, that's an approach one we believe must take if you're being realistic. So on those, they would be lower. But certainly, where there's a meaningful retail component, yes, that would be a good ballpark.

[Jenny Ma, Analyst]

Okay. And is it fair to assume that the weighting of resi development would be similar to what's in the pipeline overall, so kind of in that 75%, 80% range?

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

Yes.

[Jenny Ma, Analyst]

Great. I'm looking at the variable income that you guys had mentioned, and maybe this question is for Neil. There's not a lot of transparency and sort of what the inputs are and that's okay. But when we're thinking about the number that was achieved this quarter, which was pretty healthy at almost $7 million, where do you think the delta between that and full potential would be? If I look back in sort of the pre-pandemic quarters in 2019, it was tracking in and around $7 million, is the bucket for this line item different in terms of the composition? Like how should we think about the potential upside? And whether or not there's any seasonality involved in this number as well given that there's a hotel.

[Neil William Edward Downey, Executive VP of Enterprise Strategies & CFO]

Thanks, Jenny. There is a bit of seasonality from the hotel. On the flip side, there's also a bit of seasonality from things like parking, if you think about holiday sales and the like. If you want to kind of shortcut the answer, we're probably still running at around 50% or 60% in terms of an NOI contribution as to where those variable revenue streams would have been circa 2019. So Adam did make some comments about variable revenues are recovering. But equally, we believe there's still good recovery potential in those revenue streams.

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

And the only other thing to keep in mind, Jenny, is that going back to Jordy's theme of silver linings and some opportunities that arose. One of them was the opportunity for us to acquire the remaining 40% interest in the hotel we didn't own. So when we're fully recovered even on -- if you achieve the same level of contribution, given the size of the variable revenue pool, that actually does swing it a bit. So it's just something to keep in mind.

[Jenny Ma, Analyst]

Right, right. Okay. So really, you're looking at a different composition going forward versus 2019 then, so there's more room for that number to improve?

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

Yes, mainly from the hotel component.

[Jenny Ma, Analyst]

Okay. Great. That's very helpful. Thank you. I'll turn it back.

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

Okay. Great. Thanks, Jenny.

[Operator]

Thank you. Our next question, please go ahead.

[Sam Damiani, Director, Institutional Equity Research]

Sam Damiani. Thank you. And I just wanted to talk about dispositions. The $239 million held for sale. Is that all expected to close in the fourth quarter? How much would slightly slip into Q1? And just beyond that, are you teeing up more assets for disposition in the near term? And how should we think about your, I guess, your expected leverage ratio over the next couple of quarters?

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

So the majority, Sam of those dispositions held for sale are scheduled to close in Q4, but not all of them. Some of them are scheduled to close in Q1. To the extent you'd like it, we can give you something more specific on that front offline. I don't have the number handy. In terms of dispositions, I'll elaborate on what I said to Victor is that we're a lot happier with how the portfolio stands right now.There's definitely been a shift over the course of 2021 as it's progressed to a more and more opportunistic mindset around that. Again, not which assets we would consider selling, but more the price that we would require to sell them. And so, that has certainly continued. In terms of our leverage metrics, they continue to drift down. Part of that has been the disposition activity. The bigger part looking forward is going to be the full recovery of some elements of the business from -- that'd have been impacted by the pandemic. And so, what we would expect is a continual gradual decline in those leverage metrics.

[Sam Damiani, Director, Institutional Equity Research]

Okay. And just kind of related to that, you've got a fairly lengthy pipeline of zoning entitlements and expected approvals of new zoning entitlements. What is your plan for this growing pipeline in terms of realizing value for the REIT in terms of either selling the assets, selling the density, developing as condo or rental? What's the, I guess, the priority over the next 12 months in that regard?

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

The priority is to increase the value of those properties. That's the priority number one. From there, it gives us a lot of optionality. And it will be a mix in terms of what we do with those. The mix will be selling the density outright where it makes sense, selling a partial interest in the density to someone who brings an expertise that we view is very beneficial to the risk return profile of the development. And in some cases, we'll develop it on our own. What we do in terms of where assets end up in each of those buckets is going to depend on a variety of factors that we will review closer to the time when the option for each of those assets materializes.Condo versus rental, we have -- we definitely have a bias towards rental. We talked about this on previous conference calls where condominium development is not a perfect fit by any stretch in a public company structure. We get penalized with the debt through the development and lots of people -- lots of analysts like to focus on our debt much more than we do. But that's a reality. It does put pressure on your debt metrics, and we live with the implications of that.But on completion, regardless of how much money we make, it gets discounted because it's not a recurring income stream. So not a perfect fit for how the capital markets view real estate companies in several cases where it's strategic, we do do it and we will continue to undertake it, but there's a strong bias towards rental. And I think if you look forward at our activities, we would expect that the majority of the residential we do fits into the rental category versus condo category.

[Sam Damiani, Director, Institutional Equity Research]

That's great. I will turn it back.

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

Thank you, Sam.

[Operator]

[Operator Instructions] The next question Pammi Bir.

[Pammi Bir, Former Analyst]

Thanks, and hello, everyone. Just maybe rounding out the disposition discussion again. As we think about maybe the program over the next, call it, 12 months or so, given that you've already cycled out a lot of perhaps some of the non-core assets. Is it fair to think that what comes up next will be again predominantly density related or perhaps some income producing assets to partners of maybe some of your core assets?

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

Well, the short answer Pam is we don't know. Certainly, there's a lot of strategic merit to some of the developments where we do intend to bring in what I'll call a strategic partner. But some of the income-producing stuff will be a function of opportunity. And it's not that we don't own any assets that -- some of the assets we do hold, we still plan to sell long term. And Jordy talked about one, which is our asset in St. Catherines. There was an opportunity to reposition the Walmart that vacated just before COVID started. It's taken a bit longer because of the pandemic, but that's done now. We've secured leases in a manner that are creating a lot of value in that former box of property will be worth more when we're completed than it was -- when Walmart was there. And we feel that that value may be discounted if it's sold prior to the full execution.But certainly, that's an example of an asset that FCR is very unlikely to hold in 5 years. When we trade out of it will depend on a number of things, but the mindset is opportunistic. And that's what I would encourage you to keep in mind when you think about how we're approaching dispositions looking forward.

[Pammi Bir, Former Analyst]

Got it. And we have seen -- as we think about some of the transactions we've seen or, I guess, pricing on transactions for just your sort of bread-and-butter grocery anchored properties across Canada, the appetite is still quite strong. Curious if you've seen perhaps pricing change for the types of assets in your portfolio in that group over the past few months or at least over the course of this year. Are you seeing any pressure from a cap REIT standpoint?

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

Yes, we're seeing a lot of pressure. I'm not sure I've ever seen a transaction market this strong for grocery-anchored retail and mixed-use properties in cities like Toronto, Montreal, Vancouver. We're fortunate, those are the 2 types of assets we own. But we've never seen pricing stronger for either one of those than what we're seeing today.

[Pammi Bir, Former Analyst]

Got it. Maybe just last one for me. It sounds like from a leasing standpoint, the velocity -- it does seem quite strong and occupancy is, I think, maybe a bit above your long-term average. The leasing spreads are coming in pretty good. So when you look at it, how much further upside do you see from an occupancy standpoint? And then, just on the flip side, what might give you some concern on the outlook?

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

Well, I mean, we view full occupancy somewhere between, call it, 95% and 96.5%. The highest occupancy level the company has ever achieved is 96.9%, which was achieved in Q4 of 2019, so just before the pandemic. But we have a dynamic portfolio where we are obsessed with merchandising mix. And so, we're very proactive in where we have the opportunity to turn over space to maximize the type of tenant offering that we can provide and maximize rental rates. And so, inherently, we always have some portion of the portfolio that we're transitioning, which is why we view full occupancy somewhere in that, call it, 95% to 96% range. We don't really see ourselves bearing outside of that range based on what we see going forward. And sorry, Pam, there was another element to your question. I just want to make sure we answer it if we hadn't.

[Pammi Bir, Former Analyst]

Just the second part was just what might give you some concern or maybe a pause in terms of the outlook?

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

Well, I mean the obvious one is we feel like the pandemic-related restrictions have definitely headed in the right direction. But the obvious concern is any type of reversal on that front. That would be the main concern. Otherwise, we're feeling very good about what's going on at the property level.

[Pammi Bir, Former Analyst]

So you haven't really -- I guess, maybe one extension to that is you haven't really seen like perhaps change in, I guess, demand from some of the small shop tenants or some of the independents?

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

We have seen a change. We've seen demand accelerate in the last few months, especially in Ontario and Toronto specifically.

[Pammi Bir, Former Analyst]

Okay. Thanks very much. I'll turn it back.

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

Okay. Thank you very much, Pammi.

[Operator]

Our next question, please go ahead.

[Tal Woolley, Research Analyst]

Tal Woolley. Just a couple of quick questions to start up front. For the debentures coming up in 2022 or then maturing in 2022, assuming you'll just be looking to refinance those in the market?

[Neil William Edward Downey, Executive VP of Enterprise Strategies & CFO]

Well, Tal, I think we have a lot of options given the financial flexibility within the capital structure, our liquidity and the fact that we continue to have proceeds coming in the door from asset sales in Q4 and beyond. So we're evaluating our options, and we'll address those in due course.

[Tal Woolley, Research Analyst]

Okay. And then, Jordan, I'm just wondering if you can talk a little bit, there's some real motive behind this. I'm just trying to get a sense of what's going on in the ground. Any real geographic differences you're noticing at all in terms of leasing activity across the country because we haven't been able to travel much these days. So it's hard to know what's going on everywhere else.

[Jordan Robins, Executive VP & COO]

Yes. It's a good question, Tal. Generally speaking, we don't see much geographic diversity. I would say Vancouver perhaps has been strongest because it's been least impacted by lock-downs in particular. But generally speaking, otherwise, from a retail perspective, the markets appear to continue to be strong and tend to operate similarly.

[Tal Woolley, Research Analyst]

Okay. And I just wanted to wrap it up with a few questions of zoning. I noticed like between Q2 and Q3, your zoned entitlements went up in your 2019 vintage applications. I think maybe that's Yonge & Roselawn. Do I have that correct or was there some other because I think it's up about 600,000 square feet?

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

Yes. It wasn't Yonge and Roselawn. It may have been Christie, where we secured more entitlements than we anticipated and included in that chart. But leave that with us, Tal. We'll confirm offline and get back to you.

[Tal Woolley, Research Analyst]

Okay. And then, if we're just looking at the next 12, 18 months, what are some of the critical zoning decisions you would expect to see on properties? And any other -- we've talked before about transit decisions, stuff like that. If you can just give us an idea of what we should be expecting to see over the next while?

[Jordan Robins, Executive VP & COO]

Probably the next significant one to come through would in fact be Roselawn, which we expect in the coming, I'll say, months. It's for all intensive purposes done, but it has to be finalized. And the next tranche will be coming through, I would suggest in the next 12 to probably 12 to 15 months. And that is a tranche we can talk about maybe next call.

[Tal Woolley, Research Analyst]

Okay. And just lastly, obviously, inclusionary zoning has become kind of a hot topic at City Council of late. What are your thoughts sort of with what the city is proposing and how you think it might impact to your planning going forward?

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

So look, inclusionary zoning doesn't work. I mean, that's our view. That's -- we feel that's been proven. Ultimately, the cost of any diminution of value in proportions of the site get passed on to the balance of the site, Jordy anything else to add?

[Jordan Robins, Executive VP & COO]

No. And I think that's the frustrating part is the city's view is that they can be treated distinctly. And the fact is, to Adam's point, it has an overarching impact. Ultimately, our position is what we have to figure out a way to increase supply in order to address affordability in particular.

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

Yes. And we know Realpac is working closely with various governments to articulate that fact. Our views black and white supply is the only thing that contributes to the affordability issue we have. It makes no sense that from the time we have a site that's designated for the intended use that we have, it's plus or minus 7 to 8 years before someone is going to live in that. That's not acceptable given the dynamic in our large cities, but especially Toronto.But look, whatever the government ultimately decides, obviously, we will work within that framework. And Realpac is very active trying to articulate the views of the industry and hopes that whatever policies do get implemented, achieve their intended purpose. Our view is inclusionary zoning will not do that.

[Tal Woolley, Research Analyst]

And you've talked a bit about the density market -- or sorry, the market for potential development right now, it's been pretty strong. And I'm wondering, like to what extent and when you're having these conversations or hearing about what's going on, to what extent is the legislation like a factor right now in the decisions that people are making?

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

Well, look, it's always a factor that we have to consider. We try and consider all factors that could influence either demand of what we have or the value of what we have. And so, government policy, especially around housing is something we pay close attention to for that very reason. But it's one of many factors that we consider in making those types of decisions.

[Operator]

Last question, please go ahead.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Dean Wilkinson. Sorry for taking you over the hour. Adam, you're in the unique position where you can sell assets at a premium, perhaps a substantial premium to NAV. And you could go into the market and buy your equity at a 25% discount. How are you guys thinking about the potential of that accretion dynamic?

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

Yes. Well, we're thinking about it. That's for sure. Speaking of the discount, the operational and transaction activity that we've achieved, especially this year has been better than we expected. And when you look at what the business has done and the value that's been created just this year alone, our unit price is disappointing to say the least. But we're staying focused on executing our plan, the outsized disconnect between the intrinsic value of our company or the NAV and the stock price is a top priority for management and the Board.One thing that we're cognizant of when it comes to selling a material amount of assets to do that is just there's other implications there are implications on the scale and platform and other things that really weigh into that fact, which is why we haven't done that to date.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. Good. That's all I had.

[Operator]

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

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

Okay. Thank you very much. And we'd just like to take this opportunity to thank everyone for taking the time today and for their interest in FCR. Have a great afternoon. Bye-bye.

[Operator]

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