First Capital Real Estate Investment Trust

TSX:FCR.UN

Earnings Call Analysis

FCR's Q3 Earnings Call Highlights

In Q3, First Capital REIT (FCR) maintained strong fundamentals amid economic headwinds. Occupancy stood high at 96%, and FCR leased all vacant space at One Bloor East, including a new flagship Nike store. The quarter saw nearly $1 million in severance costs with a payback of less than a year, part of FCR's continued efforts in proactive expense management. Impressively, asset disposals totaled $570 million, exceeding initial valuations. Despite a 75 basis points hike in long bond yields impacting valuations, the optimization plan assets experienced a modest fair value increase of $12 million. Additionally, funds from operations (FFO) increased by $2 million compared to the previous year, reaching $68.6 million. Moving forward, the guidance for 2024 includes FFO per unit at $1.20 plus, aiming for a 4% compound annual growth rate (CAGR).

Enhanced Financial Performance Showing Resilience Amid Economic Changes

In their recent financial discourse, the company outlined notable achievements in their third quarter, which investors should find reassuring. Funds from operations (FFO) saw an uplift to $68.6 million, a $2 million increase compared to the same quarter in the previous year, with FFO per unit climbing by 4% to reach $0.32 for the quarter. This increment signifies a healthy profitability trajectory, demonstrating that the company is adept at maintaining its financial stability amidst broader economic shifts.

Robust Net Operating Income Despite Disposal Impact

The company's net operating income (NOI) stood at $109.3 million, mirroring the previous year's performance, and rose by $2.5 million from the preceding quarter. This stability in NOI comes despite the $4.8 million year-over-year reduction due to property disposals, indicating the company's capacity to balance asset sales with operational earnings. Additionally, the average in-place portfolio rental rate per square foot ascended to $23.08, which, coupled with the reported bad debt recovery, reflects the robustness of the company's income-generating assets.

Debt Management and Liquidity Reflects a Strong Balance Sheet

From a balance sheet perspective, the company has executed judicious debt management, with net debt decreasing to $4.14 billion, down $50 million over the quarter and $300 million from the previous year. This debt reduction and the slight increase in EBITDA coalesced to trim down the net debt-to-EBITDA multiple from 10.9x to 10.1x. The company's liquidity also remains formidable, with $6 billion of unencumbered assets and nearly $1 billion of available liquidity, marking a sound financial standing that promises resilience amid fluctuating economic tides.

Shifting Real Estate Dynamics and Strategic Dispositions

The company spoke to the secular changes in real estate that are reshaping its business outlook. Notably, the escalation in replacement costs has been roughly 50% above the market value of necessity-based retail space, hinting at a muted new supply outlook. Tenant sales and margin sustainability have also painted a positive picture, improving tenants' rent-paying capabilities. The strong Canadian population growth bolsters the demand for the company's retail properties, providing further impetus for rental revenue increases. Currently, pivotal vacant spaces, such as the former Nordstrom space at One Bloor East, are being transformed into lucrative leasing opportunities with higher market rents, which were set almost a decade ago, aiding in revenue growth.

Commitment to Environmental and Social Responsibility

Sustainability and societal welfare remain integral to the company's ethos. This corporate responsibility was underscored by the company's achievement of GRESB Sector Leader status, further bolstering its reputation in the investment community. Additionally, the company's charitable initiatives, particularly its significant fundraising efforts for Kids Help Phone, which raised over $220,000 recently, showcases its dedication to community support.

Conclusion

The company concludes on a confident stride, sharing their optimism and plans to navigate future macroeconomic conditions like interest rates and market fluctuations. With effective expense management, a proactive stance on optimizing real estate assets, and a commendable social footprint, the company stands poised to remain a resilient player in the real estate sector as it looks towards the future.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon. Thank you for standing by. Welcome to the First Capital REIT Q3 Conference Call. [Operator Instructions]I would now like to turn the conference over to Alison. Please proceed with your presentation.

[Alison Harnick, executive]

Thank you, and good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today's call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements.A summary of these underlying assumptions, risks and uncertainties is contained in our securities filings, including our Q3 MD&A, our MD&A for the year ended December 31, 2022, and our current AIF, which are available on SEDAR and our website. These forward-looking statements are made as of today's date, and except as required by securities law, we undertake no obligation to publicly update or revise any such statements.During today's call, we will also be referencing certain financial measures that are non-IFRS measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the REIT's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this conference call.I'll now turn the call over to Adam.

[Adam Paul, executive]

Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us for our conference call. Overall, Q3 was a good quarter. Neil will provide details on the key metrics while my remarks will speak to some of the things we are seeing in the business that will have more of an impact on our future.Earlier this month, we held an internal conference for our real estate services team, which is comprised of our property operations and leasing personnel. To kick off the conference, I had the opportunity to lead a discussion on the secular change underway that is impacting the fundamentals for the space we own.Starting with inflation, both with respect to replacement costs as well as tenant sales. Replacement costs have escalated significantly over the past few years. To date, we estimate they are roughly 50% higher than the market value of the necessity-based retail space FCR owns. This dynamic will continue to keep new supply effectively muted as has been the case for several years now. The space our tenants occupy is more valuable today than ever before on a replacement cost basis.Secondly, FCR's tenant sales have been positively impacted by inflation. Just as important, margins have generally been protected across our tenant categories. Higher sales with stable margins means that tenant rent-paying capability has improved.Next, we discuss Canada's robust population growth. The neighborhoods in which FCR's properties are located continue to attract a significant share of this growth. The lack of supply, coupled with higher population, continues to decrease the retail square footage per capita in our trade areas.Now, to bring this all together, inflation has increased replacement costs and increased tenant sales, while margins have largely been protected. This significantly improves FCR's tenants' rent-paying capability, even as rental rates rise. The population of the trade areas we operate are also growing significantly, which increases the customer base of our tenants. And next to no new supply has or will be created absent exceptional rental rate growth.These factors underpin the fundamentals of the grocery-anchored necessity-based retail properties we own, and that is a good segue into our third quarter results. Occupancy remains in the range of full, at 96%, with some positively impactful vacant spaces to come online in the near future. Some of those are at our One Bloor East property.Last quarter, we unexpectedly got back 40,000 square feet of space previously occupied by Nordstrom Rack. I'm pleased to share that we have entered into a long-term lease with Altea for an upscale wellness and fitness concept that is very well suited for the area. They will occupy the entire second level of the former Nordstrom space with a ground floor entrance totaling 32,000 square feet. We have strong demand for the remaining 8,000 square feet of the former Nordstrom space, which is located on the ground floor at the hard corner of Yonge and Bloor. We expect to share good news on that space soon.It's clear at this point current market rents are significantly higher than the Nordstrom rent set a decade ago. Rounding up One Bloor East, beyond the former Nordstrom space the property had 20,000 square feet of available space, all of which fronts Bloor Street. We're thrilled to announce that all of this space has been leased to 2 tenants, the larger being Nike for a flagship location.We're making great progress on leasing opportunities in other properties as well. Consistent with the strong fundamentals I touched on, our leasing pipeline is deep. This strength in leasing will continue to benefit FCR as we navigate through some of the macro headwinds that are out of our control, such as interest rates. We continue to take a proactive approach to expense management while maintaining a high-performance culture. This is not new to us.Our past includes a major restructuring that reduced our headcount by 20%. Over time, we've also rightsized our executive leadership team, reducing it from 9 to 6. And there are many other expense management initiatives we've undertaken. During the third quarter, we incurred nearly $1 million of severance costs. These costs will have a payback period of less than 1 year.Our optimization plan continues to progress well and remains well on track. Jordan will provide some color on our recent transactions, both during and subsequent to the quarter. In total, we're now at $570 million of dispositions under the plan at an average yield of less than 3% and an average premium to pre-mark IFRS carrying values equal to 14%.This progress is a result of the outstanding work and incredible execution by our investment team in a market that's become less constructive since we started a year ago, but they continue to find the right buyers for each asset, which has been a lot of work, but has resulted in numerous transactions at very strong pricing.We continue to surface unrecognized value that we have created in numerous low-yielding assets in which we have seen our short- to medium-term value-enhancing goals achieved. And we have another wave of properties in which our rezoning have or will be imminently secured and will contribute to a future batch of asset sales under our plan.These include our Staples Lougheed property in Burnaby and 801 York Mills in Toronto among numerous others. The sales of the properties under our plan have the rare and impactful effect of improving both our balance sheet and our earnings or FFO per unit at the same time. This is a key differentiator for FCR, particularly in an environment of higher interest rates. It's also a testament to the expertise and hard work of our development team in continuing to successfully build and execute our entitlements program.Speaking of higher interest rates. The significant increase in long bond yields by approximately 75 basis points during the quarter is not helpful for stable IPP values. But it is true that transaction volumes remain very limited, but that does not mean IFRS cap rates should be unaffected. Accordingly and responsibly in our view, we adjusted our average in-place cap rate for IPP assets by 30 basis points. Neil will cover this further in his remarks.I'll importantly point out, though, that the assets in our optimization plan are generally not stable IPP properties. And therefore, these were not subject to any appreciable fair value markdowns. In fact, the assets that remain in the optimization plan saw a modest net fair value increase of $12 million during the quarter.Turning to our environmental and climate-related activities. During the quarter, we received GRESB Sector Leader status in the development benchmark in the North American retail peer group with a score of 90. And we ranked second in the GRESB Standing Investments Benchmark in the listed Canadian Retail Centers peer group with a score of 82.And to close my remarks today, on the social side, I am pleased to note that the FCR Thriving Neighbourhoods Foundation team raised more than $220,000 for Kids Help Phone through the foundation's second annual Commercial Real Estate Softball Classic held in September. This brings our total fundraising for Kids Help Phone to over $400,000. I'd like to thank all of the FCR team members and our real estate friends and partners for coming together to support such an important cause.And with that, I will now pass it over to Neil.

[Neil Downey, executive]

Thank you, Adam, and good afternoon to all of our call participants. As is customary, we have an accompanying conference call presentation available on our website at fcr.ca. In my prepared remarks today, I will make several references to that presentation. Overall, we're very pleased with the underlying operating and financial performance of the business again through the third quarter. Both were in line to slightly better than our internal expectations.Referencing Slide 6 of the presentation, Q3 2023 funds from operations of $68.6 million increased by $2 million year-over-year. FFO per unit was $0.32 for the quarter. This was an increase of 4% from the $0.31 earned in the third quarter of 2022. Similarly, excluding other gains, losses and expense items, quarterly FFO per unit also increased by 4%.Third quarter results from last year included net revenue and expense items that elevated FFO by nearly $0.01 per unit. Similarly, the Q3 2023 results included items that benefited FFO to the tune of $4 million or approximately $0.02 per unit. I'll touch on these in a moment.So let's walk through the components of FFO. To begin with, Q3 2023 net operating income of $109.3 million was in line with the $109.5 million in the prior year and an increased by $2.5 million sequentially from the second quarter. Lost NOI related to property dispositions was $4.8 million year-over-year and $1.9 million quarter-over-quarter.Q3 NOI included a bad debt recovery of $1.2 million. More than 80% of this related to a specific tenant where we reached an agreement with respect to rent payment. This recovery did not impact the same-property statistics, where growth was 1.2% year-over-year or 1.4%, excluding bad debt expense or recovery. In this regard, the organic growth rate for the quarter was lower than our more normal annual expectations. This was mostly due to the 40,000 square feet of vacancy at One Bloor [ East ] caused by Nordstrom's early departure in June. Carrying this sizable and notably high-cost vacancy hit Q3 organic growth by approximately 140 basis points.Moving further down the FFO statement. Q3 interest and other income was $9.5 million. This included $3.8 million related to a legal settlement for foregone rent. Excluding the settlement income, the year-over-year and quarter-over-quarter increases were less than $1 million, and they were principally related to higher interest income on recent cash balances.Corporate expenses were $9.9 million in Q3 2023. This was similar to the prior quarter and $1 million lower year-over-year. As Adam noted, Q3 corporate expenses included $900,000 of employee severance and restructuring costs incurred as part of our ongoing efforts to ingrain a performance-oriented culture while proactively managing expenses. The prior year figure included similar charges totaling approximately $1.5 million.And finally, and this is really just a reminder for those who look at year-over-year growth rates, abandoned transaction costs in the third quarter of 2022 included a $3 million purchase deposit taken to income after a planned property sale did not close.Referencing Slides 9 and 10, FCR's operating performance metrics were solid and leasing, in particular, was strong. The portfolio rounded at September 30 with an occupancy of 95.9%. This was unchanged from Q2 as tenant openings were equivalent to closures. Occupancy was up 20 basis points year-over-year, and that's notwithstanding the fact that the portfolio continues to carry 60 to 70 basis points of vacancy related to a former 91,000 square foot Walmart store in Edmonton which just closed in June and the former Nordstrom space I just mentioned.Third quarter renewal leasing volume was 477,000 square feet, generally consistent with the prior quarter. Lease renewal spreads in the quarter were affected at a strong average increase of 12.4%. And with these conditions at hand, the September 30 average in-place portfolio rental rate per square foot reached $23.08, that's a new all-time high.Slides 11 and 12 provide distribution payout ratio metrics. I'd say these are mostly for informational purposes and they show how we view and measure the cash generation and sustaining capital expenditure requirements of the business. For calendar 2023, we continue to expect approximately $40 million of sustaining CapEx, including leasing costs.Advancing to Slide 13, the REIT's net asset value per unit at September 30 was $21.26. This represents a decline of 8% from June 30th's $23.13. In this regard, the overarching theme across financial markets through the third quarter was a sizable increase in bond yields. And as a specific case in point, the 10-year Government of Canada bond yield increased by 75 basis points from June to September, ending the quarter at 4.03%. That's a 22% increase in interest rates. And the effects on our property valuation models were broad-based in the form of increasing cap rates and discount rates.In aggregate, yield adjustments were made to more than 70% of the portfolio by value and the portfolio's weighted average cap rate increased by 30 basis points during the quarter, ending at 5.6%. On a stand-alone basis, these yield changes resulted in a Q3 net fair value decrease of $457 million. Other factors provided for net fair value increases of $24 million, and hence, the overall net fair value decrease for the quarter was $433 million or approximately $2 per unit.Providing an update on capital deployment as summarized on Slide 14. We invested $34 million in Q3 into future income-producing properties and residential developments and $12 million into portfolio CapEx and leasing costs. As we look forward for the balance of this year, we currently anticipate calendar 2023 development CapEx of approximately $140 million.Finishing up with Slides 15 through 17, you will find details related to key financials, debt metrics and liquidity. There's 3 key points of note. Firstly, Q3 net debt was $4.14 billion. This is a decline of more than $50 million during the quarter and more than $300 million year-over-year.Secondly, FCR's trailing 4-quarter EBITDA increased slightly. And in combination with the lower net debt, the net debt-to-EBITDA multiple decreased to 10.1x from 10.9x 1 year ago. Trailing EBITDA continues to bear the burden of activist-related costs from earlier this year, and we won't fully lap those until the first quarter of 2024. Ex these costs, net debt-to-EBITDA was 9.9x at September 30.And thirdly, I'd state that FCR's liquidity and financial strength simply remains excellent. At quarter end, the REIT had $6 billion of unencumbered assets and nearly $1 billion of available liquidity comprised of $800 million of revolving credit facilities that were completely undrawn and $193 million of cash.Now subsequent to quarter end, in late October specifically, there were several important financing events. Firstly, FCR's $250 million unsecured revolving credit facility reached its October 31 maturity date. Prior to the maturity, we extended and essentially divided that credit into 2 pieces, through a new $100 million unsecured revolving credit facility that matures in April of 2025 and through a new $150 million BA-based term loan.We entered into interest rate swaps to fix the cost on the term loan for 5 years at an all-in rate of just under 6%. In round figures, this was 100 basis points inside the indicated funding costs of placing a new 5-year senior unsecured debenture. Also on this October 30 maturity date, we repaid our $300 million Series Q senior unsecured debentures. Funds for the repayment were provided by the new term loan that I just mentioned, with the balance drawn from FCR's sizable cash balances, which had been accumulating due to asset dispositions under the optimization plan.And finally, late in the quarter, we also upsized an existing $100 million revolving credit facility to $150 million of availability. In conjunction with that upsizing, we extended the maturity date by 1 year to August 31, 2025. So if you take all of those October financing events into account, we addressed a notable debt maturity profile, we extend the term and we maintain a pro forma liquidity posture of approximately $750 million. And for context, that liquidity roughly equals the total value of all of FCR's debt maturities through the end of the first quarter of 2025.I'll now turn the session to Jordan Robins to provide some commentary on our optimization plan and our entitlements program.

[Jordan Robins, executive]

Thanks, Neil, and good afternoon. Today, I'm going to provide you with a brief update on our enhanced capital allocation and portfolio optimization plan and the advancements we've made on our entitlement last week. This past quarter, we sold $114 million of previously disposed assets. Subsequently, in October, we entered into binding agreements to sell an additional $58 million of income producing and development assets, bringing the total announced sales under the plan to $570 million. The aggregate proceeds from all of these sales represent a meaningful premium to our pre-mark IFRS NAV.Included amongst the assets for which we have a binding agreement to sell in Sterling Retail. This property is a single-tenant 30,000 square foot space. It is leased to Save-On-Foods, who operate a store on the ground floor of a residential condominium located in the Carousel neighborhood in Vancouver. The purchaser waived all of their conditions in October. And on closing, at the end of this month, they will settle the purchase on an all-cash basis.Subsequent to Q3, we also entered into an unconditional agreement with Woodbourne's newly formed Build to Own Fund. We've agreed to sell them a further 25% interest in our Yonge & Roselawn development at a price slightly higher than our original sale price of $225 a foot. You'll recall in December of 2022, we had sold an initial 25% interest to Bouwinvest, for whom Woodbourne acts as custody.Our objective is to ultimately sell down our remaining interest to 25% while retaining our co-role as development manager. Since the initial 25% sale, we made a meaningful progress with respect to the development of the property. The historic facade retention and demolition activities have been completed and a majority of the 149 geothermal boreholes have been drilled and tested. Shoring has commenced and site plan approval is imminent. We have determined that 3 additional stories can be added to each tower, resulting in approximately 50,000 square feet of incremental gross floor area. Initial discussions with city staff with respect to this additional density have been extremely positive, and we intend on filing a minor variance application in the next 30 days.To the extent we do secure this additional density, our agreement for both the Woodbourne and the Bouwinvest sale contemplate an increase to the purchase price to reflect this additional density.We've continued to advance our entitlement [ lap ] as well. To date, we've submitted for entitlements on over 17.7 million square feet of incremental density, representing 78% of our remaining 22.7 million square foot pipeline.In Q4, we expect to submit applications for an additional 1 million square feet of incremental density. In 2023, we have received approvals for 2.2 million square feet, bringing our total approved density to more than 10.7 million square feet. Like the balance of our pipeline, the density that was approved in 2023 is all situated in high demand, transit-oriented urban neighborhoods. These locations include Place Anjou on Island in Montreal, [indiscernible] in Vancouver, Liberty Village in Toronto and the 3-story office building that we own located at the southeast corner of York Mills' Road in Leslie Street in Toronto.As part of our 2-year optimization plan, we've identified 6 million square feet and approximately $400 million of value that we expect to generate from the sale of entitled density. In addition to what we've announced, we are in discussions with potential purchasers on a number of sites and look forward to updating you on these prospective sales as they progress.And with that, operator, we can now open it up for questions.

[Operator]

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

[Lorne Kalmar, analyst]

Maybe just starting off with the One Bloor, Obviously, a lot of good progress there. I was wondering if you could just clarify when exactly you expect NOI to come on from the Altea lease and then also from the Nike and, I guess, the other lease, the remaining lease there of the 20,000 square feet?

[Adam Paul, executive]

I hope you're in a different time zone given the good morning comment, but -- so we expect a turnover possession to both retailers sometime early 2024, and we expect them to be open and rent pay ideally end of '24, and in one case, maybe early '25.

[Lorne Kalmar, analyst]

Okay. And then I know that's not been exactly probably the easiest asset since it's kind of come on stream to lease. And I was just sort of wondering, did you guys have to make any concessions on TIs or anything? Or the fundamentals are so robust that things that were difficult are no longer difficult?

[Adam Paul, executive]

Yes. No, you're right. The asset has had a number of leasing surprises since we've owned it. But we felt that --look, we're at the busiest train station in the country, the busiest intersection. We had a view on market rents. And that's one of the reasons that it's taken this long. So no, there was no compromise on rental rates nor deal cost for that matter.

[Lorne Kalmar, analyst]

Okay. And then -- I guess, you said previously that you expected the rates to be above what Nordstrom was paying. I'm assuming that has materialized?

[Adam Paul, executive]

Yes, that has. And we're expecting and hoping to provide more detail in that context, but it's not going to be today really for 2 reasons. The first is that we're in the midst of finalizing the last piece of space, which is the 8,000 feet. And second, as many of the people on the call know and people in the industry know, Nordstrom has made a settlement offer to landlords that we're also working through. So we have a couple of important negotiations underway. And so we just don't want to prejudice our situation opposite -- or in those negotiations.So the rates have definitely been higher, not surprising given the Nordstrom rents were set a decade ago. But it is a bit of an anomaly of the FCR portfolio. As we disclosed last quarter, the average rent in the FCR portfolio is about 1/4 of what Nordstrom was paying. And so we just didn't have the same finger on the pulse that we would in spaces that we lease on a regular basis or certainly more regular basis.But certainly proven to be the case that, that intersection and that neighborhood is a wonderful neighborhood and demand has clearly deepened over the last little while. And that's coming through in not only the quality of the tenants, but also the financial terms of the leases, including rent.

[Lorne Kalmar, analyst]

Okay. And then just last one for me. As you mentioned, the rents are kind of around $23. Where do you think rents need to get to, to make -- we're to the point where you start getting concerned about new supply starting to come on stream?

[Adam Paul, executive]

There are 2 barriers to new supply today. The one you're referencing is financial. The second, which has been around longer is just physical barriers to entry. Look, if you analyze the trader is that our properties are situated, you don't see greenfield sites. So that makes it more challenging. But if we're talking about strictly the financial barrier to entry for new supply, I mentioned in my opening remarks that replacement costs today are roughly 50% higher than the market value for space.That doesn't mean per se that market rents have to increase by 50% because in general, the in-place rent in our portfolio is below market. So it's somewhere below 50%, but it's not meaningfully below that. So the bottom line is rents have to move by what I described as an exceptional amount to really facilitate the pro forma working for new supply. Then the second challenge would be actually finding sites to build these types of properties.

[Operator]

The next question is from Matt Kornack from National Bank Financial.

[Matt Kornack, analyst]

Don't expect anything spectacular this early on in my recoverage of the name. But just with regards to One Bloor East, I remember at the time when you acquired the asset, it was stated that the condo developer had built it with maybe not the most foresight to what retailers would want. Have you during kind of this retenanting process, been able to optimize kind of the functionality of that space given the market?

[Adam Paul, executive]

Well, welcome back, Matt, to our account. We have. I mean, we -- there are certain things that we were able to change and there are certain things that we were not. And some of it is not big a deal. Some of it that we weren't able to change related to the demisability of space and ultimately, what the optionality was in terms of whether you put 1 tenant or multiple tenants in. But the bottom line is the space works, it's functional. It has tremendous presence from either Yonge or Bloor.And there's a lot going on at that intersection and other properties that we think will just strengthen it going forward, whether it's the Mizrahi development, we don't know who will end up in that space, but it's a spectacular space at the corner. What Kings St. is doing a kitty corner to us and redeveloping that with a flagship lululemon is the anchor, and we expect something is going to happen to the fourth quarter as well. So short answer is, yes, we were able to make some changes. It certainly helped.We think that the tenant mix that we've got secured now is more solid from a long-term basis. We had, believe it or not, in hindsight, some tenants that didn't gravitate to the Nordstrom Rack as a cotenancy. And so their departure actually, I think helped get some of these additional deals done at least on terms that we may not have been able to achieve. So yes, we have made some changes over time.

[Matt Kornack, analyst]

And would these new leases contemplate kind of percentage rent clauses as well? Or are they just straight rental deals?

[Adam Paul, executive]

There's one of them that has, we would describe, a rent that's set at the greater of low end of market and a percentage of sales.

[Matt Kornack, analyst]

Okay. And then just quickly, Neil, I appreciate the clarification with regards to the recovery and not being in same-property NOI figures. But am I correct to understand that it is in the total NOI and then also it does funnel down to FFO per unit. So if we wanted to tenants get to a stripped out figure, we should take that out of those 2 metrics?

[Neil Downey, executive]

That's correct.

[Operator]

The next question is from Sam Damiani from TD Cowen.

[Sam Damiani, analyst]

First question, I guess, for you, Adam, just on the optimization plan with the rise in bond yields over the last year and a bit, do you still see the same targets as being appropriate. In other words, something less than 10x debt to EBITDA and less than $4 billion of debt? Or do you feel the need to maybe tighten that up or be a little more specific given the new interest rate environment that we fire yourselves in?

[Adam Paul, executive]

Yes. It's a very good question. On the first time we've been asked it. Fortunately, we're tracking ahead of plan on our debt-to-EBITDA target reduction. If you carve out the activist cost, we're now below 10x and we plan to make further progress. We continue to notch down our total debt. We're now at $4.1 billion. The short answer, Sam, is absolutely, we expect to achieve the objectives we laid out. We continue to strongly believe we remain well on track. And the moment that we feel like we may fall short of those targets, we feel that would be material information. We make a statement to the market as a whole. That is absolutely not the case today and not something we're contemplating today.

[Sam Damiani, analyst]

So I guess just to be, I guess, clear, what I was asking is, given the higher interest rates we find ourselves in, is it appropriate to set a lower leverage target than you had said a year ago?

[Adam Paul, executive]

Okay. So I apologize for misunderstanding the question. And it's a good question. We felt like the targets we had set a year ago were quite ambitious within the 2-year time frame. And so we remain on track with that. We're not even halfway through in terms of -- we said this will take us through the end of calendar 2024. I don't think it should be a fair assumption to assume barring any material changes that we would expect to stop at that point given the depth of the density pipeline, the entitlement program we've got, I foresee us selling density for many, many years to come.And then there's a capital allocation decision to make. Our expectation at this point is sometime in the beginning part of the first half of in 2024. We expect more progress will be made. We'll be nearing or at least have clear visibility to the end of that time line measured in months, and we will come out with what our vision is for the FCR business, our balance sheet, et cetera, at that time. And when we do that, that would be the time that we've been talking about metrics beyond 2020 for what we think is achievable and what we think is the best thing for our investors.

[Sam Damiani, analyst]

And last one for me is just on kind of more leading indicators. I believe you're participating in the ICSC meetings recently. Is there any sort of tenants on your watch list that maybe weren't there a quarter ago? Any change in tone in your leasing discussions that give us a hint as to what sort of impact maybe a pending economic slowdown might be having on the business?

[Adam Paul, executive]

Yes. We had a very busy ICSC. And I can tell you today, the volume and number of lease transactions, square footage under negotiation is the deepest that's ever been for our company. And so we see no slowdown on that front. Look, in terms of tenants on our watch list, yes, there has been one that's popped up as I believe you know, we've got a small WeWork location in Liberty Village. There's been lots of press around them in the last 24 hours.So certainly, based on that press, they would remain on our watch list. It's a space that we feel like there would be good demand for. Keep in mind, it was designed in this retail space. We ultimately lease it to them, but we've already had inquiries and not just in the last 24 hours, but the last couple of months from, we'll call it, other co-working companies, but we also have flexibility in the event we do get the speed back to put a retail use in.It would be premature at this stage to comment any further, given we don't know what happens with the Canadian business. And what we do know is the space is fully built out and it's had a high utilization rate, and it was a very busy location, I think is why we've been approached by our coworking concepts. But at this point, we don't really have much to add other than them, no, there's no one else in our watch list today.

[Operator]

The next question is from Mark Rothschild from Canaccord Genuity.

[Mark Rothschild, analyst]

Kind of following up on some of what you've been discussing maybe 2 parts just in regards to the move in interest rates, is this impacted in any way the pace or the pricing that you expect on your asset sales? And maybe just a second part of that, with One Bloor now closer to stabilized. Is this an asset that strategically you want to long term? Or is this a type of asset that you think you might just be able to get a good price for and sell?

[Adam Paul, executive]

Yes. Thank you very much, Mark, for both questions. On the first one, again, the assets we're selling are not the stable grocery-anchored multi-tenant retail properties that comprise the majority of our business. And so we've now gone through over $0.5 billion of dispositions. The average yield in place is less than 3%. So even at the early stages of interest rates rising or when we started the program, interest rates were a lot higher than the yields in place. That's because these assets have long-term upside.And so people are -- a certain profile of investor is prepared to pay for that upside to date. We see no change. Interest rates have been rising. There was a loss for Q3. As you already mentioned, we had 2 transactions last week that went firm. There was no change to the terms of those, no price reduction in those. One of them was Yonge & Roselawn. That was the second 25% we sold. We can tell you the price is higher on the second 25% than the first 25%.And based on the composition of the remaining assets and particularly their smaller size, I think they average around $20 million each. And most importantly, the active negotiations that we have underway on those assets, we do not expect to start falling behind or having to decrease pricing at this point. Again, while we're funding the right buyer for each asset, all private capital, that's the common denominator. But we do not feel that the market has shifted to the point where it materially will impact our ability to execute.On One Bloor, yes, you make a good point. The property is different than a lot of other assets we own. And so I would say, certainly your commentary warrants consideration around that. And in my response to Sam's comment earlier about our intent and plan to clearly articulate what our vision for FCR is beyond the optimization plan. That will include some commentary around our real estate strategy. And I think at that point, it would be clear where One Bloor fits into it or not. But at this stage, it's a great asset. We still have work to do. We still have value to service, and that's what we're focused on today.

[Mark Rothschild, analyst]

And maybe just one more question in regards to the balance sheet. The term of maturity debt is relatively short. Is that by strategy that you haven't been working to extend it too much? Or would you like to see that longer? Like where would you expect to see that over the next 2 years?

[Adam Paul, executive]

I mean, I'll see if Neil has any further commentary. One thing that's been clear is when you're delevering and paying off debt as it comes due, it's very tough to extend your maturity ladder. In the time period when FCR was not reducing debt, we would typically have a maturing piece of debt and we would term it out like typically 10 years, and then you had a nice 5-year average term to maturity. In recent times, we've been paying off a lot of debt. And so that makes it more challenging.And so over the long term, I would expect a weighted average term to maturity to be higher than it is today. But in the near term, we're going to continue to pay off a meaningful amount of debt, which inherently shortens the latter absent other types of loan extensions. It doesn't possess that that's the reason why if we were refinancing everything that was maturing in short terms, that will be a different story. The fact we're reducing that inherently takes risk out of the whole balance sheet. So anything you want to add. No. Okay. Apparently, that completes the answer, Mark.

[Operator]

We have a question from Mario Saric from Scotiabank.

[Mario Saric, analyst]

Hopefully, you can hear me okay. I just have one really quick one. As part of the optimization plan, you highlighted kind of a target FFO per unit CAGR of about 4% through '24. There was a different interest rate environment than what we're living in today. So is that target still applicable? And then b, if we were to extend that into 2025, given the leasing that you've achieved at One Bloor, is there any reason to think why a similar growth rate could not be achievable in '25?

[Neil Downey, executive]

Mario, it's Neil. So to your point, we've made public statements with respect to 2024 and where we see both our net debt at sub $4 billion. Our net debt-to-EBITDA at sub-10x and our FFO per unit at $1.20 plus, which equates to a 4% CAGR on a multiyear basis. And so we do not give specific point guidance as it relates to FFO or unit growth. We put the framework around the optimization plan on a 2-year basis with those metrics at hand. And I guess what I'd have to say beyond that is the modeling is in your court.

[Operator]

The next question is from Pammi Bir from RBC Capital

[Pammi Bir, analyst]

Just looking at the unit buybacks, that was very quiet this quarter. I'm curious how you're thinking about that at this stage, just given with the asset sales that are still in the pipeline and of course, the rather sizable gap to your reported NAV?

[Neil Downey, executive]

Pammi, it's Neal again. So I noted in my earlier remarks that the interest rate trend through the third quarter was clearly not our friend. And so as rates rose this year into the summer and more poly through the third quarter, we did take a step back from unit repurchases really in order to see how conditions evolve. The fact of the matter is we have a very high degree of sensitivity to making sure that we stay true to our prior statements about prioritizing debt repayment.We continue to see the NCIB as a valuable tool through which to invest on attractive risk-adjusted value basis. But we'll only do that within the context of the framework within the context of a framework of delivering upon those publicly stated debt reduction and credit metric objectives. And we view those objectives as commitments, in fact, commitments to all investors, both bondholders and unitholders.So the fact of the matter is that net asset value per unit is a key value indicator. But we do have a preference, I would say, for strategies that can positively impact FFO and AFFO per unit relative to those that can solely benefit net asset value. So when you have long bond yields rise by 75 basis points, that effectively increases our hurdle rate.And when I talk about hurdle rates, I'm really referring to the interest rate that FCR will incur on its next refinancing or perhaps more aptly, the interest rate that FCR can avoid if it delays or forgo some unit repurchases and instead preserve that capital to be allocated towards debt repayment. So it's a bit of a long answer. The short answer is we paused because rates went up a lot.

[Pammi Bir, analyst]

Just with respect to the write-down that was taken this quarter on the portfolio and mostly, it looks like it was the income portfolio. Just curious how you're thinking about valuations going forward. I think you've been probably more proactive than the group or some of your peers just in taking charges. But just given, again, to your comments around the move in volumes that we have seen what are you may be watching for that might result in further charges ahead or not?

[Adam Paul, executive]

It's a good question. So obviously, one of the things we're looking for are market transactions, and those remain thin, which has allowed some to lean on that as a reason to hold that. We understand that. We don't think, for us, that's a prudent approach. There is a correlation between the cost of debt and cap rates. It's not a perfect correlation, but there is a positive correlation. So when you see a very significant spike in a single quarter by 75 basis points, we say that we can ignore that even though there are trees.And so we adjusted by 30 basis points. That gives you some insight as to our view on correlation between cap rates and interest rates. But we're looking obviously for the cost of debt, and we're looking certainly over the longer term, more importantly, comparable trades, which have remained thin.

[Pammi Bir, analyst]

Just one last one for me. You mentioned the long-term leases at One Bloor that were, I guess, arranged recently with the 3 tenants that you mentioned. Can you just comment on what is sort of the duration of those? Are these 10-year plus maybe with options? And then do these leases incorporate steps?

[Adam Paul, executive]

They all incorporate steps, their 10-year plus.

[Operator]

I would now like to turn the meeting back over to Adam.

[Adam Paul, executive]

Okay. Thank you very much, operator. Thank you, everyone, for attending today. Thank you for all that participated in our analyst Q&A. Have a wonderful afternoon. Thank you.

[Operator]

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