First Capital Real Estate Investment Trust

TSX:FCR.UN

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon. Thank you for standing by. Welcome to the Quarter 3 2024 Conference Call. [Operator Instructions]

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

[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 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, 2024, 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. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the REIT's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this conference call.

I will now turn the call over to Adam.

[Adam Paul, executive]

Okay. Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today for our Q3 conference call. At our Investor Day earlier this year, we outlined the key objectives that we aim to deliver over the long term. They include consistent growth in FFO, net asset value and distributions, each on a per unit basis.

Following another strong quarter, we remain well positioned to deliver on all of them. I say this for 2 reasons. Firstly, the strong fundamentals for grocery-anchored retail real estate. Demand from retailers is robust and rents are rising. The second reason is the continued successful execution of our strategy.

2024 is shaping up to be a year of great progress. Our third quarter results were solid across the board with a major highlight once again being the strength in leasing. Portfolio occupancy and same-property NOI were both up. We also saw strong growth in rental rates on lease renewal spreads. We continue to secure higher contractual growth rates during the renewal terms. Last quarter, we had a number of questions on this topic, so I'm going to take a moment to provide clarity.

Our lease renewal spread metric is calculated by measuring the increase in net rent per square foot from the last year of the expiring term to the first year of the renewal term. In Q3, this spread or lift was 12.4%. Again, this only reflects the lift in rents during the first year of the renewal term. But as I mentioned, in most cases, we have been successful in negotiating contractual rent steps beyond the first year and throughout the renewal term.

Historically, those rent steps typically averaged between 1% to 1.5% per annum. Year-to-date in 2024, those growth rates have more or less doubled. This can be seen through the second lease renewal metric that we measure and provide to our investors. For this metric, we similarly calculate the rent increase from the last year of the expiring term. But instead of measuring the rent increase to year 1 of the renewal term, we use the average net rent throughout the renewal term. In Q3, this number was 16.9%, which is 450 basis points higher than the 12.4% spread calculated only on year 1 rent.

The important takeaway is that both of these renewal spread numbers are tracking higher this year than our long-term average. The positive environment has also helped our leasing team to secure improved cost recoveries in several of the renewed leases. We have also been successful in obtaining qualitative improvements. For example, no build and use restriction relaxations. In short, the leasing environment remains very healthy. We continue to be active on new deals across all of FCR's core tenet categories.

I want to come back to and briefly comment on the objectives our strategy is designed to deliver. Two of the key ones are stability and growth in FFO and NAV. I'll start with FFO or more specifically operating FFO, which is more indicative of FCR's underlying earnings. Year-to-date through the first 3 quarters, the headline OFFO is $1.04 versus $0.87 per unit over the same prior year time frame. This represents year-over-year growth through the first 9 months of the year of 20%.

OFFO is typically or at least is intended to be a normalized earnings metric, but this reported 20% growth rate includes several nonrecurring items. Therefore, it's important to drill a bit deeper in order to understand the trend of the underlying business. Once these adjustments are made, the adjusted OFFO growth rate is approximately 7%.

Now in this regard, there are 4 major adjustments to OFFO as reported. Two items relate to 2023. The first is a $3.8 million legal settlement in FCR's favor. The second is an expense of $6.9 million relating to costs associated with unitholder activism. The net negative impact of these 2 items lowered 2023 OFFO by $3.1 million, which, of course, makes for an easier comp this year and a higher growth rate, all other things being equal.

The remaining 2 items relate to 2024. On a 9-month basis, they have both increased OFFO. The first is a $9.5 million property sale assignment fee reported in Q1. The second is an $11.3 million density bonus included in Q3, which relates to a development property we previously sold. In substance, both of these are better characterized as disposition proceeds. However, the accounting requirements include them in and consequently increase OFFO.

Excluding these 4 items, provides a more trend line view of the underlying business. By doing so, our year-to-date OFFO growth rate changes from 20% to just over 7%. Although it's obviously important for us to provide the headline number for OFFO growth, I don't want to take anything away from the lower adjusted number. So to be clear, we are very pleased with the strong year-to-date adjusted OFFO growth rate of 7%.

At our Investor Day earlier this year, we laid out our 3-year plan for investors. In that plan was a key objective to deliver an OFFO CAGR of at least 3%. That's not to say that we will have greater than 3% OFFO growth every year, but our objective is to average a greater than 3% CAGR over the course of the 3-year time frame. With our Q3 results and after adjusting OFFO growth down to 7%, we remain nicely ahead of our internal plan for the year, and we are also tracking favorably against our 3-year plan.

Moving to net asset value. NAV was relatively flat this quarter at close to $22 per unit. The things that are largely within our control, such as leasing, asset management and dispositions have gone very well this year and have had a positive impact on our NAV. However, IFRS property values have taken a bit of a hit as a result of higher interest rates and their lag effect on the property investment markets. That being said, the Bank of Canada is now clearly in an easing cycle and if interest rates continue to decline as most economists forecast, cap rates could be favorably impacted and consequently, so could our NAV.

On to our current investment activities. We continue to be active on real estate investments in development and dispositions, which Jordie will expand on. Starting with dispositions, we continue to make very good progress in a market that has been far from easy. Since late 2022, we were tracking our results against our optimization plan. Earlier this year, we moved on from our optimization plan and introduced our 3-year objectives at our Investor Day.

In essence, the strategy underpinning the optimization plan was applied to a longer-term plan. However, it's worth noting that with both plans involve the sale of low and no-yielding assets in which our value-enhancing objectives have been achieved. Since we launched this asset divestiture plan 2 years ago, interest rates have increased significantly, which has made execution more difficult. We have made significant progress nonetheless.

[ Closed ] or announced asset sales totaled over $750 million. These had an average yield of less than 3%. We achieved sales prices with an average premium to IFRS values of over 20%. We recognize with hindsight that we were fortunate to start when we did. These dispositions have meaningfully improved both our FFO and our balance sheet. We're pleased to report that we continue to have active deals at various stages of the transaction process, and we remain focused on and committed to premium pricing for the assets we sell.

Year-to-date 2024, we have closed or announced approximately $275 million of dispositions against our full year plan of roughly $400 million. I noted that we're working on new dispositions, some of which we expect to get done in Q4 and some that may occur next year. Given our notable progress year-to-date, and therefore, regardless of where our final tally for the year comes in from here, there will not be a significant variance to our 2024 plan or our 3-year plan.

We continue to be confident that the combination of above-average earnings growth, coupled with an even stronger balance sheet will be a unique and compelling offering across the Canadian REIT landscape. We believe we are well positioned for continued outperformance as it relates to total unitholder returns.

Earlier this year, as part of our 3-year plan, we summarized the opportunity for investors, which includes a unit price target in the low to mid-20s as we continue to execute. We're now 9 months into our 3-year plan. Our actual results so far have been slightly better than the plan. So while still early, I am pleased to say that we are on track to deliver what we presented.

Neil will now expand on our Q3 progress and our results. So Neil, over to you.

[Neil Downey, executive]

Thanks, Adam, and good afternoon, everyone. Consistent with our usual practice, we have a slide deck available on our website at fcr.ca. And in my remarks today, I will make references to that presentation. So let's start with Slide 6 and the quarter. FCR generated operating funds from operations of $76.9 million in the third quarter, an increase of $8 million from the third quarter of 2023. This translated to OFFO per unit of $0.36, an increase of $0.04 year-over-year.

As we cited in this morning's press release and as referenced a few moments ago by Adam, the REIT's Q3 2024 results benefited from a density bonus of $11.3 million related to a previously sold property. This is recorded within interest and other income. Similarly, interest and other income in the third quarter of 2023 benefited from a $3.8 million legal settlement. So if we adjust or otherwise normalize for these 2 amounts, FFO per unit was approximately $0.31 in the third quarter of 2024, up from $0.30 per unit 1 year prior. Underlying the recent results were continued strong growth in same-property NOI, partially offset by higher trust and interest expenses, notwithstanding a slight year-over-year decrease in FCR's total net debt.

So to examine the numbers in more detail, let's turn to the components of FFO starting with net operating income. Q3 total NOI of $112 million increased by nearly $3 million year-over-year. Growth includes an increase of $2.6 million from same-property assets and the net $300,000 increase from all other property categories. Same property NOI, excluding lease termination fees and bad debt expense or recovery was $104 million equaling an increase of $3.8 million or 3.7%. Higher base rents, higher occupancy and improved recoveries were the key drivers.

Across the non-same property categories, net disposition activity accounted for a year-over-year decrease in NOI growth of $500,000. And finally, other nonsame-property NOI of $6.3 million improved by $800,000 year-over-year. The key contributors here were straight-line rents and development and redevelopment coming online.

Moving further down the FFO statements. Q3 interest and other income was $19.1 million, an increase of $9.6 million year-over-year. I've already noted the unusual items contained in both the current and the comparable quarter. So if we exclude these amounts, interest and other income was otherwise $7.9 million in Q3 2024, up from $5.7 million last year and consistent with $7.9 million in Q2 '24.

Both the second and third quarters of this year, FCR held sizable cash balances, these were earning a return of approximately 5%. The high cash balances were the product of capital generated from asset sales and in particular, the $300 million Series C senior unsecured debenture offering that was completed on June 12. So the substantial Q3 debt repayments drawing down reached September 30 cash balances to $67 million from $455 million at June 30 year, you should expect a decline in Q4 interest income.

Q3 corporate expenses were $10.6 million. Sequentially, this was down slightly from $11.4 million in Q2 2024. I know I've stated in the past, and this is true once again, there's always some variability in G&A from quarter-to-quarter due to accruals and the timing of certain expenses and invoices. Overall, we remain on track with our previously stated expectations for 2024, and we remain proactive in expense management.

Interest expense was $43.2 million in Q3. This was 4.5% higher relative to $41.3 million in Q2, and it was about 10% higher year-over-year. The increases are mostly related to higher interest rates gradually working their way through an FCR's debt capital stack.

The timing was also a factor as we had the entire balance of the Series C debentures outstanding during the third quarter, while we repaid the Series R debentures and several mortgages throughout the third quarter. More specifically, the Series R debentures had a $281 million principal balance, an effective interest rate of 4.8%, and they were repaid on August 30. And mortgages on 3 properties having an aggregate loan balance of $61 million at a weighted average interest rate of about 4% were repaid between July 23 and August 1. So in the 9 months results now delivered, and these are summarized for you on Slide 7, specifically, FCR's year-to-date same property NOI growth, again, excluding lease termination fees and bad debts, was 3.3%.

In our July 31 conference call, I noted that we expected 2024 same property NOI growth to be within a range of 2.5% to 3%. This was an improvement from our beginning of the year expectations of 2% to 2.5% growth. As of today, we believe full year same-property NOI growth should meet or exceed 3%. And looking ahead to 2025, we expect FCR's internal growth rate to be higher still, again, for reasons that we've previously discussed.

Slides 8 and 9 cover key operating metrics, some of which Adam already touched upon. So I won't discuss these in any greater detail, but I will note that the general theme through the third quarter was continued and broad strength across the metrics.

Slides 10 and 11 provide distribution payout ratio metrics. These 2 are mostly for informational purposes, and they show how we view and measure the cash generation and sustaining capital requirements of the business. The key takeaways are as follows: during Q3, FCR generated $68 million of adjusted cash flow from operations, bringing the 12-month trailing figure to $243 million. Relative to $183 million of trailing 12 months cash distributions, this equates to an ACFO payout ratio of 75% and retained cash flow of approximately $60 million.

Advancing to Slide 12. FCR's net asset value per unit at September 30 was $21.92. This compares to $21.95 per unit at December 31, 2023, and $21.26, 1 year prior. So on this basis, the REIT's net asset value per unit was little changed through the first 9 months of 2024, while it increased by approximately 3% on a trailing 12-month basis. The 2024 theme has been one of slight improvements in portfolio-level cash flow models and general stability in cap rates and discount rates. In this regard, the Q3 2024 weighted average portfolio cap rate was 5.5%, which is unchanged in each of the last 3 quarters.

During the third quarter, FCR booked a net fair value gain on investment properties totaling $19 million, which is a very small number in aggregate relative to the size of the business. The year-over-year net asset value per unit increase has been driven by several factors, including: one, a net upward mark to contracted sales prices on dispositions, including held-for-sale assets; secondly, valuation increases related to higher cash flow assumptions; thirdly, 4 quarters of retained cash flow; fourthly, a slight decline in the portfolio's weighted average cap rate, and that really occurred back in the fourth quarter of last year. And these have been partially offset by the final factor, which have been net valuation decreases on density and development land.

Turning to an update on capital deployment as summarized on Slide 13. Capital invested into the business during the third quarter totaled $52 million, including $16 million into the operating portfolio and $35 million into development activities. For the year, we expect 2024 development CapEx to be within the $100 million to $115 million range. While all other capital expenditures are likely to be in the $65 million to $70 million range.

Slide 14 summarizes key financing activities this year. During the third quarter, $404 million of debt was repaid, $53 million of this was funded through a 10-year refinancing of a maturing mortgage with a rate actually dropped from 5.3% to 4.9%. The rest of the repayments totaling $351 million were funded mostly with the cash that had been raised through the Series C unsecured debenture offering in June. On a year-to-date basis, FCR has repaid $748 million of debt at a weighted average rate of 5.3% and sourced $708 million of new debt at a weighted average interest rate of 5.5%. In the fourth quarter of this year, FCR has only $11 million of contractual debt maturities added share.

Turning to Slide 15, where I'll make 3 key points on liquidity and leverage. Firstly, relative to the second quarter, FCR's liquidity position has normalized and it remains strong. The September 30 liquidity position of $765 million included $698 million of undrawn capacity on revolving credit facilities and $67 million of cash, but this does compare to that $1.2 billion liquidity position at June 30. Secondly, the REIT unencumbered asset pool remained sizable at more than $6 billion. And thirdly, FCR's net debt-to-EBITDA multiple decreased to 9x at September 30 from 9.2x last quarter and 10.1x, 1 year ago.

The recent improvement in debt to EBITDA has been, if you will, enhanced by several nonrecurring income items over the past 2 quarters. And with the passage of time, we will lap these amounts. So when we think about the trend line for adjusted multiple, our internal analysis pegged in the low to mid-9s at the end of the third quarter and importantly, it remains on track with our standard year-end 2024 objective of a low 9x debt-to-EBITDA multiple.

Finally, for your reference, details related to FCR's debt maturities are provided on Slides 16 and 17. As I mentioned, essentially all of the debt maturities were addressed for this year by the end of August. Now similar to the REIT sector overall, FCR's debt capital structure does continue to face interest rate roll up, particularly over the next 3 years. However, with 5- and 10-year Government of Canada bond yield now in the 3.1% to 3.3% range, coupled with FCR's strong credit spread performance over 2024 in particular, this interest rate rollout is much less acute today than 1 year ago.

Over the course of 2025, FCR had $442 million of maturing mortgages, term loans and senior unsecured debentures. This equates to 11% of the total balances outstanding 2025 maturities carried an average interest rate of 4% and the first maturity is a relatively small one, is a $75 million term loan that matures in April of next year. Overall, FCR is very well positioned to continue to manage and mitigate interest rate roll up, while also extending the term of its debt ladder over time and of course, while also delivering upon the key objectives of the 3-year plan. So this concludes my prepared remarks.

I'm now pleased to turn this session to Jordie for an update on investments, dispositions and other activities.

[Jordan Robins, executive]

Thank you, Neil, and good afternoon. Today, I'm going to provide you with an update on our investment, development and entitlement activities. As Adam had mentioned, we have and we remain very busy with respect to managing our disposition program. We have binding agreements in place for the sale of a number of assets. These include the previously announced 1629 to 1631 Queensway transaction, which you'll recall is a property located in Toronto, subject to a long-term fixed rent lease with Zanchin Automotive Group, who operate Queensway Mercedes-Benz. We also have a binding agreement for the sale of 895 Lawrence Avenue East, a 30,000 square foot unanchored income-producing retail center, also located here in Toronto. These transactions are scheduled to close in Q4 2024 and Q1 2025, respectively.

Regarding new transactions, this past quarter, we entered into a binding agreement to sell our 50% interest in 200 West Esplanade. By way of background, construction on the 75-unit mixed-use rental residential development with approximately 9,000 square feet of retail space commenced in Q1 2022. First occupancy for the building took place in December of '23 and the residential rental component stabilized by the second quarter of 2024. The project has been very successful from a development profit perspective. However, consistent with other residential rental development in North Vancouver, it provides a low yield based on market value.

Given Vancouver's rent-controlled market, the growth profile of 200 Esplanade is also expected to be muted. As a result, we believe we maximize its value for the foreseeable future and do not expect it would significantly contribute to the key objectives we aim to deliver to our investors. Therefore, we're crystallizing our development profit by selling the product, and we'll reinvest the proceeds to generate a higher return on our invested capital. Closing of this transaction is scheduled to occur in the fourth quarter of this year. We are also actively working on several other transactions that are consistent with our strategy.

Turning now to development. We are really pleased with the progress we've made with respect to our redevelopment of Humbertown Shopping Center in Toronto. In Q3, we transferred 23,000 square feet of space in Phase 1 for redevelopment back into IPP. Phase 1 includes 11 retail units, including Humbertown jewelers and Royal Bank, and all but 3 tenants are now in possession. As forecast, average rents in this portion of the center have more or less doubled from the former in-place rents. We have just received permits for Phase 2 and Phase 3 of the project. As part of Phase 2, we will expand the existing grocery store. This next phase will commence in January 2025, so is not to disrupt Loblaws' holiday sales.

Phase 3, which includes a new full format Shoppers Drug Mart and a new Scotiabank amongst other tenants, will commence later in 2025. In total, we expect to invest $49 million in the redevelopment of Humbertown. This investment will deliver very compelling returns for FCR and will meaningfully improve the asset. As many of you know, Humbertown has been an integral part of the fabric of this highly desirable community for decades, our investment will ensure it remains an essential amenity to the neighborhood and a core FCR asset for the next several decades. We have a number of other similar and exciting retail redevelopment in the planning stages and look forward to sharing these schemes with you shortly.

Construction of our 1071 King Street West development project in Liberty Village is also progressing very well. We own 25% of this 298-unit, 225,000 square foot purpose-built residential rental project, which includes 6,000 square feet of at-grade retail space. Geothermal drilling for the project has now been completed and excavation is also nearly complete. The tower crane was just installed this past week. And so we'll see this building come up out of the ground in the months ahead.

Construction and foundation and below-grade structural element is also well underway at our Yonge & Roselawn project. We own 50% of this property and served as its development manager. This project is a 636-unit mixed-use purpose-built residential rental building with 65,000 square feet of retail space. The tower cranes are now installed and 72% of costs have been awarded. We are targeting both of these projects to be net-zero and LEED goal.

With respect to entitlements this past quarter, we were successful in securing approval for 400,000 square feet of residential density at our Morningside Crossing company located at Kingston Road and Lawrence Avenue here in Toronto. Consistent with our entitlement strategy, we invested a little more than our [ sweat ] to rezone a discrete portion of the property that today accommodates just 7,000 square feet of retail space. The economics of replacing this existing retail footprint with 400,000 square feet of residential density are quite compelling.

What's more, our existing shopping center will remain largely intact and will benefit from the increased customer earnings that the new residential density will attract. To date, we've submitted for entitlements on over 16.5 million square feet of incremental density, netting out the density we've already sold. This represents 74% of our 22 million square foot pipeline. This year, we expect to receive approvals for a further 600,000 square feet, and we plan to submit for an additional 1 million square feet of density before the end of the year.

In closing, we continue to make great progress in all areas of our business. It should be clear that we remain focused on our objectives and the delivery of results that reflect our successful execution.

Thanks for your attention and your continued support. And with that, operator, we can now open it up for questions.

[Operator]

[Operator Instructions]. The first question is from Mike Markidis from BMO Market.

[Michael Markidis, analyst]

I know it's early days -- congrats on the strong quarter, first and foremost, but I know it's very early days. The plan was just announced last week, fundamentals are incredibly robust. You've given us your outlook for same-property NOI growth of higher than 3% in 2025. But just curious if you have any preliminary thoughts in terms of what the potential slowdown in population growth might mean for the cadence or the momentum that you have, if it expected to be drive any change at all?

[Adam Paul, executive]

Thanks very much, Mike. Yes, by and large, we expected some slowdown to occur in the pace that we witnessed over the past few years seems a bit unsustainable and that running a shopping center business for the long term, one of the really critical things for the success and health of our shopping centers is the health of the neighborhoods in which they're situated. And if you spend a lot of time in almost any neighborhood today across the country, that's in an urban market like our portfolio, unfortunately, there's clear signs of some of the issues of this population growth. We see it in our operations group through security expenses, we're spending significantly more today than we were 5 years ago on security. And keep in mind, we're not an enclosed mall business, we're an open-air shopping center business.

So for us, we still see population growth. We think it's a more healthy, sustainable level. And importantly, the business we do with our tenants when they make new lease commitments, I mean they're planning a decade plus out from where we are. So I can tell you, we don't believe that there will be any noticeable impact to our performance. And more importantly, we don't think there's any significant impact to the 3-year plan that we laid out earlier this year for our investors.

[Michael Markidis, analyst]

Okay. Great. I think in the preliminary or the opening comments, 7% year-to-date sort of adjusted or normalized growth rate was mentioned as being ahead of the internal plan. What have been the key drivers? I guess what -- first question is, what's the differential? I mean, was it 3? Was it 4? Was it 5 in terms of the delta between current and what you were expecting? And then what would be the preliminary driver of that variance?

[Adam Paul, executive]

Yes. So we've never come out and outline what the internal plan is other than what we said earlier this year, which is over the 3-year period, greater than 3% earnings growth, greater than 3% same property NOI growth. We didn't really give a range because there are a bunch of variables. So all we're going to comment on at this point is we're tracking slightly ahead of our plan, which is good. The main drivers are leasing has gone a little bit better than expected. So some of the leasing we expect to do next year got pulled into this year. The leasing we did do rates came in a little bit better than we expected.

We're starting to get a little bit of a benefit on the debt that we're doing relative to the plan. Even the 2 bond deals we did in the summer we're marginally ahead of the plan. We noted at our Investor Day in February that the assumption throughout the 3-year time frame was that the current market interest rate at that time was held constant through the 3-year plan. So we saw it come down a little bit in the summer. We've seen it come down a little bit further. Neil, am I missing any of the large items?

[Neil Downey, executive]

No, that's it in a nutshell.

[Michael Markidis, analyst]

Okay. Great. Just one more for me before I turn it back. I guess you don't have a lot of debt maturing in the short term. You do have some additional proceeds coming with Queensway and Lawrence and I suspect there will be other like West Esplanade, and I suspect there will be others over the next 6 months. Neil, should we expect your liquidity or cash position to increase over the next few quarters? Or do you have other opportunities to repay debt or retire debt early?

[Neil Downey, executive]

Yes. Mike, so to your point with respect to Q4 dispositions and what you see in the pipeline, we would generally expect that number to be up modestly through the fourth quarter. Q1, we actually tend to be a slight user of working capital simply from a seasonality perspective. And then as I mentioned, we do have not a large debt repayment, but a $75 million debt repayment in April. So we would envision having cash on hand at that point to extinguish that liability.

[Operator]

The next question is from Lorne Kalmar from Desjardins.

[Lorne Kalmar, analyst]

Maybe flipping over to the disposition side of things. Are you guy -- with the change in the rate environment, are you seeing a pickup in appetite or a narrowing of the bid-ask spread on the transaction front?

[Jordan Robins, executive]

It's Jordie. I'd say the market is constructive -- like across the property, particularly for income-producing assets, and I would say, even more particularly given the nature of the assets that we are selling. And as we talked about, we've got a number of executed firm and conditional agreements that are in diligence now that are moving. I would say the market for density seems to be more bifurcated geographically. In that -- in Toronto, in particular, I would say the demand has shrunk and it may be some time until that reappears. But I would say, given the nature of the density that we're selling, it's urban, it's transit-oriented, our cost base is low. And so we expect when it does return that certainly our properties are going to be favored.

I would say with respect to Québec, and this is what I talked about geographic diversity, the demand there for density remains pretty strong. And we're seeing a lot of inbound calls for density, both that we have articulated to the market and that which people just asked about.

[Adam Paul, executive]

And I think by Quebec, we mean Montreal specifically. That's the only place we're active. But I think this lower rate environment is a leading indicator, and we saw at the front end of this rate-hike cycle. So we sold a major asset in December of 2022 King High Line, $5 rents in place, stabilized resi building in Liberty Village sold that is sub 3% cap rate -- sorry, $4 rents, so-called market rent at the time. And you sold a 2.9% cap rate, rates had already moved a lot. Our view was that represented old world pricing, but there is a lag in the property market. .

So now we're kind of appear to be coming out at the other end of the cycle, where rates have come down and you can do 5-year money at significantly lower rates, mid-4s generally, which is very different than even a few months ago. And I think Jordie would agree that we've seen a marginal improvement in the market, but we expect more improvement as we look ahead. So, Jordie, you're saying yes.

[Lorne Kalmar, analyst]

So I guess sort of rates in your view, is the big catalyst for the market for density starting to pick up?

[Adam Paul, executive]

Yes. Well, I think what we'll be at the front end of this will be anything with some level of income. So we've got a small amount of carrying yield. I think that's making the job a little bit easier for the investments group, where there's no yield. What Jordie was saying is Toronto remains tough. Montreal remains much better. We're selling density in both markets. So that's how we would describe the current state of the world through what we're seeing on the ground.

[Lorne Kalmar, analyst]

Okay. Perfect. And then maybe just quickly for Neil, I believe, on the 2025 same-property NOI target, what's sort of underpinning that greater than 3%? Is it rent growth or occupancy growth or a combination of the 2?

[Neil Downey, executive]

Yes. Lorne, A lot of it, which I think we talked about specifically on the Q2 call is really contracted rent growth. And so One Bloor, in its own right, gives us a pretty substantial boost there, and that's where all the leasing has been done and the tenants are in fixturing periods, and they really commenced their cash rent payments at a point in time that starts late in 2024 through 2025 and then incremental in 2026. So we measure our same property NOI on a cash basis. And we talked about that in the context of a discussion, I believe, on straight-line rent in the Q2 conference call.

[Operator]

The next question is from Mario Saric from Scotia Bank.

[Mario Saric, analyst]

The first one is a relatively quick one, for Adam or for Neil, can you highlight what the average weighted lease term achieved during the quarter was on the 400,000 square feet that was renewed?

[Adam Paul, executive]

Yes, that's a good point. So our longer-term average is around 5 years. We were closer to 6 years this quarter, just over 6 years. So it's about a year longer than what we call our normal renewal term is.

[Mario Saric, analyst]

Okay. And then just coming back to the disposition market. I think Adam, in the past, you've talked about kind of the breadth and depth of residential density buyers being pretty much private, private family, private buyer, looking at single assets. That sounds like it's still the case. How would you characterize this shift, if any, in terms of institutional demand for income-producing assets in Canada, and specifically, whether you're sensing foreign capital is increasingly looking into Canada?

[Adam Paul, executive]

I would describe the buyer approval for the assets we're selling is very similar. We've seen an increase in demand and capital pools available are for FCR's core assets, which are grocery-anchored stabilized shopping centers. So unsolicited inbounds have increased all with institutional capital. However, given their core assets, and we see a lot of upside from here similar to the institutions that have been reaching out. Those are not assets that are available for sale right now.

[Mario Saric, analyst]

Got it. And those inbounds, would they be both domestic and foreign?

[Adam Paul, executive]

Yes. More weighted to domestic, but there's a mix of both.

[Mario Saric, analyst]

Okay. And just my last question just pertaining to your sitdown restaurant tenant base. It's really stood out in terms of stability in the past contrary to what we're seeing in the broader kind of market headlines, is that still the case, particularly given the inflation is subsided? Or are you seeing any change in trend there in terms of demand?

[Adam Paul, executive]

It's still remarkably strong and stable. We've had we have somewhere between 700 and 800 restaurants, plus or minus. We had 10 defaults year-to-date. That would be at the low end of the normal year. And so we're continuing to see activity at the property level, whether it's the performance of existing restaurants or the leasing whether it be renewal or new leasing to restaurant space and the rental rates and the deal terms and net effective rents we're achieving that are still very, very strong. So we've read the headlines. We continue to see an entirely different story play out across our business and it's similar right across the country.

[Operator]

The next question is from Sam Damiani from TD Cowen.

[Sam Damiani, analyst]

First question, back to Mike's first question actually on population growth. Adam, your answer was not surprising, but I wonder if you could give a little bit more of the sort of the reasoning for believing that there won't be any noticeable impact on the performance of the REIT.

[Adam Paul, executive]

Well, again, part of it comes back to the health of the neighborhoods and with the population growth that's occurred with the lack of infrastructure that's kept up with it, notably housing and the affordability issues that it's introduced coupled with the inflationary environment, that's why we're spending more on security. There's just a lot more people that are having trouble getting by, and that's playing out across every neighborhood for the most part. And so tempering the head a little bit and letting some of that infrastructure to catch up and things settling out, we think will be a good thing.

But the main reason is we're in a long-term business, and our tenants are in a long-term business and space commitments and the capital commitments for that space continue to be playing where tenants are looking through various cycles. There has not been meaningful supply of the product type we owned for over a decade. It's really hard to imagine that changing over the next decade. And so you're seeing it with major, major retailers, whether it's grocery stores or dollar stores or you can go down the list they're being a lot more flexible with formats and type of space that they're occupying.

And our leasing pipeline continues to remain very robust amongst the deepest we've ever seen, and we're sitting here with the portfolio from an economic perspective effectively full. We may have a little bit of occupancy grind over the next year or 2, but we're pretty close to full. We're continuing to get very high rents and so. And look, it's been fresh, but we have talked to a lot of our tenants. We've got a lot of lease negotiations underway. And it certainly seems pretty evident to us at this point that it's full steam ahead.

[Sam Damiani, analyst]

So you're not seeing any of your retailers maybe tempering some growth plans as a result of the reduced expectation on population growth?

[Adam Paul, executive]

Absolutely not. We have not seen that yet. I acknowledge it's early. But again, I go through the reasons why we will be very surprised if it does temper in any significant way. There's just been such tremendous population growth, no supply, inflations benefited tenants top line sales. We know that largely profit margins have been protected. So the rent paying capability is up, the value of the space there is up and the replacement cost of the space that they're in is up.

So yes. And we're really well positioned. It'd be near impossible to recreate the quality of the portfolio that we've assembled, the neighborhoods that we're in. So we continue to feel that we're very well positioned, notwithstanding the government's change in immigration policy.

[Sam Damiani, analyst]

And just moving on to rents. There was a question earlier about the rent spreads. I want to get into the spread, I guess, the differential between the renewal uplift on the year 1 and then the full term. This is the second quarter where the spread between those 2 metrics was unusually wide in First Capital's history. The first quarter, part of the explanation was -- I should say in the Q2, part of the explanation was longer lease terms. And again, this quarter, you got 6 years versus perhaps a 5-year term normally. So a little longer than normal, but the differential is still quite large. So you would agree these are not anomalies. This is kind of a new pattern for FCR in terms of achieving these contractual bumps.

And I'm just wondering, as a follow-up, are you having to put in more money into these deals basically incentives or whatever to achieve these higher spreads?

[Adam Paul, executive]

Yes. So a few points there, Sam. So starting with your last one. No, one thing that we can say is our lease renewals are super clean. We typically have absolutely no deal costs, no free rent, no tenant inducement, no leasing commissions. So in almost every case, it's a pure rent negotiation with no deal cost whatsoever. So no, that's not impacting the spreads at all. Yes, the last couple of quarters, we've had a slightly longer lease term, which obviously helps the second lift metric, but that lift metric has doubled from historical standards. And we've literally gone from a 5-year term to a 6-year term. So not like nothing major.

One thing I will say is that I will credit Jordie and Carm Francella, and what Carm has done with his team which he's been working on for a number of years in strategizing how to approach these negotiations because it's a shift. In the old days, if a tenant exercised the right to renew for 5 years, you'd negotiate one rent number, that would be the new rent number for the 5 years. So the annual growth was not typical and Carm and the leasing team have done a really good job of being proactive to secure these lifts. And what allows us to do that, which is just a combination of strong fundamentals for grocery-anchored retail real estate, coupled with the fact that we own highly desirable locations that simply aren't getting built anymore.

[Sam Damiani, analyst]

Fair enough. That's a good answer. And just last quick one, just confirming my -- I guess, my expectation that One Bloor was kind of neutral to the same property NOI metric this quarter and will be positive starting in Q4. Is that correct?

[Neil Downey, executive]

Sam, it's Neil. I actually don't have the answer to that question at the tip of my figures on an individual property basis. But as it relates to your forward-looking view, it will certainly be a net contributor to same-property NOI growth in calendar 2025 in a fairly sizable fashion.

[Operator]

The next question is from Dean Wilkinson from CIBC.

[Dean Wilkinson, analyst]

Adam, I think I know the answer to this question, but maybe some additional color might help. With the shift in the yield curve and ostensibly lowered construction financing costs, do you guys see a change in the mix in the nonincome producing bucket of your assets to severe more active participation in properties under development? Or do you still want to with, as Jordie describes it, the sweat equity component of entitlements and zoning and selling off those buckets first?

[Adam Paul, executive]

Yes. Look, the entitlement business is phenomenal business for us. And the returns are spectacular because it's significant value creation with very little capital that is required. So under any circumstance, and Jordie has done a wonderful job leading the development of that capability over the last decade and has become a core competency for FCR. So under any circumstance, regardless -- almost any circumstance, regardless of the yield curve, that is full steam ahead.

What's changed, which has less to do with the yield curve and more around the strategy work we've done in the last few years around capital allocation has been, number one, there's a renewed opportunity in retail redevelopment. And with the achievable rents on the type of product we own today, there are a number of centers where we've had an eye to improving it, other by unenclosing an enclosed component or redemising space to make it more appealing like in Humbertown and the returns are very attractive. And so Jordie touched on it in his prepared remarks that we have a number of properties in that bucket that we are far advanced in the planning stage. And I can say with confidence will form part of our redevelopment program likely starting next year. So that's an important part of our development program.

And then on the mixed-use side, that probably has the most impact around interest rates. We got a lot of mixed-use development opportunities, as you know, what's happened over the last couple of years has put the majority of them off site. Yonge & Roselawn and 1071 King are the outliers, where the numbers actually still do work and we brought in third-party capital to lower the amount of equity we invest through the, we'll call it, the nonproductive phase when we're going through the development, which we are right now.

I don't think we've got a meaningful appetite to increase a meaningful amount of additional capital over the next couple of years to that program, Neil outlined at our Investor Day, which holds true today, roughly what the order of magnitude is. And these are multiyear developments. So we're going to pursue those on a temporary measured basis. We're going to reduce our equity from what typically starts out at 100% through the entitlement phase to generally 25% to 50%, which we think is the right balance to deliver the objectives we've committed and outlined to our investors while still capturing that upside. But I think when Neil went through that our Investor Day, holds true. And it's hard to imagine it will change meaningfully over the next couple of years, regardless of what the yield curve looks like.

[Dean Wilkinson, analyst]

That's great. It's kind of what I figured. I mean the market doesn't like it's in a position to underwrite development risk at this point. So the strategy kind of works. Other question...

[Adam Paul, executive]

That may change, right? That may change. And there were other periods where some could criticize us out, we were doing enough development. Now today, the general preference is like less is more, but I do believe that will change. At the end of the day, we've kind of laid out a 3-year plan, and we think -- and we do continue to come back to it. But at this stage, we think the 3-year plan we laid out in February continues to hold truly on what we're focused on executing.

[Dean Wilkinson, analyst]

Yes. Well, the leader of the A team put it best, right? I love it when a plan comes together. On the density payment issue, is that something we can expect maybe a little more of going forward, albeit maybe less predictable and lumpy, but is that how you're structuring the deals? Or would that just be a one-off specific to that asset?

[Jordan Robins, executive]

It's Jordie. I would say, taking a step back, when you think about -- as we talked about securing entitlements, it's become a really important part of our business and an area where we really create a lot of value, both in terms of the properties that we developed and also those properties that we end up selling. It's interesting to note, and as you can imagine, developers have unique visions with respect to their projects. And so oftentimes, we will get approvals for something that may not entirely align with the developers vision. And I would also say that oftentimes municipalities over the course of time will become less restrictive on things like height and use.

So we really know and have for some time, address these potential changes in agreements and purchase sale and including them what our post-closing adjustments for what is the final approved density number. So when it really relates to the density bonus this quarter, in particular, that we reported the purchaser submitted a zoning amendment post-closing. It approved this last quarter. And the increase in density pursuant to that amendment results in what was increase in the purchase price of just under $20 million and the payment is going to be made on the issuance of building permit. So that date is still obviously several years out. And accordingly, the payment was discounted.

So it's a very long way of answering your question, but I think it gives you the context that I would say it's not certainly something that is going to be routine, but is not something that -- or is something that will certainly happen again.

[Adam Paul, executive]

It's actually the third one. It's actually the third one that we've earned. The other 2 were on 1071 King and Yonge & Roselawn where Jordie and his team went in and given the more favorable environment secured additional height. So Jordie generally builds into every sale agreement where over a period of time, as more density is secured, we get paid. The difference with the one that showed up in Q3 is that we sold the entire property. And as a result, that's why it hit the P&L. On 1071 King, and Yonge and Roselawn, because we retained an interest, the accounting treatment actually flows through the balance sheet instead of the P&L. So to Jordie's point, it is lumpy. It's not totally unique, and we don't really have visibility as to whether it will be recognized -- more will be recognized in the future.

[Operator]

The next question is from Gaurav Mathur from Green Street.

[Gaurav Mathur, analyst]

Just a couple of quick questions. Firstly, when you're looking at your Vancouver cap rates, we noticed that your median cap rates have increased about 30 bps in the portfolio on a stabilized basis. I was just wondering if you could provide some more color on what led to that increase? And what you think about Vancouver versus the rest of the country?

[Jordan Robins, executive]

So I think probably Harbour, in particular, would have resulted in a change. Yes. I think if you think about the increase in rent there from our anchor tenant in particular, will have a meaningful impact or had a meaningful impact on the cap rate.

[Adam Paul, executive]

Yes. So I think what happened is we were able to take the NOI closer to the market. And as a result, the cap rate got adjusted. Yes. So to be clear, despite the higher cap rate, there was no detrimental value impact on the asset because the income went up so much.

[Gaurav Mathur, analyst]

Okay. Perfect. And just last question. We've talked about -- or are you seeing the slowdown in the condo market as well. Could you just provide some color on the pre-leasing activity on the current projects in the pipeline?

[Adam Paul, executive]

Yes. There are 2 active projects that are beyond the presale stage. One is our Edenbridge projects adjacent to our Humbertown Shopping Center and the other is 400 King Street that we own. We own a partial interest in both. The bottom line is we've got a little bit lucky in the cycle in a sense that the units were sold well before the peak. Current market values today, especially if you take the deposits into account, which in one project is 15% and the other is 20%, there's a meaningful cushion from current market values, which we would surely agree that current market values are well off their peak through this cycle. We think we're in good shape in that regard.

And closings will commence in 2026. So we believe that they were closing today, we would have no issue. I think there's a strong likelihood that situation or the overall condo market improves by 2026, but that's the current position we're in today.

[Gaurav Mathur, analyst]

And would that also be the same picture for the Yorkville project as well?

[Adam Paul, executive]

Yes. The Yorkville project is still going through. It's very unique. It's a high-end product. So far, every unit that's been sold has been sold to someone is intending to live in the project. It's obviously a very high price point. So it's a bit different in that regard, and it's got a longer time horizon before the planned deliveries.

[Operator]

And the next question is from Matt Kornack from National Bank Financial.

[Matt Kornack, analyst]

Just a quick follow-up to Dean's line of questioning around capital allocation. Can you give us a sense as you go forward, given yield curve is coming down, obviously, we moved a bit backwards on that front, but how you kind of balance deleveraging versus earnings accretion in a lower interest rate environment?

[Neil Downey, executive]

Matt, it's Neil. I think the changes candidly, are very much at the margin. We've got a stated strategy and a 3-year plan. And the 3-year plan is really focused on growing our FFO per unit, while also continuing to deleverage our balance sheet. And if you look at the business and the asset allocation, we've got about 82% of the real estate value in this business earning a run rate NOI yield of 5.6%. The balance of the capital or 18% of the capital invested in real estate in the company is earning a run rate yield of under 3%. .

And so we're really focused on changing that balance to achieve the objectives. And while it's true that changes in the yield curve and lower interest rates should make that process a little easier in terms of returning liquidity to property investment markets and presumably firming up pricing. It's equally just unlikely that, that has any real impact on the way we're going to run the business for the foreseeable future at this point.

[Matt Kornack, analyst]

Okay. That makes sense. And then just a quick technical one, straight-line rent decelerated a bit quicker than expected in the quarter. Can you give us a sense as if there was anything onetime in that? And what we should think about for the next couple of quarters as the cash rents come online?

[Neil Downey, executive]

Yes. It's both an accurate and very, I'd say, fine point observation. The straight-line rent number was actually a little smaller than we would have anticipated 3 months ago, and that's because we did have a lease amendment in a particular situation that actually resulted in the write-off of some straight-line rent. So had that not occurred, and you got to test my memory here, I think our straight-line rent adjustment was about $1.4 million in the quarter, probably would otherwise have been slightly more than $2 million in the quarter.

As you look out to Q4, probably about $1.5 million straight-line rent adjustment again. And then that number will begin -- should begin to taper quite dramatically through the next couple of quarters, particularly as it relates to that One Bloor cash rent conversion cycle, so converting from straight-line rent to cash rent.

[Operator]

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

[Adam Paul, executive]

Okay. Thank you very much, and thank you, everyone, for taking the time to attend today for your interest and support in First Capital. Have a wonderful afternoon. Bye-bye.

[Operator]

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