First Capital Real Estate Investment Trust

TSX:FCR.UN

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the First Capital Realty Q4 2017 Results Conference Call. [Operator Instructions]I would now like to turn the conference over to Ms. Alison Harnick. Please proceed with your presentation.

[Alison Harnick, General Counsel & Corporate Secretary]

Thank you, Patrick. Good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today's call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in our various securities filings, including our MD&A 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 company's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this conference call.I'll now turn the call over to Adam.

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

Okay. Thanks, Alison. That was Alison Harnick, our General Counsel, who joined us last year, and she has been a very nice addition to our executive team. We also have certain other members of our executive team present. Kay will be for speaking, and we've got others here available for certain questions, if they arise.So with that, I would like to wish everyone a good afternoon, and thank you for joining us. We ended 2017 with one of our best quarters ever. Our results over the last couple of years provide a degree of validation that our carefully designed strategy continues to deliver consistent growth in an evolving retail world. But it's what we see ahead that we are most optimistic about. I think First Capital is at a pivotal point in the sense that the company is progressing in notable way over the last few years and looking ahead we will be noticeably more advanced than a few more years than we are today.I think of First Capital in 3 different phases or periods of time. The first phase represents many years that culminated in 2014. This was a period where our core DNA was established. During this first phase, we grew our real estate portfolio very aggressively. This gave us critical mass in Canada's largest urban growth markets with a portfolio that continues to have the best demographic profile in the industry. We also executed a very focused and proactive approach to tenant mix during this phase by religiously concentrating on the strongest necessity-based retailers.On the balance sheet side, we were a Canadian real estate leader in pursuing unsecured debentures as a primary source of debt capital. While this came in at a meaningfully initial cost, it gave us a competitive advantage that we now benefit from. During this critical phase where the foundation for our future was built, we grew our NAV significantly but had work to do on growing our earnings and building our platform.The next phase took place over the last 3 years. We started out with a leadership change, which was a natural time to thoroughly review the business. One of the major things we've then focused on was platform building. We made many changes to our structure, people and systems. While the financial results we reported in 2015 were short of our aspirations, our focus and priority that year was preparing us for the future.We've improved considerably because of those changes, and we are now very well positioned for the next phase that lies ahead. The platform improvements we made during that important transition year, combined with our high-quality portfolio, has since led to very strong results. Compared to 2 years ago, our operating FFO is 10.2% higher, FFO was 17.2% higher and NAV is 19.8% higher, all on a cumulative per share basis.Equal and importance to the changes we made was ensuring key fundamental things did not, such as our entrepreneurial spirit and our creative and innovative approach to real estate. My biggest fear at the time was that we would diminish some of those traits through our transition. But our culture has evolved better than anticipated. Not only did we maintain those traits, we are now better at them. For instance, our approach to urban design and architecture. 101 Yorkville is our most recently designed project. The public realm, pedestrian connectivity, architecture and placemaking that we have designed is at a new level from anything we've done so far. We've already learned things at 101 Yorkville that we're applying to our other upcoming redevelopment and intensification projects. When it comes to placemaking and community building, our Christie Cookie site affords us the best opportunity of all to move to yet another new level as we work collaboratively with the city and other stakeholders. We are in the middle of an international, master-planned architect competition for our site, which is now 28 acres with the addition of the Bemo Corner Pad we acquired last month. This note has seen tremendous density emerge, with over 7,300 condominium units immediately surrounding our property, 2,800 or 38% of which have been built in the last 3 years alone.Getting back to entrepreneurialism, creativity and innovation, other things that come to mind is our involvement in relocating Toronto Fashion Week and our partnership with the Dali Foundation that brought the Salvador Dali Art Exhibition overseas to Yorkville Village. Our public art program, which has resulted in 26 pieces, and counting, that are permanently on display at FCR properties. The upper-level restaurants spaces we create, like at Yonge and Lawrence and Liberty Village with nano-walled glass systems and retractable glass roofs and projects like Stacked, which is a transportable retail market made from shipping containers. We're opening the first stack market with a partner at Bathurst and Front this summer in Toronto.We've also focused on making our properties more accessible and walkable to the dense consumer base that surrounds them, which we believe will become increasingly more important as densification continues. Walk Score is a leader in measuring walkability. Their mission is to promote walkable neighborhoods and they have developed a walkability index that provides a numerical score for properties and neighborhoods. First Capital has an average walkability score that places us in the second-highest category achievable, described as, and I quote, "Very walkable, where but most errands can be accomplished on foot." Sustainability continues to be an increasingly important part of our success. Our sustainability strategy started in 2006 when we were the first of our peers to build LEED standards. And in 2010, when we were Canada's first publicly traded real estate company to issue a GRI-complaint corporate responsibility and sustainability report, we set reduction targets. And over the last 5 years, we've seen a decline in greenhouse gas emissions up 23%, notwithstanding an 11% overall increase in square footage. Today, we have over 20 million square feet of our portfolio certified BOMA BEST and LEED that have installed over 120 electric car charging stations.Lastly, we're very proud to have been named to Corporate Knight's Future 40 Responsible Corporate Leaders in Canada. Every year since the awards commenced in 2014, the only publicly traded real estate company to hold that distinction. Through this second phase, we continue to be focused on assembling in everyday life-based tenant mix in our centers that drives overall traffic and sales. To pick just one of many examples, we now have 95 daycare and learning centers with an average size of 3,500 square feet. Consider that on average, 75 kids are enrolled per location. With 2 visits per day, 5 times per week, over 3.5 million consumer visits per year have been added to our shopping centers from this relatively small use alone.We're coming out of this second phase with a nearly irreplaceable portfolio that has the best demographic profile amongst our peers. The incremental density that can be added to our portfolio has now grown to nearly 22 million square feet or 90% of our existing leasable area. This makes First Capital one of the best covered land plays available. The vast majority of our properties are income producing, but the land is often the most valued component of the property. Many of these have or will have a higher and better use through redevelopment, given the value of unbuilt density potential. This density potential also limits our downside risks significantly. We also have the advantage of scale. Our platform is deep and combined with our culture puts us in a better position to create value than ever before. Our tenant base is focused on retailers who are generally thriving and who we can grow with together. Our balance sheet is solid and will continue to strengthen. This has led to a payout ratio that has improved significantly over the last couple of years and will continue to get better, eventually paving the way for regular dividend increases.But it's our next phase that is most important because it's where we're heading from here. Our real estate strategy continues to be fine-tuned. For some time now, the criteria we use to select assets, in which we can best create value by applying the capabilities of our platform, include urban locations with strong demographic profiles, especially significant and growing population density. Transit is, of course, another key factor, including planned transit enhancements.The areas that we have had the most success and where we expect to be going forward is where we can positively impact already thriving neighborhoods by creating retail-focused environments. To maximize our potential in this regard, we need scale within each target node. Critical mass allows us to assemble the right number of retailers, so we can curate an offering that is optimal for the targeted trade area. This results in the assembled group of retailers, collectively driving more traffic and overall sales, which we know leads to higher rent growth. Large positions also give us flexibility to redevelop in phases and to retain tenants as their needs change. It also makes it more feasible to introduce public realm and amenity space, which can be easily overlooked but is so critical when it comes to community building.We know that urban mixed-used projects that are well designed and well located create benefits for all property types. For example, having a retail offering of grocery, fitness, restaurants, daycares, liquor and so on make adjacent residential properties more desirable and more valuable because of the convenience and amenity-rich lifestyle the retail provides. And with residential on top of or adjacent to retail, that built-in customer base makes the retail more successful. Our experience in mixed-use projects has given us a deeper appreciation for the extent of this cross-use benefit and the positive impact on rent growth. So this is something that we are looking to capitalize on as we assess new projects. We will be more open to retaining an economic interest in additional uses at our properties that complement the retail and vice versa. But we're well underway on our larger asset strategy. When you think of Liberty Village, Yorkville, Young/Avenue and Lawrence, Mount Royal Village, South Oakville, Griffintown and the Brewery District, those 7 positions alone represent almost 20% of our total value today.During the first 2 phases I discussed, we were very proactive and busy on building our portfolio. Over the last 5 years alone, we sold nearly $1 billion of real estate and added $3 billion more through development and acquisitions.That $4 billion swing was pretty transformational. We're now at the stage where we're very happy with our $9.5 billion real estate portfolio. But we do own some great properties that don't necessarily fit the larger position profile I touched on. So we will continue looking to that group of properties as a capital source to fund our growth.Another means of expanding our sources of capital will be through partnerships. We're seeing some great opportunities through partners or potential partners who value and are seeking our retail and development capabilities.Over the last few years, we've done more partnerships. Our partners at Bayside on Queens Quay and 101 Yorkville each had control of the real estate and selected us as their retail development partner of choice. I believe we will source meaningful new investment opportunities over the next few years through similar-type partnerships in properties we may not otherwise have the opportunity to own.To summarize how our asset strategy is evolving, we will continue to focus on fewer but larger positions in Canada's best urban nodes where we can achieve a meaningful retail position. And we will also be more open to investing in uses that are adjacent and complementary to our retail, most commonly, residential. But again, where the retail is a key component. We'll also continue to expand our capabilities and get better at what we do. Now I don't expect it to be a sprint, but we will be more advanced, more innovative and even better positioned several years from now.I'll now pass things over to Kay, who will speak to our strong fourth quarter and annual results in more detail. Kay?

[Kay Brekken, Executive VP & CFO]

Thank you, Adam. Good afternoon, everyone, and thank you for joining us today. We were very pleased with our overall results for the fourth quarter and the full year as our operating FFO per share increased by 8.1% in the quarter and 5.1% for the full year. Our annual operating FFO of $284 million or $1.16 per share sets a new record for the highest annual earnings we've ever posted, an achievement we are all very proud of. These results continue to build upon our track record of generating higher growth and operating FFO per share.I will now take you through the results in more detail. Starting on Slide 6 of our conference call deck, we generated solid growth in operating FFO in the fourth quarter and in the full year. Our operating FFO for the fourth quarter increased 8.1% or $0.02 on a per share basis and 8.5% or $5.7 million in dollar terms. For 2017, we achieved operating FFO growth of 5.1% or $0.06 on a per share basis and 9.1% or $23.6 million in dollar terms.The primary driver of the growth in operating FFO during the year was a $16.1 million increase in NOI due to 3 key factors: first, growth in same-property NOI of $9.1 million, driven primarily by rent escalations; secondly, growth in NOI of $3.7 million due to the net impact of acquisitions and dispositions completed over the past 12 months; and thirdly, growth in nonsame-property NOI of $3.3 million, primarily due to development completions.Also contributing to the growth in operating FFO in 2017 was a $9.4 million increase in interest and other income. This increase was primarily due to the deposit we made in 2016 towards the future acquisition of One Bloor East, which subsequently closed in the fourth quarter of 2017 as well as higher loans outstanding.Moving to Slide 7. Our 2017 same-property NOI increased by 2.5% versus the prior year. The growth was driven by higher same-property rental rates, primarily due to rent escalations and lifts on renewals.On Slide 8, we present our lease renewal activity for the quarter and annual period. Our Q4 total portfolio lease renewal lift was 6.7% on 582,000 square feet of renewals. On an annual basis, our total portfolio lease renewal lift was 6.3% on 1.7 million square feet of renewals. We continue to improve the terms in many of our leases at the time of renewal including recovery closets, which is not reflected in our net rental rates but is picked up in gross rent.Moving to Slide 9. Our average net rental rate grew 2% or $0.39 over the prior year to $19.69 per square foot, primarily due to rent escalation, renewal lift and development completions. During the year, we transferred 131,000 square feet of new GLA from development to income-producing properties with an invested cost of $116 million. The average rental rate on the 124,000 square feet of lease space is $37.26 per square foot, 89% higher than the average rental rate for our portfolio.On Slide 10, we made meaningful improvement in our occupancy levels during the fourth quarter. Our total portfolio occupancy rate increased by 80 basis points since Q3, primarily due to Save-On-Foods taking possession of 2 grocery stores spaces located in Calgary as well as the lease-up of a significant amount of CRU spaces by our leasing team.Our year-end total portfolio occupancy rate of 96.1% is up 120 basis points since the start of the year due to broad-based leasing activities across the portfolio. At year-end, we were holding 0.6% of our portfolio intentionally vacant for redevelopment.Slide 11 highlights our 5 largest developments that accounted for the majority of the $157.7 million of development spend during the year. In the fourth quarter, we undertook a detailed review of our entire portfolio and updated our development pipeline, which now includes a very long-term category. Very long-term projects are projects that have an expected commencement date beyond 15 years, primarily due to lease encumbrances by anchor tenants.Our pipeline increased by 8 million square feet since Q3, primarily due to the addition of this density.We did not disclose in our MD&A the incremental value of our density as we were unable to find a consistent and widely accepted methodology fit for valuing this density, and we did not identify any other company in North America that can making this disclosure. Additionally, the valuation of this density is highly sensitive to the assumptions used in the model, resulting in a wide range of potential values. Having said that, we do believe there is meaningful value for this density, which is not reflected in our IFRS values and have prepared a presentation, which highlights a number of the properties within our portfolio that have significant incremental density. This presentation also gives additional visibility on a number of our upcoming development projects, which we have discussed on prior calls and is attached as an appendix to our conference call deck.As of December 31, we have identified approximately 21.7 million square feet of additional density within our portfolio, including 2.9 million square feet of commercial density, which is primarily retail and 18.9 million square feet of residential density. This represents a substantial opportunity relative to the size of our existing portfolio, which is 24 million square feet. As the vast majority of our portfolio is located in urban markets where significant land-use intensification continues to acquire, we expect our future incremental density will continue to grow over time, providing us with even more opportunity to intensify our generally low-density properties.Slide 12 shows the factors driving the growth in operating FFO and in FFO and the related movements over the prior year periods. This slide also highlights our operating FFO payout ratio, which improved to 74.1% for 2017 from 81.9% in 2015.Slide 13 touches on our other gains, losses and expenses, which are included in FFO. For the year, we are reporting minimal other expenses of $200,000, primarily due to noncash losses of $3 million in the early redemption of our convertible debentures being partially offset by the net of the unrealized loss and unrealized gains on our marketable securities of $2.1 million and by Target settlement proceeds of $500,000.Slide 14 summarizes our ACFO metric. Our ACFO working capital adjustments primarily relate to prepaid and accrued realty taxes due to seasonal variation in these items over the course for the year. Our CapEx deduction is actual maintenance CapEx spend, which includes both revenue sustaining and recoverable CapEx. Our full year 2017 ACFO was up $11.6 million or 5% over the prior year, primarily due to an increase in cash flow from operations as a result of higher NOI and higher interest and other income, which I discussed earlier.Information on key financing activities for the year is on Slide 15. Over the course of the year, we issued $300 million of new 10-year unsecured debentures at an effective interest rate of 3.8%. We redeemed in cash $157 million of convertible debentures with an effective interest rate of 6.4% and repaid at maturity $250 million of senior unsecured debentures with an effective interest rate of 5.9%.Post year-end, we announced that we will be redeeming our remaining outstanding convertible debentures totaling $55 million on February 28.Slide 16 summarizes the size of our operating credit facility and our unencumbered asset pool as well as our key financial ratios. Our unencumbered asset pool has continued to grow and is now $7.4 billion or 74% of our total assets, an increase of $747 million since the start of the year. As expected and as discussed on our last call, our net debt-to-EBITDA ratio increased slightly in the quarter. We continue to expect this metric to decline slightly in the first half of 2018 as we complete the sale of a number of assets that were classified as held-for-sale at year-end and use the proceeds to reduce outstanding debt. We expect a further, more meaningful decline in this metric in 2019 as a result of planned development completions taking place in 2018.Slide 17 shows our 10-year term debt ladder. Our weighted average interest rate has declined to 4.4%, and our weighted average term has increased to 5.4 years. We continue to have future opportunity for interest rate roll down in our near-term maturities. We have $274 million in 2018 debt maturities with a weighted average interest rate of 5.5%.Overall, we were very pleased with the results for the quarter and the full year. 2017 was another outstanding year that would not have been possible without the dedication and support of our entire team. We are very proud of all that our team accomplished in the past year and look forward to continuing to build on these accomplishments in the year ahead.At this time, we would be pleased to take any questions you have. Patrick, can you please open the call for questions?

[Operator]

[Operator Instructions] The first question is from Mark Rothschild.

[Mark Rothschild, MD & Real Estate Analyst]

In regard to the leasing spread, it picked up this quarter from last quarter, but the trend has been a little lower over the past few years. I was wondering if you can comment on the outlook for that. I mean, clearly, there's a spread between in-place and market rental rates for your portfolio. So do you expect that to continue to rise over the next few quarters? Or is the 5%, 6%, 7% level of the range that we should be expecting?

[Kay Brekken, Executive VP & CFO]

So in terms of giving guidance on lifts on renewals, it's not something we would typically do. We would not want it to impact our future negotiations with any of our tenants.

[Mark Rothschild, MD & Real Estate Analyst]

Okay. Fine. I guess, moving on to -- Adam, you mentioned something -- you mentioned a little bit about the Christie Cookie site. Can you give a little more detail on the timing of getting started on that project? And when you would expect to start investing more significant money into that land?

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

I'm going to -- I'll say something initially, and then I'll -- Jodi is here as well, so I'll ask her if she has anything to add. But I what I can tell you is that the Christie Cookie site represents, probably, the best or one of the best opportunities that our company has ever had. And with -- the way we've acquired and the manner in which the markets evolve and the significance of the opportunity and the fact that we have a plan here to build a fully functioning community. And so when we look at all that, we're building something that's going to be there for, hopefully, 50-plus years. And so we are in no rush, in the sense of, we are going to be thoughtful and work with the stakeholders and get this right to maximize its potential and create something exceptional. Obviously, we have a sense of urgency to move that forward, but not to a point where it starts to compromise what we can achieve there. So that's the philosophical approach. Now we're very active in planning and speaking with transit authorities in the city and stakeholder groups and engaging in master-plan architect, et cetera. So I'll just say, whatever Jodi tells you, I can tell you, we're not setting for a milestone by this day, we have this done. We want to do this the right way to maximize its potential. I don't know if you have, Jody, any timeline that we can offer Mark.

[Jodi M. Shpigel, Senior Vice President of Development]

Yes, sure, Adam. Thanks, Mark. I'd be happy to provide some additional color. As Adam said, we are certainly going to do this the right way. And so what we've been doing and we will been continuing to do for the coming months is meeting with all the stakeholders. That includes not only the city and the transit authority but also the community at large. We actually hosted an idea there just last week, which was an open-house style format that really engaged the community to come and meet us, meet the people at First Capital, share with us their thoughts, their visions and hopes for their community that we're really gathering all this information and we're going to be -- going through our architectural competition where all of those ideas will be layered in, in addition to the ongoing, very positive discussions we're having at the city. So there's no set milestones. But we are, of course, proactively moving this forward.

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

And Mark, just to go back to your initial question that Kay answered. We don't mean to be coy about it, but we -- obviously, lease rate negotiations with tenants are pretty sensitive. And we don't want to put an expectation out there that it -- anyone would -- can use in that context. You have seen some compression in the spreads. They're still very healthy. I can tell you, one thing that's certainly impacted them is a proactive initiative that Carmine and his team have undertaken to utilize renewal negotiations as an opportunity to improve the lease overall. And one area that certainly impacts the net rent that we achieved on renewal, which is what gets measured for that reporting metric, is the CAM and tax recovery clause. So Carmine and his team has done a wonderful job in a lot of renewal leases over the last couple of years where we have significantly improved the CAM recovery clause. So the gross rent goes up by a much higher rate than what we show in net rent increase on renewal. There's other things, like if a tenant -- we would, obviously, never sign a lease like this, but we purchase properties that have them where tenants have rights, no bills or things like that. Those are other things we're very focused on improving in the lease. And so that has put some pressure over the last couple of years on the metric. Whereas, if we -- we're not as sensitive to those, we would have easily been able to achieve and report a higher leasing spreads on renewals.

[Mark Rothschild, MD & Real Estate Analyst]

Okay, great. And then just one last question. There was recently a change in management at Gazit, which is a controlling shareholder -- a large shareholder of First Capital, and part of their public statement was in regard to putting focus on First Capital. Can you comment on if there's been any change in the way First Capital interacted with Gazit? Or if you see this impacting First Capital at all?

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

Well, I could tell you, Mark, not a lot has changed at First Capital. Dori is in the same role with us as he was before. One difference for Dori, firstly, he's got more time. And so he's made himself more available to me, which has been a very good thing. We've always had a very good working relationship. And what I would say is, his support to me over the last 3 years that I've been here, I would say, has made me a better CEO of First Capital. And so, again, his role hasn't changed. His availability to me has improved. And other than that, things are pretty similar to the way they have been over the last 3 years.

[Operator]

The next question is from Sam Damiani.

[Sam Damiani, Analyst]

Just on the excess density estimate, as you say, increased by about 7 million square feet, which were the key properties behind that increase? And which key properties in the portfolio still aren't included in that estimate?

[Kay Brekken, Executive VP & CFO]

Sam, so the -- there's actually a geographic spread of that increase that you're seeing. There's no one particular property. There is, of course, some assumptions for some of our large assets that we have across the country and that's all contributing to that increase. And you'll see it's primarily in the residential density number that's driving that increase.

[Sam Damiani, Analyst]

Right. And just by coincidence, perhaps, the -- I think -- I've added up all the GLA on Page 3 of the appendix, it adds up to 11.7 million square feet, which was the old number. Like for example, is Christie Cookie now included the number? Or is it still not included?

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

Christie Cookie is -- has been include -- that -- the level of GLA included in Christie Cookie has not changed. So some of the properties that come to mind is, Liberty Village is one. So we have a lot of excess density in Liberty Village that has not been developed because of tenant leases. Meadowvale Town Centre is another where lots of density going up around Meadowvale. Again, encumbered with leases, but cloud trail is an assembly we've put together in Calgary that is the same. Peninsula Village in South Surrey, so a relatively recent acquisition. We are adding density in that market through our semi-annual property. We've done some asset management and improved the NOI profile of Peninsula. But again, not within that 7 -- that 15-year timeframe in terms of what we expected it. But -- so that gives you a sense of some of the properties. What I do expect is, you're not going to see density shift from shorter term to very long term. Over time, you will see a shift in some of that density from very long term to more current timeframes because I believe strongly that we will negotiate with some of these anchor tenants in a manner that facilitates more expedited redevelopment. And given the value difference between the properties in their current form and at developable land, we'll be in a position to have some bargaining chips and financial chips to help facilitate those negotiations. And so that's what I would have expected to unfold. In terms of properties that we haven't -- that we -- everything we've identified has been included. But it's a fluid process. We expected to do a deep dive and a thorough review generally annually. And so this was the time of the year that we did that. And my guess is, as we do it, we will find more density, not less density.

[Sam Damiani, Analyst]

Okay, that makes sense. Just on the IFRS, I know you haven't provided anything new in that regard. But what value would be on the balance sheet already in respect of some of this excess density?

[Kay Brekken, Executive VP & CFO]

Sam, it's the -- property is unencumbered, then it's included within the IFRS value. If it's encumbered, it would be not included.

[Sam Damiani, Analyst]

So something like a Meadowvale or Liberty Village?

[Kay Brekken, Executive VP & CFO]

That is correct.

[Sam Damiani, Analyst]

At least, there's no value of an IFRS...

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

Correct. The majority of it -- so not all of it, but the majority of it would not have an ascribed value under IFRS.

[Sam Damiani, Analyst]

Okay. Before I turn it back, on One Bloor East, is there an update you can provide in terms of leasing and timing of stabilization?

[Jodi M. Shpigel, Senior Vice President of Development]

Sami, it's Jodi. So just by way of background, our focus has really been on and remains on completing the required landlord work to open a center. So the work that we're doing is really going to improve the functionality of the retail space, including the improvements we're making to vertical transportation. And after -- those improvements really relate to the McEwan space in particular. By way of background, the Nordstrom space has been turned over, and we're aiming to turnover McEwan space as quickly as possible, but really expect to do so in, I would say, mid- to end of second quarter. The balance of this stage is to a certain extent subject to tenant-specific requirements, those tenants that we're talking to when we expect to complete that work probably in the second half of the year. With respect to leasing, I would say, it has been entirely consistent with that, which we expected when we purchased the property given its location. And I would say, interest has intensified as the completion of the project gets nearer. We've been working with a number of larger tenants who are interested in the Bloor space in particular. And I would say, as you were fielding call daily -- virtually, daily but with respect to the internal units in particular. And currently on the Yonge Street side, we're working through multiple offers, and we should be able to make further announcements with respect to the Yonge Street space in particular over the next short while.

[Sam Damiani, Analyst]

Okay, that's very helpful. So things are going very, very well. But full stabilization probably at 2019, early 2019, is that -- does that sound about right?

[Jodi M. Shpigel, Senior Vice President of Development]

Yes, that sounds about right.

[Operator]

The next question is from Pammi Bir.

[Pammi Bir, Analyst]

Just with respect to the 2018 guidance for OFFO per share growth, can you maybe just expand on some of the assumptions that were underlying that outlook? Be it on same-property NOI acquisitions or developments?

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

Pammi, same-property NOI consistent with, kind of, our 5-year average occupancy, consistent with where we ended the year. Acquisitions -- generally acquisition -- the type of acquisitions we do don't add much accretion. We, as you know, buy properties that are at the high-quality, lower-yield end of the cap-rate spectrum, but that has well above-average upside. And so when we first buy them, we generally don't get much accretion. And even, in fact, in some cases, we get dilution. So there isn't a lot assumed in acquisitions. But again, we don't expect that to move the needle in a big way if it varies from what we have in our model. Little bit of dispositions. Development spend, we've been in and around $200 million roughly over the last few years, generally consistent with that. We do have an above average amount of development completions assumed, but they're generally back-end-year loaded, so we do expect -- we've got 5 big projects, the majority -- multi-year projects, the majority of which get completed this year. And so we've made a reasonable assumptions on that as well.

[Pammi Bir, Analyst]

Just maybe on the -- from an NAV, you've, obviously, had some pretty strong growth over the last couple of years or several years. But do you care to, sort of, comment on what sort of growth do you think the company could achieve in the next, call it, 12 months with NAV?

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

Well, look, our NAV growth has been exceptional. So our expectation -- if you look at what's happened over the last couple of years, our expectation is that we'll be short of that, but well above average relative to the peer group. I -- that's all I would say on NAV at this point.

[Pammi Bir, Analyst]

Okay. Maybe just going back to your comments with respect to potential partners. Under what sort of circumstances would you maybe consider potentially bringing in partners on some of your, call it, trophy, stabilized assets to maybe recycle some equity into some of the bigger projects that are coming up?

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

Well, if I get -- if I step back a little bit further than that, we're very pro-partnerships in certain circumstances. And those circumstances, in terms of where it makes sense for us, is certainly in some of the large, mixed-use projects where we will look to bring in a partner who has a strategic expertise that we can benefit from. So in King High Line, that was a good example of that. Other areas where we would be keen to partner is where we have a meaningful position -- a potential partner has a meaningful position in a node and we can combine those positions to create something better than we can each create on our own. Certain projects that are very large and capital-intensive like Christie Cookie is one where we will look for partners. And then we've been approached and continue to be approached, which is very encouraging with partners who have some great real estate and view our retail and development capabilities as something very desirable. And so based on what we're seeing now, we expect over time, given the seeds that have been planted, that we will look on partners on more of those. Is there are a specific property that you're thinking of when you asked the question? Because it -- we view it differently within the context I just outlined.

[Pammi Bir, Analyst]

Yes, no. That was helpful. I was thinking of some of the assets that are already kind of stabilized or close to stabilization, like the Yorkville Village or Liberty Village, whether there is possibility there.

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

Yes, I mean, the issue is what -- when you refer to Yorkville or Liberty as stabilized, I agree from an accounting perspective. From an economic perspective, I think both of those properties are significantly better in 5 years and they're going to be significantly better 5 years after that. And so when I look at Yorkville, Liberty Village, I think we're still in the early innings of a real cyclical situation for those -- not only those nodes but our assets within them. So if we were to transact there, it would be more than just recycling capital. It would be something that's part of a broader, strategic transaction.

[Pammi Bir, Analyst]

Okay. Just looking at the Main & Main sale, the $240 million, I guess, that's at 100%. How does the sale proceeds or the price compared to the IFRS value? And if you can also just maybe comment on the timing of the remaining sales in that portfolio.

[Kay Brekken, Executive VP & CFO]

Sure, Pammi. I'll comment on the IFRS values, and I'll let Jordan speak on the timing of the remaining. So of the ones that we announced that would be slightly ahead of the IFRS values that we had recorded at the end of the year that were based on third-party appraisals.

[Jordan Robins, Executive VP & COO]

Yes, sorry, Pammi. It's Jordi. Given we're in the midst of the sales process, we're going to be careful and try and be as brief as possible. We took the portfolio out. We announced over half the portfolio is subject to firm agreements and we'll be making, likely, further announcements very shortly with respect to the balance.

[Pammi Bir, Analyst]

Okay. That's helpful. And then just lastly, the -- I think there was a fairly sizable uptick in the straight-line rent for Q4. Was that assumption of One Bloor? Just want to clarify what may be the right run rate is for that?

[Kay Brekken, Executive VP & CFO]

Sure, Pammi. So One Bloor would certainly be part of that as Nordstrom is in possession of that space. We did have an uptick in our occupancy, which also would mean we would have a number of other tenants in fixed-rent periods now. When you look forward into 2018, Adam touched on it, our development completion's being -- expected to be higher next year. So from a run rate perspective, I would expect straight-line rent to increase next year as a result of that increased occupancy and higher development completion.

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

The thing is we're doing a lot of leasing. There were a lot of steps in the rent, so I think straight-line rent's going to keep going up for the short term.

[Operator]

The next question is from Michael Smith.

[Michael Smith, Analyst]

I just wanted to touch on the future projects. Kay, you said that, I guess, in the IFRS values, if a property is encumbered, then it's not included any of that density. And I'm just wondering if you could give us a little bit more color on what you mean by encumbered. Like, it's a 10-year lease, a 5 -- a 20- year -- 15-year lease, or...

[Kay Brekken, Executive VP & CFO]

If it's really an operating, income-producing shopping center, from the IFRS perspective, that is what its value is based upon. And anything where we have encumbrances like leases that you indicated, 5, 10 years, we would consider that not be included in IFRS.

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

It's got to be pretty short term. Like, if you take our Royal Orchid property, which is, technically, an income property, I believe we adjusted our IFRS value last year. All of the leases run out on or prior to 2019. So now we're getting real close and have better visibility. But to give you a sense of the timing, it was 2017 when we made the adjustment for 2019 development start.

[Michael Smith, Analyst]

Okay, so it's very short then?

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

Yes.

[Michael Smith, Analyst]

Okay. And just -- I wonder, like, just switching back to the renewal spreads. I know, you been adjusting your lease is to get a more growth -- operating expense pick up, but what would -- let say, had you not done that and it's just factored in, would that brought them a couple of 100 hundred basis points, the real spreads? Or is there some sort of ballpark that you have?

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

Yes, I know Carmine has actually looked at that. So -- because we did look at -- what you looked at is the gross rent. So this ignores the qualitative things that we achieved and there's some of them we would prepared to give up rent, like if we free up the no-build where we can build something. But if -- I know Carmine has looked at the straight gross rent impact. What is it, Carm?

[Carmine Francella, Senior Vice President of Leasing]

We -- when you take into consideration the CAM recovery and even some of the flat anchor tenants, the lift would've been around 8%.

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

A little over 100 basis points.

[Michael Smith, Analyst]

Okay. And you just -- you've obviously got -- you've got a lot of development and redevelopment on the go. I'm wondering if you could just give us some color on what the construction costs are like. Like, in terms of competitiveness, inflation, construction inflation? Is that a headwind? Or are you happy with the way things are?

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

No. I mean, I'd say, it's certainly been a headwind. Especially -- where we're developing, these are also the most dense-active markets in terms of benefiting from the urbanization trend. So the availability and cost of skilled trades has gone up significantly, I would say, Jordie, over the last couple of years.

[Jordan Robins, Executive VP & COO]

In particular, the last couple of years, you've noticed a meaningful difference in cost, given the amount of construction we're doing, we're pricing that cost inflation into our budget, so we're then particularly cautious given the escalations we've seen.

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

So certainly, it makes -- like the pro forma stage, you've got to be pretty careful. And it certainly, I -- we noticed a big increase in cost over the last couple of years. Now fortunately, we've also been achieve rental rates that are often higher than we anticipated. And especially, in a project like we have in Liberty Village where we're going to be going to leasing 500 apartment units this year, the market certainly went in the right direction from a rental-rate perspective, which certainly helps to mitigate the increasing cost. But it's a competitive environment out there in the big cities for good trades and good labor, and it's something that gets a lot of airtime when we're making decisions on starting new developments.

[Michael Smith, Analyst]

And have any -- have you, like, just looked at a new development and said, "You know what? We're just going to delay this because of the cost?" Or have you got to that point yet?

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

Well, not only because of the cost. But again, I go back our mentality on these redevelopments and we've got some phenomenal dirt and when we redevelop them, we're making a 50-plus year decision. And if you take Humbertown, which is a good example, I know you know about property well, we went through a pretty aggressive entitlement process and got fully zoned a number of years ago. But we made a decision to delay the development. And it's 2019 that was one of the key dates in terms of key tenant lease. And that's why. I mean, the timeline -- it's income-producing, almost all of our properties are. And so the reality is, whether we start the redevelopment in 1 year or 5 years later, does not have a material impact on the business. And so generally these neighborhoods are betting. Generally, rental rates are growing at an attractive rate. And so we're not hurt by waiting. And so we'll look at construction cost in the context of a lot of other things. And then we'll make the decision on what we accelerate or what we delay.

[Operator]

The next question's from Matt Kornack.

[Matt Kornack, Analyst]

First question is for Kay with regards to One Bloor. I think you answered part of it. But just wondering how that property is now being accounted for? It was under, sort of, a loan receivable and you were getting interest? But do you know when that would have shifted? Is it an IPP? Is part of it an IPP? Or is it all in development at this point?

[Kay Brekken, Executive VP & CFO]

Portion of it is in IPP, and that's the portion where Nordstrom is in possession, and that took place in November, I believe, when they took possession.

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

And that's about 1/3 of the overall project.

[Kay Brekken, Executive VP & CFO]

So that's -- yes, that leaves the remainder under development. And the next possession we would expect to take place is in the Q1 of the first half of 2018.

[Matt Kornack, Analyst]

Okay. And you -- did you capitalize any interest against that in this quarter? Or will you start capitalizing interest against it, I guess, in the next few quarters? The development portion?

[Kay Brekken, Executive VP & CFO]

On the development portion, we do capitalize interest on anything that's under development. So we would currently have done that in the fourth quarter, and that would continue.

[Matt Kornack, Analyst]

Okay, that's fair. In terms of the density, do you know or have a sense as to what percentage is the $22 million almost is zoned versus unzoned?

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

Well, the majority would be unzoned.

[Kay Brekken, Executive VP & CFO]

But the majority would be zoned for commercial uses because our income-producing operating, shopping centers. So there's -- the majority of zones for commercial use of that exist. And a lot of them, I don't have the exact percentage, but there's a good number that are -- that have an official plan designation, mixed-use, but the zoning would have to be rezoned in order to comply with the officials.

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

Yes, sorry, that's a good point. So there are properties where you know the density would be higher, but based on the official plan designation, we kind of went with the official planned designation. But in terms of going through the formal zoning process for a lot of -- especially the residential density, until we have a reason to go through the rezoning process, we have not done that.

[Matt Kornack, Analyst]

And I guess, you're probably dealing with it now because Christie Cookie is not going to happen before the OMB, sort of, changes or sees -- goes to more of a community-activist type role? Do have a sense of how does that impact the development going forward? Or are you, sort of, prepositioning yourself with regards to Christie Cookie doing all these meetings and consultations in advance?

[Jodi M. Shpigel, Senior Vice President of Development]

Matt, it's Jodi. So that's a great question. So as it happens for Christie Cookie, we actually inherited an appeal by the vendor who we purchased the property from, but that is not our focus. Our focus is what you just described, which is the community, stakeholder-based approach, working with the city. We spent, really, the last 18 months, building relationships and working with the city and reaching out to the community. It's certainly not our desire to use that appeal, but it is, of course, there for us. And regarding other properties, we've always taken a very proactive approach with municipalities. And we will continue to do so. So I don't see a lot of changing for us as it relates to the OMB. But generally speaking, there will be, for everybody, a more proactive approach that people will take.

[Matt Kornack, Analyst]

In terms of -- so you see a lot of completions coming up this year and maybe into early next year. When do you think you'll, sort of, outline the new side -- I'm sure you're already working on them, it's just a question of public disclosure of properties that will make up the new development pipeline going forward.

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

Well, we -- so we added a deck as an appendix to this conference call deck. And it's a sample of those. But it gives you good indication. And if you go through them, Matt, it will show you the density that we're building and when we expect to start. And it -- generally, the ones we've included are the ones we're starting anytime between now and 2019. So that will give you a pretty good window into the next set of redevelopment properties.

[Matt Kornack, Analyst]

I'm sorry. Is this something separate from the sample future development projects? Or is that what you're referring to? Or is it completely different?

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

No, that's what I'm referring to.

[Matt Kornack, Analyst]

Fair enough. So I'll take a look through that. Last question, with regards to Main & Main, once the sales process is complete, how do you get access to that cash? Or is it going to stay in Main & Main? Or is there special dividend of some sort that comes to FCR?

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

Yes, it won't stay in Main & Main. It'll be distributed to the respective partners.

[Matt Kornack, Analyst]

And is there a tax implication to doing that? Or I don't know something of those sorts?

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

No, correct me if I'm wrong, Kay, there's no tax at the Main & Main level, it's rolled up into the FCR level.

[Kay Brekken, Executive VP & CFO]

That is correct.

[Operator]

The next question is from Dean Wilkinson.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

This will be quick because Matt just asked the question that I was going to ask about Main & Main, so thanks for that. I guess, looking at those valuation in Main & Main, and what you said, Kay, slightly ahead of the IFRS, would that suggest what's left in there at the 100% levels, probably, something in the area of $300 million?

[Kay Brekken, Executive VP & CFO]

I'm just looking at the numbers here. So your question is, after the 1 3 that we just announced?

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Yes.

[Kay Brekken, Executive VP & CFO]

What would be remaining within that number? Okay, let me get that for you, give me one -- give me a minute and then we'll take your second question.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

And the other one was, the $14 million, which is the outstanding commitment, is that in relation to what would be the 3 remaining properties within Main & Main?

[Kay Brekken, Executive VP & CFO]

Sorry. Say that again, Dean.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

The $14 million, which is your share of the outstanding commitments that Main & Main has that, totals 26 6 and yours is 14 1.

[Kay Brekken, Executive VP & CFO]

Yes, that's correct. That is in relation to the remaining 3 that we are retaining.

[Operator]

[Operator Instructions] The next question's from Sam Damiani.

[Sam Damiani, Analyst]

Two quick ones. So the 4 projects that are sort of earmarked to start of next couple of years on the back of the slide deck there. So 101 Yorkville, or Royal Orchard, Humbertown or Wellington, those are all greenlighted?

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

That's the expectation right now, yes.

[Sam Damiani, Analyst]

And to follow on what you said at the beginning of the call, Adam, is it your intention to, perhaps, retain an interest in the nonretail properties that's built as part of these projects?

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

Some of them, yes. I mean, what I was trying to say is, we've got some real experience now in mixed-use projects and coming through the other side. And in a number of cases, we didn't participate in some of the nonretail uses. And the economic performance of those has been very well -- very good. But what we've noticed is the part of the reason it's been good is because of the retail that we've created. And so all we're saying is, we're more open now, doesn't mean we're going to do it on every project. But we will be more open now to participating in making more of what, I would describe, as a neighborhood investment. Obviously, where the retail is what our key focuses. But what we've done on the retail has made, in some cases, the residential and some cases, the office, like a [ 30:80 ] more valuable and Liberty Village. And so, we'll just be -- we're more open-minded to it right now.

[Sam Damiani, Analyst]

Okay. And just lastly, the sale in London, I'm just wondering -- I mean, it's pretty good price per foot, seems anyways, just wondering why you didn't do an outright exit of that market?

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

Yes. It come back comes back to what I was talking about our larger position strategy. And so we've got a meaningful position in the London market, it's a bit spread out, so we can't accomplish some of the things we can in some of the markets where we got really big positions in very close proximity. We like the London market. I mean it's a university town -- we've done very well there. And we've got, what we believe, are the best assets in the London market. And so we didn't want to exit entirely. And so instead, we've got a wonderful institutional partner where we're able to continue to grow these assets and we can enhance our return on the invested capital through some of the fee income that we'll achieve. That's the reason. It is a good market and there are great properties and we think we'll make money there. And that's why we didn't want to exit entirely.

[Kay Brekken, Executive VP & CFO]

And then just coming back to the prior question that you asked, Dean, we would to estimate that number closer to $250 million for the entire set of properties, including the ones we're retaining.

[Operator]

The next question is from Michael Smith.

[Michael Smith, Analyst]

Just a quick follow-up. Is there any particular reason why you sold a 50.5% interest in the London properties as opposed to just 50% or 49%?

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

Yes, there is, Michael. Our partner is a Québec-based financial institution/pension funded. And there are -- so this was their request and there is anticipated legislation that would put some restrictions on them if they didn't own more than 50% and so that's why we structured it that way. When it comes to decision-making and things like that, it's the same as it would be in a 50-50 partnership. So we would have equal rights and control. But from an economic perspective, they had a desire to go to 50.5%, that's the reason.

[Operator]

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

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

Okay, Patrick. Thank you very much, everyone, for your time this afternoon and your interest in First Capital. Happy Valentine's Day. Have a great afternoon.

[Operator]

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