Primaris Real Estate Investment Trust

TSX:PMZ.UN

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, and welcome to Primaris REIT's First Quarter 2023 Results Conference Call. [Operator Instructions]

I will now turn the call over to Claire Mahaney Lyon, Investor Relations. Please go ahead.

[Claire Mahaney Lyon]

Thank you, operator. During this call, management of Primaris REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Primaris REIT's control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions, risks and uncertainties are contained in Primaris REIT's filings with securities regulators. These filings are also available on Primaris REIT's website at www.primerisreit.com.

I'll now turn the call over to Alex Avery, Primaris' Chief Executive Officer.

[Alexander Avery, executive]

Good morning, and thank you for joining us today to discuss Primaris REIT's first quarter 2023 results. On the call today with me are Pat Sullivan, President and Chief Operating Officer; Rags Davloor, Chief Financial Officer; Leslie Buist, Senior Vice President, Finance; and Graham Procter, Senior Vice President, Asset Management.

We are off to a very strong start in 2023 with our financial and operating results demonstrating a clear trend of growth delivering Q1 same property and same property cash NOI growth of 9.8%, rising occupancy and positive and strengthening leasing spreads.

Our financial and operating results demonstrate the resiliency and enduring value proposition of our business despite market skepticism that continues more than a year after we began demonstrating this resiliency. The acceleration of the trend in leasing spreads is a great example of our strong fundamentals.

Last month, we received an issuer rating upgrade to BBB high, the highest DBRS rating currently awarded within the Canadian public REIT universe, a title we share only with Granite REIT and Choice Properties REIT. With our March 27th unsecured bond deal, we materially reduced refinancing risks and now have nearly $0.5 billion of liquidity or approximately 40% of our total debt, covering all debt obligations into 2026.

We see a significant NOI growth potential through increasing occupancy to historic stabilized levels. We made material progress over the last 15 months on this, but the vast majority of the opportunity remains to be captured over the next few years. We are also focused on continuing to convert pandemic lease concessions to market rents. While tenant sales in our portfolio has more than recovered from the recent operating challenges of the last few years, 2022 NOI was 10% lower than 2019 NOI, despite occupancy being 5 percentage points higher in 2022. Recapturing these economics is a key growth driver for Primaris over the next few years.

As we continue to execute on our strategy, we enjoy several competitive advantages that enhance our ability to capitalize on market opportunities. Firstly, our business is performing very well with significant runway for rent growth and occupancy growth over the next few years. Secondly, our scale provides us with a competitive advantage as we partner with retailers on multiple location leasing plans, building deeper and more collaborative relationships. Third, our differentiated low leverage, low payout ratio financial model provides us with excellent access to capital and the financial flexibility to deliver growth per units to our investors in the face of hiring borrowing costs and many peers pursuing deleveraging activities.

Fourth, our best-in-class governance profile and high-quality independent board provide excellent oversight for our business and make us a preferred partner for institutions, investors and retailer partners alike. And fifth, our fully internal comprehensive full scale management platform with a 20 year track record of success provides a particularly strong competitive advantage with very few peers in Canada with comparable platforms and capabilities.

On our Q4 call, we communicated to you our goals for 2023 including number one, continuing our awareness campaign with expanded research coverage, investor meetings and conferences, property tours and investor days. Number two, demonstrating our ability to transact on acquisitions and dispositions that are consistent with the REIT's strategy and enhance the value of Primaris REIT units. Number three, continuing to execute on capturing the internal growth opportunity through active management of our portfolio to drive occupancy higher, restore standard lease terms among the remaining pandemic amended leases and driving rental rates higher over time.

And number four, achieve all of the above while acting in a manner consistent with the best-in-class profile that we have created at Primaris including ESG commitments being a respected and sought after partner and transaction counterparty and a preferred place for employees to work. We are on track to achieve our goals.

In recent weeks, Lorne Kalmar from Desjardins Securities, Fred Blondeau from Laurentian Bank, Brad Sturges from Raymond James and Tal Woolley from National Bank initiated coverage. They joined Mark Rothschild from Canaccord Genuity, Gaurav Mathur from Industrial Alliance Securities, Sumayya Syed and Dean Wilkinson from CIBC and Sam Damiani from TD Securities, all of whom have initiated coverage over the last 16 months. We are very pleased to have these high-caliber analysts follow our progress and evaluate our performance against our strategy.

I'll now turn the call over to Pat to continue to discuss our platform, operating and leasing results, followed by Rags who will discuss our financing, financial results and provide you with an update on our ESG strategy and disclosure package.

[Patrick Sullivan, executive]

Thank you, Alex, and good morning. Our NOI growth outperformance in the first quarter is coming from a number of sources, rising occupancy, completion of remerchandising of former anchor tenant premises, increasing sales, partially due to rising inflation, driving percentage rent income higher. Especially leasing income is returning to pre-pandemic levels. Nonrecoverable expenses are falling due to lower bad debt, along with increased occupancy, specifically related to formerly vacant anchor premises and our recovery ratios are improving as we convert tenants on preferred rental terms provided to maintain occupancy during the pandemic back to net leases.

Same-property 12-month rolling same-store sales productivity are at an all-time high of $605 per square foot as of March 2023, driven by strong sales growth over the past 24 months. This figure climbs to $610 per square foot when considering the total shopping center portfolio as of the end of March. Same property sales in December of 2019 were $545 per square foot for reference. We do not anticipate that sales growth will level off. We do anticipate that sales growth will level off during the second quarter.

And while we are starting to see sales for some tenants sales plateau and in some cases, decline modestly year-over-year, March 2023 same-property sales were still 9% higher than in March of 2022, led by strong gains in Alberta. Properties that have reached milestones and in terms of same-store sales productivity as of the end of March 2023 include Orchard Park in Kelowna, which is now performing at $813 per square foot, New Sudbury Center at $748 per square foot, Park Place in Lethbridge at $719 per square foot and Regent Mall in Fredericton at $669 per square foot. We ended the first quarter with committed occupancy of 91.3%, up from 89.2% at the end of the first quarter of 2022 and down slightly from 91.5% at December 2022. Occupancy is typically higher in the fourth quarter due to the seasonality of retail driven by the holiday season.

Over the past year, we have shown solid progress in growing occupancy. The in-place occupancy rate at the properties acquired from HOOPP was 87.9% at the end of Q1 2023 compared to 83.2% when first acquired. The in-place occupancy for this portfolio is almost 5% higher than this time last year.

Leasing activity is strong, continuing the trend from prior quarters. During the first quarter of 2023, our leasing team completed 137 transactions, encompassing almost 500,000 square feet, including 21 new CRU deals, which is comparable to prior years. Our Garden City Square in Winnipeg, Dollarama committed to a new 14,600 square foot location, and we continued to improve occupancy at Highstreet in Abbotsford, having signed a new 3,900 square foot La Vie en Rose store, which will be located proximate to a 5,000 square foot lululemon that opened in December of 2022. We renewed 15 leases with Garage Dynamite in the quarter, the majority of which were placed on variable rent structures in 2020 following their CCAA filing.

All new terms with Garage Dynamite commence August 1, 2023. In addition, 2 leases with TJX at one at Place du Royaume and one at Dufferin were renewed during the quarter as well as 2 Cineplex leases, one at Quinte Mall and the other at Medicine Hat.

Overall, renewal rents increased 4.9% over previous in-place rents with CRU space showing an impressive 6.9% increase. With tenant sales having risen considerably over the past 24 months and growing occupancy, we anticipate continued positive momentum in rental growth. Not included in our renewal rent change is the increase in rent derived from converting tenants on preferred rental terms provided to maintain occupancy during COVID back to net leases.

At quarter end, there were 313 tenants representing 14% of our tenant base on preferred rental structure. This is a reduction of 22 leases from December 31, 2022. With a number of other leases completed commencing later in the year, including the previously mentioned Garage Dynamite leases, this figure will continue to decline during the balance of 2023 and will have a meaningful significant impact on our NOI for 2023 and beyond.

As a reminder, we do not have any Bed Bath & Beyond, Nordstrom or David's Bridal in our portfolio. The Sears redevelopment at Quinte Mall in Belleville, Ontario is nearing completion with 60,000 square feet of the former Sears having been demolished in favor of future intensification opportunities and the remaining 30,000 square feet leased to winners, which is now open and operating.

FreshCo, a 35,000 square foot grocery store Medicine Hat Mall in Medicine Hat, Alberta took possession earlier this year and is anticipated to open November of 2023. We have also commenced work on a 16,000 square foot bank pad at Lansdowne Place in Peterborough, Ontario and a 5,300-square foot bank pad at Kildonan Place in Winnipeg, Manitoba.

In both cases, Primaris is providing a service pad and the tenant is responsible for constructing the building. At Northland Village in Calgary, redevelopment of this enclosed mall into a mixed-use open-air center is progressing well. As a point of interest, prior to its demolition, the mall was leased to the HBO series, The Last of Us, while the interior of the mall was -- while the interior of the mall is now being demolished, much of the surrounding structure was retained and forms part of the redevelopment.

A fully leased multi-tenant 6,600 square foot pad will be ready for occupancy in the fall of 2023 with rent commencing in early 2024. The project is now 76% leased with approximately 15% under active negotiation. The majority of new tenants will take occupancy in 2024 and there are additional outparcel opportunities -- outparcel developments that will form the final phase of the development in 2024 and 2025, subject to pre-leasing.

At Devonshire Mall in Windsor, the vacated Sears space plus the adjoining lands comprised approximately 18 acres. We are redesigning plans for the entire area, which will include the demolition of the former Sears space. The process to demolish the Sears at Devonshire has now commenced and we anticipate a complete demolition at -- completion of the demolition will occur in early 2024.

And with that, I'll turn the call over to Rags to discuss our financial results.

[Raghunath Davloor, executive]

Thanks, Pat, and good morning, everyone. Our differentiated financial model, including very low leverage, a low payout ratio and significant retained free cash flow is a major strategic advantage for Primaris REIT. Keep in line -- keeping in line with best practices and transparency, we are reiterating our guidance for 2023. Growth in same property cash NOI is anticipated to be between 3% to 5%. And as of today, we are leaning to the higher end of the range. G&A is estimated to be -- to be approximately $30 million. Interest expense in Q1 is a good run rate going forward, absent any property transactions.

During Q1, we established -- we accomplished a number of key milestones with regards to our capital structure aligned to our disciplined capital allocation approach. As Alex mentioned, on March 15, we proudly received initial ratings upgrade to BBB high from DBRS. This upgrade is reflective of our best-in-class differentiated financial model and the growth profile embedded within our business.

Primaris' conservative financial profile and capital structure provides for excellent access to capital in a manner that minimizes our cost of capital while allowing us to pursue investment opportunities to maximize value for unitholders. Our issuer rating is a component of the financial covenants of our $400 million unsecured revolving term facility and the $200 million unsecured nonrevolving term facility. As a result of the upgrade, the interest rate on each of these facilities was reduced by 25 basis points.

Subsequent to the upgrade, we successfully issued $250 million of unsecured debentures at a rate of 5.934% and used the proceeds to pay down our operating line. We are also sitting on approximately $60 million of cash. We hedged a floating rate interest on the nonrevolving facility through an interest rate swap to fully cover the draws outstanding on the facility.

Primaris is in the enviable position of having no floating rate debt. Unsecured debt now comprise 72.8% of our total debt stack with unencumbered assets of $2.7 billion, 0 exposure to variable rate debt and no debt maturing in 2023, we have materially reduced refinancing risk and enhanced liquidity, freeing up valuable resources to focus on management business and growth opportunities. We renewed the NCIB on March 7 and have the ability to purchase and cancel up to 7 million units and entered into a new automatic share purchase program, enabling Primaris to buy back stock in the market throughout blackout periods.

At present, our most attractive use of capital is buying back units at a deep discount to net asset value per unit on a leverage-neutral basis. As of today, since the inception of the program in March 2022, we have purchased a cancellation 5.2 million units at an average value per unit of $14.09, representing a discount to NAV of approximately 35%.

With regard to our disclosure package, we've enhanced our property level disclosure by providing details around NOI site coverage, mortgages and occupancy, which can be found throughout the MD&A in Sections 8 and 10 with all property level data consolidated in the investor deck. The intention is to make it easier for investors and analysts to value our portfolio.

Upon completion of our Board-led ESG strategic plan, the team has been working hard on the implementation phase. We are preparing to submit our inaugural GRESB real estate assessment, and we'll share these results with you later in the year. ESG is an essential component in Primaris' overall strategy from both risk mitigation and opportunity optimization standpoint.

Now to our financial results. Same-property cash NOI was up 9.8% for the quarter, driven by strong rental growth, effective cost management at the property level and net bad debt recoveries. The enclosed malls across our portfolio are experiencing a significant rebound in sales growth and our many operating metrics are improving significantly.

Net interest expense of $11.8 million was impacted by higher interest rates. As I mentioned earlier, we have now fixed all our interest rates on 100% of our debt and have no debt maturities this year, reducing the refinancing risk and volatility and enhancing liquidity. FFO and AFFO per unit diluted for the quarter was $36.9 and $31.9.

On the quarter, the FFO and AFFO payout ratios were 55.5% and 64.2%. We are marginally above our FFO payout ratio target of 45% to 50%, but expect this to come back within the range towards the end of the year. Primaris' fair value of investment properties was $3.1 billion with external valuations received 3 properties at fair values totaling $141 million.

On a portfolio basis, we incurred a favorable fair value adjustment of $2.7 million for the quarter, driven -- mainly driven by growth in the underlying cash flow models. There were no changes to the discount of terminal cap rates in the quarter.

Based on the value of our assets, we ended the quarter with a NAV of $21.47 per unit and debt to total assets of 33.5%. Debt to EBITDA for the quarter was 5.1x. We started 2022 with a weighted average term to maturity on our debt of 1.7 years and have extended this out to 3.9 years.

Primaris reach scale and highly differentiated financial model acknowledges both the clear preference public investors have for reaching the conservative financial model and the advantages to having one of the lowest payout leverage among Canadian REIT peers. We are committed to our differentiated financial model, enabling Primaris to self-fund its growth. Our capital structure was purposely designed to weather market turmoil and uncertainty and we are in an excellent position to pursue our growth strategy.

With that, I'll turn the call back to Alex.

[Alexander Avery, executive]

Thank you, Rags. We continue to prioritize raising awareness about Primaris REIT, communicating our strategy, building a public track record of strong results and demonstrating disciplined capital allocation are key to building institutional support. We completed a successful Board outreach program last month, connecting members of our Board directly with the investment community, which is considered a governance best practice, but is barely adopted. We are raising awareness about our properties with our first property tour scheduled for later this month on May 30. We are excited to get people out to see why our financial and operating results have been so strong.

In conclusion, we find ourselves at Primaris in a unique situation with numerous growth drivers, continued strong operating and financial performance and the financial flexibility to execute on both internal and external growth opportunities. And that's exactly what we plan to do, drive growth in free cash flow per units and growth in NAV per unit.

We are now pleased to answer any questions from the call participants. Operator, please open the line for questions.

[Operator]

[Operator Instructions] Our first question today go to Fred Blondeau of Laurentian Bank Securities.

[Frederic Blondeau, analyst]

First question maybe for Alex. In terms of capital allocation, it looks like you'll keep a focus on the NCIB. I was wondering when looking at your potential acquisition pipeline, is it fair to say that you look at -- you'll keep a focus on transformational opportunities and likely vendor take-back type of opportunities? Are these still in existence today?

[Alexander Avery, executive]

Yes. Thanks, Fred. The NCIB is, as you noted, continues to be active. We're now I guess, probably 13, 14 months of buying stock every single day. We did step down the volume of the buyback activity about a month ago, a little over a month ago. And I would describe that as balance. We, as you noted, have been pursuing transactions. And we think it's really critical to demonstrate our ability to transact both on the buy and on the sell side.

And as we go through some of those opportunities, what we want to make sure is that our commitment to our differentiated financial model and keeping the balance sheet in the best-in-class kind of position where it's at is really important to us. And it's -- I think we'll be able to achieve a bunch of different objectives over the course of 2023, noted the objectives in the opening remarks and transactions are one, but continuing to grow NAV and cash flow per unit are also very high and the NCIB is just a phenomenal tool for that for us.

[Frederic Blondeau, analyst]

And would you say vendor take-back type of opportunities are still existent today?

[Alexander Avery, executive]

Yes. No, it's -- we think it's a very large opportunity. We're engaged with multiple different counterparties and look forward to being able to deliver some news on that, hopefully during 2023. We really think that is critical to demonstrating the strength of our platform.

[Frederic Blondeau, analyst]

Got it. And then moving on to Dufferin Mall, I was just wondering what's the time frame in terms of a decision-making process on the monetization of the value?

[Alexander Avery, executive]

Yes. I mean we have it fully zoned and titled severed. It's essentially shopping ready. But the -- as far as making a decision on it, it's a big chunk of cash. And what we'd like to do is optimize the sale price. And right now there's not a lot of transaction activity for residential development sites. We think that over the course of the next 12, 18, 24 months that that market will see a resumption of transaction activity. We think in that kind of an environment where you've got a more regular cadence of transactions, we'll be able to optimize the pricing on it. And we have the luxury of time because we don't need the money right now.

[Frederic Blondeau, analyst]

Yes. Now that's totally fair. And maybe last one from me. Patrick, you mentioned that you're seeing select retailers looking to expand their store [ foot ]. I was wondering if this is consistent pretty much across every sector in your portfolio or it's more sector-specific?

[Patrick Sullivan, executive]

No, I wouldn't say it's sector-specific. There's a lot of activity, fashion, food, discount retailers, footwear, guys like Torrid, or which is a plus size ladies clothing store, a lot of transactions happening with them. JD Sports is expanding rapidly in Canada. You still got Dollarama expanding, Pandora is on an expansion kick, Sephora is still expanding. So it's really a wide spectrum of retailers and there's quite a few of them actually that are engaged with this and looking for more space.

[Operator]

And the next question goes to Lorne Kalmar of Desjardins.

[Lorne Kalmar, analyst]

You had a strong showing in Q1 on the leasing front. Wondering how that's carried over into Q2?

[Alexander Avery, executive]

Yes. It's -- leasing is going well. I mean there's a lot of tenants looking for space where our occupancy is growing. And the leasing spreads are reflective of the sales growth for a lot of the tenants. They really rebounded strongly in the last 24 months and we're still seeing the growth continue in terms of sales and the rental growth is simply a reflection of that.

[Lorne Kalmar, analyst]

And maybe just following up on that with the comment around kind of same-store sales maybe starting to plateau and level off for some tenants. Do you expect that to have a corresponding impact on the -- on your ability to achieve improvements in rent growth?

[Patrick Sullivan, executive]

No. I think the reality is a lot of these retailers have had tremendous sales growth over the last 24 months and they're hitting all-time highs for productivity in our portfolio, which means when the leases do expire, we can drive rents higher, even if they do plateau, I mean, these guys are -- some of these guys are now busting at the seams for space. We expect some of them will be coming forward looking for a larger space, so they can drive sales higher. But I don't see it at holding us back from driving rents higher at all.

[Alexander Avery, executive]

I noted in the opening remarks, Lorne, that our NOI in 2022 was still 10% below our 2019 levels despite being 5 percentage points higher in occupancy. I mean there's a lot of slack in there between the economics of the retailers in our properties and our capture of those economics. So we've got quite a runway even if sales volumes are sort of plateauing.

[Lorne Kalmar, analyst]

Okay. And then maybe just quickly flipping back to acquisitions. Any like target markets you're looking at? Or are you kind of market agnostic?

[Alexander Avery, executive]

We're looking at several different markets. And really, the characteristics are less driven by the specific markets and more driven by the profile of the shopping centers. We're really interested in market dominant shopping centers. We like growing markets, growing in terms of population and economic activity. We like diversified economies and we're looking at several of them. Some of them -- I guess, it's pretty much across the country actually.

[Lorne Kalmar, analyst]

Okay. And then just last one from me. Are there any plans to try and pursue any additional rezonings this year?

[Patrick Sullivan, executive]

Outside of the GTA, the zoning process gets a lot easier in our portfolio. So in some cases, it's a fairly simplistic process. So we're looking at some parcels of our land, whether we're going to dispose of them in the near future. And to be honest with you, we don't really need to go through an exhaust process to do that.

[Operator]

The next question goes to Brad Sturges of Raymond James.

[Bradley Sturges, analyst]

Just to go back to the discussion on acquisitions and I guess the framework around maybe structuring yield similar to the HOOPP transaction. Obviously, probably the stock is not where you want it to be, but does that impede or change the way you think about how you would structure a deal given the dynamics between where vendors may take backlog and maybe the size of the deal you might want to do right now?

[Alexander Avery, executive]

Thanks, Brad. Good question. And your reference to the HOOPP transaction is spot on. That's the way that we look at it. And it's a very unique set of circumstances. The counterparties that we're speaking with love their malls. They think their malls are attractive properties. They see a lot of recovery potential, but they're balancing different objectives from a portfolio construction and optimization perspective. And so our transaction profile with them offers them some partial liquidity with the opportunity to continue to participate in the recovery of the shopping centers. I mean, 9.8% same-property NOI growth this quarter.

Clearly, the property type still has a long way to run. And so it's a unique sweet spot for some of these vendors. And it is unusual, but we're looking to take advantage of those opportunities and really enhance the profile of our portfolio.

[Bradley Sturges, analyst]

And if you were to look at a transaction where it was funded with cash, obviously, you're retaining a little bit of [ April ] that's being earmarked for stock purchase now, but if you're looking at capital recycling, is that something if you were to execute on? Are you looking to time the case of maybe capital recycling with acquisitions that you have near term in the pipe? Or would you do some one-off asset sales on a stand-alone basis, even if there's not an acquisition tied to it?

[Alexander Avery, executive]

It's a good question, Brad. And yesterday, we spent a bunch of time with our Board just talking through strategy and this is one of the topics that we discussed in pretty good detail. And I would say the takeaway was really that the motivations for our capital recycling are a couple. One is to demonstrate that we can transact and demonstrate that the IFRS fair values that we're carrying are actually reflective of market conditions and also from a portfolio construction perspective, looking to recycle capital from malls that have less of the characteristics that we want to ones that have more.

So more market dominance, more higher growth, like there's a bunch of those characteristics. But what we also discussed was specifically that the recycling of capital from the bottom end of the portfolio is not a pressing or urgent need because of our differentiated financial model. So we are pursuing opportunities to recycle capital, but it's not out of any urgency or necessity to use that capital to fund things on the acquisition side.

[Bradley Sturges, analyst]

That makes sense. And just last question for me, just to go back to the opportunity to capture better economics and leasing. Given that you're at, call it, 90% or higher in terms of occupancy, does that give you more leverage now to convert, I guess, lease signed in the last few years with concessions back into traditional net leases? And then where do you see your traditional net lease exposure trending by the end of the year?

[Patrick Sullivan, executive]

Yes. No, definitely, we've got a lot more traction with the retailers to convert the leases and to strengthen our terms with them based on a rising occupancy and the amount of good space and shopping centers, not just in our portfolio, but in Canada, in general, is limited and dwindling. And it has been a process to get a lot of these tenants off of their preferred rental structure. We're making good progress. I mentioned we had 15 of them coming off in August with 110 alone. And there's a few other examples out in our portfolio.

So I see us trending towards -- I think our target is, say, 12% or where we're sitting at 15% at the start of the year. We're 14% now. I was thinking 12%, but I'm hopeful we'll get closer to the 10%, 11% of our portfolio. And just for reference, our historical norm was more like in the 5%, 6% range. And I think we'll get there in the next 18, 24 months.

[Operator]

The next question goes to Sam Damiani of TD Cowen.

[Sam Damiani, analyst]

Just continuing on the acquisition theme, Alex, I mean, Primaris already has scale and dominates a number of markets. But what are your thoughts on the sort of optimal sort of peak size and scale market penetration for Primaris in Canada is a 20 million square foot portfolio, optimal 30 million feet, what is the sort of long-term optimal sort of goal in mind?

[Alexander Avery, executive]

Thanks, Sam. Again, talking through a lot of strategy points yesterday. I think one of the ways that we were framing exactly the answer to the question that you're asking is really what we'd like to be is the first call for retailers when they come to Canada, have a portfolio that spans the country that captures the bulk of the population that represent the market dominant shopping center in each of the markets that we're in. And it's not really about a number of malls or dollar value of the portfolio, but really optimizing our ability to be a first call partner for retailers and have the malls that have the best economics.

So the highest growth, the best rock ratios, the best performance, stable and growing rents and occupancy, that's really the way that we've been framing it. So it's a little difficult to answer the question different ways in terms of is it a number of square feet or a number of properties. What we really want to do is have the best enclosed shopping center platform in Canada. And the transactions that we can see taking place over the next few years, it actually is not that far off. We've got a lot of opportunities, and we're really looking forward to getting there.

[Sam Damiani, analyst]

That's great. That's very helpful. Next question for me is, Alex, your opening comments referenced some lingering skepticism on the enclosed mall sector. And I'm just wondering if there's anything you see out there that would you attribute that to clearly missing from Primaris. But just in the market, is it focusing on the U.S. experience, like what is the biggest barrier to changing that skepticism in your mind?

[Alexander Avery, executive]

Yes. No, I think it's a bunch of different things. We came out at the beginning of 2022 and we're building some momentum and then Central Bank started hiking pretty aggressively. And then that pivoted to concern about economic softness. We've pointed people to the same-property NOI growth performance or same-property NOI performance of Primaris 1.0 back in the pre-2013 era reflected very stable performance.

But at the same time, that was a long time ago. Business has changed, the environment changes. And I think what we really need to do is just demonstrate the stability and strength of our portfolio and platform. And that comment, the skepticism is a reflection from feedback that we get from surveys of investors. There's still a lot of this perception that Primaris is materially more economically exposed than some of the other retail REITs in Canada. And it's kind of a show-me story and I feel like we're doing a great job showing, but sometimes these things just take time.

In the interim, we have the fabulous opportunity of buying back our stock at a fraction of its value and that's accretive to our per unit NAV and our per unit cash flow. So it's definitely an objective of ours to get our stock to trade up to NAV, but kind of helping us in a few different ways as we get there.

[Sam Damiani, analyst]

That's great. And last one for me, just on the watch list for tenants. You mentioned 3 retailers that have had some trouble this year. Can you comment on the size of your tenant watch list today? Is it bigger than it was 3 months ago? And what are your expectations for the balance of '23?

[Patrick Sullivan, executive]

Really, there's -- our watch list is very thin. There's nothing really material on it. I would suggest what I've said many times in the past is it's a real benefit that we give our sales reported to us, and we can see things coming. And I guess there's retailers out there that aren't necessarily struggling and they're not necessarily going bankrupt, but we see that their sales -- maybe they're not about as relevant or they're not renovating their stores and we want to drive rents up higher. So we're always actively looking to re-merchandise our centers based on our sales, but not necessarily because somebody is on the verge of going bankrupt. And that really the start of the pandemic cleaned out a lot of the retailers and the retailers that were weak were able to restructure by going through the CCAA process. So there's not a lot to worry about right now.

[Operator]

Our next question goes to Gaurav Mathur of iA Capital Markets.

[Gaurav Mathur, analyst]

Just on your prepared remarks around tenant revenue streams stabilizing and in certain cases, decreasing. Any read-throughs to net new store openings or closures across the portfolio?

[Patrick Sullivan, executive]

The -- in terms of net -- sorry, can you rephrase that for me?

[Gaurav Mathur, analyst]

I'm just wondering, just with tenant revenue stream stabilizing now, would there be any read-throughs to store openings or closures that you see in the broader market and across your portfolio?

[Patrick Sullivan, executive]

No, not necessarily. I think as I mentioned before, I think sales have gone up conservative for a lot of these retailers, and some of them are all kind of high. I do see we have seen some retailers actively looking to get larger space as a result of the tailing they've maxed out their current square footage. And so we're actively working with some of those tenants to grow their footprint. I don't really see guys shuttering stores across our portfolio.

I think all retailers go through a sort of rationalization. I think it's happening in some of the major markets now where they're looking and saying how many stores do we really need in the given markets. But given our portfolio is typically comprised of dominant shopping centers, we're not really seeing a trend like that in our portfolio.

[Gaurav Mathur, analyst]

Okay. Great. And just digging to the [ TAN ] base at the moment. The rent spreads this quarter were pretty strong. Would it be a fair run rate for the year ahead?

[Raghunath Davloor, executive]

That's a good question. And we are seeing good momentum in growing our rents each quarter. The activity more recently has been really positive, given where sales have trended. And I think we have positive momentum. I couldn't pin it to a number, but I do see continued growth.

[Gaurav Mathur, analyst]

Okay. And just lastly, from an acquisitions viewpoint, any distressed asset opportunities that you're seeing in the market which could potentially fit into the portfolio?

[Patrick Sullivan, executive]

Gaurav, there is -- there are properties that are distressed. Generally speaking, there are some nonmarket dominant shopping centers where the occupancy and the performance is not stable. But for the most part, those aren't the types of properties that we're looking to acquire. Great opportunities for others and there isn't a ton of competition for a lot of those properties. But we're not really strategically focused on those types of properties. We're looking to capture the recovery potential in strong shopping centers and take advantage of a window of time in which we can acquire what we believe will be the first call portfolio in Canada. And that's really our focus here.

[Operator]

The next question goes to Tal Woolley of National Bank Financial.

[Tal Woolley, analyst]

Just to start, can you give us an idea about like on -- when you're in the process of trying to migrate a tenant of percentage rent to a more standard lease, what's sort of the average uplift in terms of receipts for Primaris that they see on those renegotiations? Just to try to quantify that for investors.

[Patrick Sullivan, executive]

Yes, it's a good question. A lot of these were percentage rent, so based on our sales. So the ones that migrated say, last year, we're seeing we're a much bigger lift simply because sales were still rebounding that. It's hard to quantify every situation is different. But I'd like to say it's at least 10%, if not much higher than that.

[Tal Woolley, analyst]

Fair. And then one of the things that you guys have tried to lay out is trying to get GROC ratios at a competitive level with tenants. Can you sort of speak to where they are now and where you want them to be? And what's sort of the conversation with tenants around this kind of initiative? Like do they recognize the value in that?

[Patrick Sullivan, executive]

They do. I mean our portfolio has always been maintained around 14% -- between 14% and 15% GROC ratio. And we've always been very comfortable in that range. I mean, GROC is one of those very generic metrics that we apply to all stores, but really every chain has a different operating margin. Some can afford more like food court tenants can afford higher, but jewelers and hair salons can afford less. So it really becomes a tenant-specific discussion.

And I think the value in our portfolio is really recognized by retailers in terms of keeping our costs down and the ability to maintain them at that level. A lot of these tenants come and open stores in various properties. And over the term of the lease, they modeled rent growth in their additional rents. And we've been able to control those costs and others have let it get early control and that's where the downward pressure on rents come on renewal time. But in our portfolio, we've maintained fairly consistent and we're going to -- we continue to do so.

[Alexander Avery, executive]

One of the other points on that is often we will run into investors who comment on our GROC ratios as being higher than what they are in some U.S. markets. And there are a whole bunch of structural market differences that account for that. And within the Canadian context, our GROC ratios are quite low. A lot of the peers would be closer to 20%, if not over 20%.

[Tal Woolley, analyst]

Got it. And then there has been some chatter of some U.S.-based retailers like Foot Locker and the gap talking a little bit more about footprint rationalization. Do you see any bleed through to your properties over the next little bit?

[Patrick Sullivan, executive]

It was funny that day the article came out about Foot Locker. We renewed 4 leases that day. We haven't seen any bleed in our portfolio gap, but we recently renewed a number of leases. We're in discussions to renew a number of our Old Navy stores right now with the increases in rents. So we haven't seen that. But I do know that Foot Locker and a lot of chains are really reviewing the margins they're achieving in malls versus non-malls. And that's where it comes back to your comment about operating costs.

As long as we're maintaining our cost structure where it needs to be, the retailer can maintain their margin in the shopping centers. I think the super regionals are really finding a challenge now because that's where the tenants are really finding themselves squeezed to make money and they're questioning, should we stay in these properties. So I think a lot of these retailers talking about going to off-mall sites and that was a trend we saw back in 2005. The reality is they just can't generate the sales volume they generate in shopping centers. So they're trying to find a balance and that's where our portfolio fits in very nicely for them.

[Tal Woolley, analyst]

Okay. And then just lastly, this is just sort of a not a housekeeping, but just a detailed question. In your large format renewals this quarter, you had 14,000 square feet, but I noticed it was -- the lease count was 5%. And I was trying to understand...

[Patrick Sullivan, executive]

Typo.

[Tal Woolley, analyst]

It's a typo. All right. This is like that's a lot. The -- over 5 leases over 14,000 square feet, I was like that doesn't seem like a large format anchor at that point. But anyway. Okay. That's great.

[Operator]

[Operator Instructions] Our next question is a follow-up from Fred Blondeau of Laurentian Bank Securities.

[Frederic Blondeau, analyst]

Maybe one last for me, Patrick. At what capacity level do you think you are today with the [ Primache ] platform? And what should we be expecting on that front in 2023?

[Patrick Sullivan, executive]

Primache was really set up during the pandemic as a tool to help our retailers navigate the period of time. I don't think we ever expected large things out of it. It was a marketing tool. It's really -- the adoption has really been a lot of our local and regional tenants who don't really have websites. It was never meant to make a lot of money for us nor has it. It was really just another tool for the retailers to sell their goods. And it has been well-adopted by the locals.

The national chains have all really embraced e-commerce through the pandemic and really develop their own systems to the point where they don't necessarily need our platform, but it's certainly a benefit to the smaller tenants, but we don't look -- we never have looked at it as an opportunity to drive significant income.

[Operator]

There are no further questions at this time. Claire, I'll turn the call back over to you.

[Claire Mahaney Lyon]

Thank you, Nadia. With no further questions today, we'll close the call. On behalf of the Primaris management team, we'd like to thank you all for participating in the call. And we look forward to speaking with you again on our next call in August and see you on May 30 for our property tour. Thank you. Goodbye.

[Operator]

Thank you. This now concludes today's call. Thank you so much for joining. You may now disconnect your lines.