Primaris Real Estate Investment Trust

TSX:PMZ.UN

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, and welcome to Primaris Rights Second Quarter 2023 Results Conference Call. At this time, all lines have been placed on mute. After the prepared remarks, there will be a question-and-answer session. I will now turn the call over to Claire Mahaney, Investor Relations. Please go ahead.

[Claire Mahaney Lyon]

Thank you, Carla. During this call, management of Primaris REIT may make statements containing forward-looking information within the meaning of applicable securities laws. 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 the 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.primarisreit.com. I'll now turn the call over to Alex Avery, Primari's Chief Executive Officer.

[Alexander Avery, executive]

Good morning, and thank you for joining us today to discuss Primaris REIT's Second Quarter 2023 results. On the call with me today are Patrick Sullivan, President and Chief Operating Officer; Raghunath Davloor, Chief Financial Officer; Leslie Buist, Senior Vice President, Finance; and Graham Procter, Senior Vice President, Asset Management; and Morici Barowsky, Legal. Our year-to-date financial and operating results continue to demonstrate the resiliency and enduring value proposition of our business and show a clear trend of growth. Same property cash NOI rose 6.4% in the first half of the year with rising occupancy and strong leasing spreads. A few quarters ago, we told you one of our 4 goals for 2023 was to demonstrate our ability to transact on acquisitions and dispositions that are consistent with the REIT's strategy and that enhance the value of Primaris REIT units. We are thrilled to have closed on the acquisition of Conestoga Mall on July 12, further validating and proving support for Primaris platform, strategy, and value proposition. This was a very important transaction for Primaris for a few reasons. Firstly, the mall is illustrative of the type of acquisitions Primaris is focused on, being a market-leading mall with mass rapid transit connectivity in a medium-sized high-growth market. Secondly, it demonstrates our ability to transact on these types of highly attractive properties. And finally, it highlights 2 prospective vendors that Primaris is uniquely positioned to partner with the institutions that are the primary owners of market-leading Canadian malls and offer liquidity solutions, including immediate partial liquidity with the opportunity to continue to participate in the recovery of the Canadian mall sector. Since the inception of Primaris REIT, we have been very clear about the significant opportunity to acquire leading mall properties. This continues to be the case, and we feel our ability to capture this opportunity is enhanced with each quarter we report and each transaction we execute. Another very significant development during Q2 2023 was the launch of our unit purchase loan program. In a nutshell, under the loan program, Primaris extends loans to full-time employees of the REIT of up to $100,000 each to purchase Primaris units with a fixed interest rate and a 15-year full amortization. This unique and innovative supplemental savings program is available to all full-time employees of the REIT, other than senior management and Board members, for obvious governance reasons. In the first window that the loans were offered in June, 25 Primaris employees borrowed $1.8 million to buy Primaris units. I'm thrilled that we're able to offer this program to help our team members build personal wealth. In aggregate, there are approximately 350 eligible employees that, in theory, could borrow as much as $25 million if every employee borrowed their maximum on the same day. As we launched this program, one of the common questions we received from many of our staff was what's in it for Primaris. My response was generally something along the lines of our team and our culture are highly valuable assets to the REIT, and this is an investment in our team. I also noted that it incentivizes our team members to make the connections between their day-to-day job activities and the REIT's broader organizational goals. In a sense, we now have 25 highly aligned and incentivized Primaris fans spread throughout the entire organization. I hope this program grows to represent more than 100 team members. Looking to the future, there continues to be substantial NOI growth potential across our portfolio through raising occupancy to stabilized levels and converting leases back to standard terms. We have made material progress over the last 18 months, but the vast majority of this opportunity remains to be captured over the next few years, an amount we estimate to be more than $30 million. This opportunity is supported by tenant sales in our portfolio that have more than recovered from the recent operating challenges of the last few years, while the rent that we are collecting remains depressed, subject to temporary lease amendments due to be renegotiated over the next few years. Indeed, with our Q2 results, we have once again raised our same-property NOI growth guidance because our business is accelerating faster than we had previously forecasted. Lastly, before I turn it over to Pat, I have a few comments on capital allocation. As you all know, we spend a lot of time thinking about capital allocation and value creation. At our Board meeting yesterday, this was a topic of a great deal of discussion. Our normal course issuer bid has been a very effective tool to drive growth in per unit FFO and NAV for Primaris unit homers. The 2 governing factors that have limited the volume of our buyback activity have been, number one, a desire not to reduce the equity base of our business; and number two, a desire not to increase financial leverage. Having completed the Conestoga transaction, we have significantly expanded the asset and equity basis of the REIT. And with this milestone behind us, we plan to accelerate the pace of capital recycling, including both non-core dispositions and higher volumes of buyback activity under the REIT's normal course issuer bid. Disposing of our open-air strip centers and excess lands provides access to capital from assets with low or even negative NOI contributions to fund highly accretive unit buybacks without shrinking the business or raising leverage outside of our target range. I'll now turn the call over to Pat to discuss operating and leasing results, followed by Rags, who will discuss our financial results. Pat?

[Patrick Sullivan, executive]

Thank you, Alex, and good morning. Following several years of headwinds, the current environment for Canadian mall ownership is very favorable. On fundamentals, the current supply of quality retail space in Canada is limited. There has not been a new mall built in decades. Current new construction is very limited, and the majority of available space created by failed department store anchors has primarily been absorbed or demolished. Population growth is expected to continue in Canada, with record-high immigration levels of over 450,000 immigrants per year to 2025. With the rising cost of living in Canada's largest cities, medium-sized high-growth markets where we own leading malls are growing at rates that outpace the Canadian population growth rate. In fact, Primaris trade areas are expected to grow at 11.1% over the next 5 years, far outpacing the forecast national average growth rate of 4.5%. Given the lack of new supply and population growth over the last 20-plus years, malls in our markets are typically located at the center of town where the population has grown around the property. Our 23 shopping centers portfolio is situated on over 950 acres of land. Not only are these properties at the center of their communities but they are located close to major transportation modes in public transit with broad zoning permitting a wide range of uses beyond retail, enabling potential future value creation. This land has been made more valuable over the past 10 years as traditional department store anchors have closed or their leases restructured, removing development constraints. Occupancy levels across Canadian retail REIT peer sets are essentially a stabilization in the 95%-plus range. Primaris has at least 500 basis points of runway until we are at stabilized levels, allowing us to capture the strong demand for space that we are seeing from tenants. Tenant sales productivity and volumes have rebounded and surpassed pre-pandemic levels at the majority of our properties. And rents have been adjusted downwards as a result of the pandemic. Ours are still considerably lower than where they were pre-pandemic. And with a financially healthier tenant base, Primaris is in an excellent position to capture this rental growth across our portfolio. It is this combination of low supply, rising sales, population growth and increasing tenant demand for quality space that creates the significant opportunity to drive rents and occupancy higher to quality tenants with the ability to pay increasing rents over time, driving NOI growth. As Alex mentioned, our team is very excited to add Canasta Mall, located in the growing market of Waterloo, Ontario, to our property portfolio. We believe that our leasing and operations teams will drive significant income growth at Conestoga Mall, consistent with our existing assets over the next 24 months. With new and exciting retailers unique in the market, including Apple and Lululemon, Conestoga Mall is amongst the top 15 most productive malls in Canada and is highly accretive to Primera's overall portfolio quality. Same-store sales at Conestoga Mall surpassed $1,000 per square foot in June 2023, which makes the property the highest-performing mall in the Primaris portfolio. Our growth opportunity for this property is to reduce the almost 55,000 square feet of vacant and short-term temporary tenancies with long-term tenants. By way of comparison, Orchard Park in Kelowna produces sales of $819 per square foot and has an occupancy rate excluding short-term tenants, that is more than 6% higher. Further, given the high productivity of the mall, we are confident that we'll be able to increase rents paid by tenants with long-term leases due to expire over the next few years. For the past several years, Primaris has been very focused on preserving occupancy as the Canadian retail mall sector observed the departures of Target and Sears, retailers' transition to omnichannel business models and the pandemic-driven government-mandated lockdowns and mall closures. In 2023, portfolio committed occupancy rose to 91%. We have very good visibility to reach stabilized occupancy above 95% over the next few years. Our leasing team has begun to prioritize rent growth in their discussions as we gain negotiating leverage. This can be seen in our growing leasing spreads since the REIT's formation. We expect to continue to push leasing spreads over the next several quarters as available space in our portfolio declines. Our NOI growth outperformance in the second quarter is supported by the strong fundamentals we are experiencing in our national full-service platform and team. Specifically, growth is coming from a number of sources, being rising occupancy, completion of remerchandising of former anchor tenant premises, increasing sales due to healthy tenant demand, and partially due to rising inflation driving percentage rental income higher, especially income, specialty leasing income returning to pre-pandemic levels following nonrecoverable expenses due to lower bad debt, along with increased occupancy, specifically related to former 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. We ended the second quarter with committed occupancy of 91%, up from 87.4% at the end of the second quarter in 2022. Over the past 18 months, we have shown consistent progress in growing occupancy. Our in-place occupancy at Q2 2023 is 89.8%, which is 4% higher than at the start of 2022. Same-store productivity is an all-time high of $615 per square foot as of June 20, 2023, driven by strong sales growth over the past 24 months. Including Conestoga Mall, our same-store sales figure rises to $640 per square foot. For reference, same-store sales in December 2019 were $545 per square foot. On last quarter's call, I mentioned we anticipated sales growth would level off. While we are starting to see sales for some tenants stabilize year-over-year, tenant sales continue to be very strong. In June 2023, same-property sales were approximately 6% higher than in June 2022, led by strong gains at our properties in Alberta. Leasing activity is very strong, continuing the trend from prior quarters. Our flat occupancy reported in Q2 versus Q1 is due to us intentionally terminating temporary tenants to consolidate space in order to accommodate new tenants on permanent leases. Typically, remerchandising occurs during the first 3 quarters, and there's downtime associated with replacing tenancies. With strong leasing activity continuing, we expect committed occupancy will continue to rise in the coming quarters. But this quarter, much of the new leasing is associated with the replacement of short-term leases with long-term quality tenancies. During the second quarter of 2023, our leasing team completed 156 transactions encompassing 546,000 square feet, including 35 new CRU deals, which is the highest number of new CRU deals completed since 2018. Of note, we completed a 19,500-square-foot transaction with a medical use for Sunridge Mall as well as 3 more deals with Sephora and 2 more deals with Specsavers. With respect to renewals, we completed a renewal with Real Canadian Superstore at Landon Place for 103,500 square feet as well as 3 Shoppers Drug Mart locations encompassing 50,000 square feet. Overall, renewal rents increased 8.2% over previous in-place rent, with CRU space showing an impressive 6% increase. With tenant sales having risen considerably over the past 24 months in growing occupancy, we anticipate continued positive momentum in rental growth. Not captured in our renewal rent change is the conversion of leases with preferred rental terms such as percentage rent in Lea base rent or gross rent, back to net leases, the implication being that there are additional gains to those that are captured by traditional net to net lease renewal analysis. At quarter end, there were 295 tenants representing just over 13% of our tenant base on preferred rental structures. This is a reduction of 40 leases from December 31, 2022. With a number of other leases completed and commencing later in the year, this figure will continue to decline during the balance of 2023, which will have a significant positive impact on our NOI for 2023 and beyond. And with that, I'll turn the call over to Rags to discuss our financial results.

[Raghunath Davloor, executive]

Thanks, Matt, and good morning, everyone. Strategically, we continue to focus on our differentiated financial model, represented by low leverage, low payout ratio, and significant free cash flow, which we believe is a major strategic advantage for Primaris REIT. Keeping in line with best practices and transparency, we are reiterating our balance sheet targets and are raising and tightening our guidance metrics, reflecting strong results to date and the strength of our business, we are raising and tightening our 2023 same-property cash NOI guidance to 4% to 5.5% from our previous guidance of 3% to 5%. Unsecured debt now comprises 73% of our total debt with unencumbered assets of $3 billion, including Conestoga Mall and 0 debt maturing in 2023. We are very well positioned with reduced refinancing risk and enhanced liquidity. In March of this year, we received an initial rating upgrade to BBB high stable from DBRS. Primaris has been in the market continuously repurchasing units since March 2022 under the NCIB. As of yesterday, we have purchased a cancellation 5.5 million units at an average value per unit of approximately $14.02. This program is very accretive to unitholders given the current discount to our NAV of 219. With regards to our disclosure package, we've added ranges for discount rates and total cap rates to provide further context to the valuation inputs use in the fair value process. Driving forward our Board-led ESG plan. The team completed our inaugural GRESB real estate assessment and CDP Climate Change Questionnaire. The results of Primaris GRESB submission will be publicly available in October 2023. The submission was the culmination of months of data collection and analysis. The data collected from GRESB will formulate the baseline environmental and social data sets from which we intend to develop targets for the core environmental and social ESG factors. The results will also highlight key areas of focus to advance Primaris ESG plan. ESG is an essential component of Primaris' overall strategy from both risk mitigation and opportunity optimization standpoints. Now on to our financial results. The same property's cash NOI was up 3.4% for the quarter, driven primarily by higher revenues from base rent, specialty leasing, and recovery of operating costs, partially offset by lower percentage rent in Leo-based rent. Same-property cash NOI growth for the shopping center portfolio was 3.7%. As Pat already mentioned, tenant health is strong across our portfolio and our many operating metrics are continuing to improve capture and growth. Operating cost recoveries continue to improve as we restructure our leases with the NOI margin improving from 56.6% last year to 57.2% in Q2 of this year. FFO and AFFO per unit average diluted for the quarter was $0.395 and $0.265. On the quarter, the FFO and AFFO payout ratios were 51.9% and 77.1%. We are marginally above our FFO payout ratio target of 45% to 50%, but expect this to come back within the range during the fourth quarter of this year. Primaris fair value of investment properties was $3.2 billion with external valuations received for 5 properties with fair values totaling $157 million. On a portfolio basis, we incurred an unfavorable fair value adjustment of $10.6 million for the quarter, mainly driven by adjustments to terminal cap rates and discount rates and cash flow assumptions around capital expenditures. While higher cap rates and higher interest rates have offset what would have been strong per unit NAV and FFO growth, we believe that we have absorbed these headwinds. As a result of our financing activities over the last 18 months, our weighted average term to maturity on debt is now 3-point secure. With the visibility we have into future NOI growth, we expect to see accelerating growth in per unit FFO and NAV over the next several quarters. Based on the value of our assets, we ended the quarter with a NAV of $21.90 per unit and debt to total assets of 33.3%. Average net debt to adjusted EBITDA for the quarter was 5.2x. Pro forma Conestoga, our exposure to floating rate debt continues to be low at approximately 8%. In due course, we would look to term out this debt with an unsecured bond issue. As we previously mentioned, our financial structure enabled us to execute on our acquisition strategy. Conestoga Mall was acquired with existing liquidity without the need to arrange additional new financing. This transaction demonstrates the advantage Primaris has with having one of the lowest leverage among Canadian REITs. We are very pleased to have executed a transaction of this quality while preserving our industry-leading financial metrics within target ranges, thereby enabling us to continue pursuing investment opportunities. We put a lot of emphasis on our differentiated financial model in our disclosure and when we speak to the investment committee. The power of this model has been somewhat obscured in the reach of financial results to date, but I'll take a few minutes to walk you through it. In the first 18 months of public importing, Primaris' NAV has essentially remained unchanged despite the weighted average going-in cap rate and the portfolio having risen by more than 80 basis points. Similarly, FFO per unit in Q2 was within $0.04 1% of the prior year FFO per unit and 6 months 2023 FFO was within $0.015 over the first 6 months 2022. This is despite interest expense being $0.10 per unit higher as a result of the REIT's efforts to term out its debt profile. In doing so, the rig's weighted average interest rates rose from 2.5% at December 31, 2021, to 4.76% in Q2 2023, almost doubling while extending the average term to maturity on the debt to 3.6 years from 1.7 years. Despite the substantial headwinds, NAV and FFO per unit were largely unchanged, with the offsetting driver in both cases was a combination of very strong NOI growth and a reduction of the units outstanding. This financial model is intentional and the critical pillar to our strategy in our growth story and forms part of our compensation structure, maintaining a conservative financial model and generating free cash flow after distributions and CapEx is a core focus with which we will not deviate from. With that, I'll turn the call back to Alex.

[Alexander Avery, executive]

Thank you, Reg. In conclusion, we are very pleased with our progress to date. 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 hosted a highly successful first property tour in May and are planning to get our investors out to see Conestoga Mall in the fall. In a lot of ways, it feels like we spent the first 12 or 18 months at Primaris getting set up. With our balance sheet properly set up, our first milestone acquisition behind us, and plans to accelerate our capital recycling initiatives, we've just begun to demonstrate what is possible. We'd now be pleased to answer any questions from the call participants. Operator, please open the line for questions.

[Operator]

[Operator Instructions]. Your first question comes from the line of Brad Stargus from Raymond James.

[Bradley Sturges, analyst]

Just to maybe kick off with the commentary around the NCIB and looking to reaccelerate, is it fair to say you would be comfortable getting back to where you were running at, I guess, prior to Q2? I think it was closer to like $50 million quarter or $60 million kind of annualized. Is that kind of the level you're thinking about, given where the stock is today?

[Alexander Avery, executive]

Yes. No, I think you're right, Brad, directionally. If you look at 20,000 units a day, which was what we were running at. We brought it down by 75% to 5,000 units a day, and we would be thinking in the same neighborhood.

[Bradley Sturges, analyst]

Okay. And then I guess on the commentary around being more open to exploring asset sales with, I guess, a few land parcels already listed or held for sale at the end of the quarter. I guess I'm curious to know how advanced are you in terms of perhaps listing an asset for sale today. And how should we think about the potential quantum of that near-term program?

[Alexander Avery, executive]

Yes. I mean as you see we've got 3 properties designated as held for sale. They're deals that are in process. As it relates to any larger transactions, this current market is a little bit more of a private discussion type of a market. We haven't listed any of our larger properties for sale. We do on a fairly regular basis, get inquiries from people looking to acquire some of our even sort of middle-sized assets. And then as it relates to our noncore portfolio, the ones that are strip centers, we've got the one industrial property and we've got a bunch of chunks of land. Those are actually pretty easy properties to transact on. The pricing, the market liquidity, and the number of prospective buyers are quite high. So as we're thinking about this, I mean, if we were to suggest that we could dispose off a couple of hundred million dollars of assets in the next 12, 18, 24 months. I think that's a reasonable quantum to be thinking about.

[Bradley Sturges, analyst]

And I guess the one question on the 3 parcels held for sale today. Can you give a sense of what properties or locations those parcels are at?

[Alexander Avery, executive]

Yes. So one is a couple of acres of land across from Orchard Park in Kelowna, we've got, I think, 4.5 acres at Sherwood Park in Edmonton, and then there's a couple of acres in Medicine Hat, all of which are just basically excess land in some cases covered in grass. And in other cases, overflow parking or things where they just haven't been utilized. We do pay property taxes on that land. So selling them is actually accretive to our cash flow, which is interesting plus, we use the proceeds to pay off debt or invest in other investments.

[Bradley Sturges, analyst]

And I guess the last question for me. In terms of selling income-producing assets, how do you expect the interplay to be between, I guess, your cap rate on exit on sale versus if you're deploying into acquisition opportunities for malls that kind of fit your criteria?

[Alexander Avery, executive]

The strip center-type assets would likely transact at similar type cap rates to what we are looking to acquire. And the land, obviously, generally has a negative cap rate, which is highly accretive for us. And then to the extent that we were to look to sell some of our noncore and closed shopping centers, generally, those would be at higher cap rates. But I mean, if you look in our IFRS fair value disclosure, we show the ranges of cap rates. And generally speaking, we would be looking to sell the lower growth assets, which tend to have higher cap rates associated with them.

[Raghunath Davloor, executive]

Yes, I mean there is a bit of a balancing act there, which is why we would look to supplement some of this capital recycling into the NCIB.

[Bradley Sturges, analyst]

Right. But also it's kind of, I guess, changing the mix of the portfolio in a better growth opportunity and into sort of the type of assets you want to own on a longer-term basis.

[Alexander Avery, executive]

Absolutely. And that's the criteria through which we look at our acquisitions as they need to enhance our internal growth profile.

[Operator]

Your next question comes from the line of Lorne Kalmar from Desjardins.

[Lorne Kalmar, analyst]

Just maybe talking about the occupancy. Obviously, down a little bit year-to-date. Was that sort of factored in when you initially provided your guidance? And could you give a little bit of color on sort of what you expect the cadence of occupancy gains to be over the balance of the year?

[Alexander Avery, executive]

Yes. Occupancy, I mean, getting caught up quarter-to-quarter is kind of -- it's tough to really measure quarter-to-quarter, especially since we're in the middle of the year and going through remerchandising. Given that the leasing market is shifting to a landlord market, we've taken a much stronger stance with retaining short-term tenants that aren't paying us enough rent. If they don't step up and pay we're replacing them. So during the quarter, a lot of the new tenants that have committed to space were just simply replacing short-term or temporary tenants. We did have a large one, H&M closed at Malis during the quarter, and we have a replacement deal in hand that will close in this quarter. So that's around 20,000 square feet. But going forward, I don't think we have any concerns about our committed occupancy driving up. There's good visibility to about 100,000 square feet of net absorption from simply a bunch of large-format tenants that we're working on, primarily at Landsdowne Place. and Sudbury.

[Lorne Kalmar, analyst]

Okay. That is very helpful. And then you mentioned a little bit of progress on the conversion of specialty leases. I think you're down to 13%. You were 14% last quarter. Where do you think you get to by the end of the year and then by the end of '24?

[Alexander Avery, executive]

Based on what's completed right now, there's about 45 deals that are already completed. Those tenants that are going to convert that just their leases have not commenced yet. And that program continues. So that's just what's already known to us. And then there's a lot more that's in transition. I think we've always guided towards being in the 11% range by the end of the year, and I think we're going to get there. And then subsequent next year will trend down from there into the single digits.

[Raghunath Davloor, executive]

But the way that we present that data is based on the leases that are in effect, not on forward commitments. So when Pat was mentioning the 45, those are deals that have been executed, but they haven't commenced yet, just to make sure everyone understands the presentation of that information.

[Lorne Kalmar, analyst]

Got it. And then lastly, there were some headlines about the Bay rationalizing stores and whatnot. Any concerns about the impact on your portfolio? Or do you guys think you're going to be okay there?

[Alexander Avery, executive]

We're going to be fine. I know that they had said they were going to close in a mall in Edmonton and subsequently came out and said they renegotiated the deal to remain in half the story. We've had no discussions with them isolative with regard to any of the locations in our portfolio, it's just business as usual for us.

[Operator]

Your next question comes from the line of Sam Daimani from TD Securities.

[Sam Damiani, analyst]

Thank you. Pat, maybe just on the dip in occupancy, and it sounds like being a little more aggressive on upgrading some tenants. Can you give us some examples of either some tenants or at least some categories that you're shifting out in favor of the types of categories or tenants that you're adding to the portfolio currently, just given the -- again, the occupancy decline this year, which was a little faster than it did last year?

[Patrick Sullivan, executive]

I'm not sure I would say it's a category-specific thing. I think I'll categorize tenants. There are some tenants that will say were space fillers for the -- throughout the pandemic era that really want to continue on the same approach of percentage, and we're not willing to continue. So an example is in High Street, we had a fashion tenant that was on percentage rent. We replaced them with -- it was a large one. It was about 8,000 feet. We took them out, replaced them with Livon Rose and has, and we've just got a shoe store that's committed to the other half. In Plastal Peter Pond, we had some tenants at Centric that were in temporary short-term percentage rent deals, so for it to both locations, and we get 10-year deals with them. So we've materially upgraded both the quality of the tenant and the long-term rental profile for the space.

[Sam Damiani, analyst]

That's great. Very helpful. And I noticed in the guidance, the development CapEx was raised by about $20 million this year. It sounds like some of that at least is to do with Northland Village. I wonder if you could provide a little more color there and give us an update on the leasing status of the Northland Village redevelopment.

[Patrick Sullivan, executive]

Sure. So it primarily is all related to Northland. So Northland from the outset, we said that the project would be driven by leasing and the pace that we actually developed this space would be driven by leasing. And we're very happy to report that we're doing very well on the leasing front. We're seeing above-expected rents. There is a number of pad buildings that we haven't started yet. So if we exclude those based on what's under construction and what's already built, we're 73% leased with another 23% at the final stages of either lease negotiation or negotiation. So we're on very solid footing and based on the leasing that was in place, we progressed, we advanced a number of our construction initiatives at that site to get turnover earlier.

[Sam Damiani, analyst]

That's great. Great to hear. And as you look out into 2024, would be your sort of highlights in terms of your development CapEx expectations or guidance?

[Alexander Avery, executive]

I think we have a lot of smaller focus projects in 2024. We have 3 bank pads where really our construction risk is mitigated. We're basically providing a service pad and then providing a tenant who's taken on the construction risk. And the larger projects that we're kind of working our way through right now is the demolition of the Sears box at Devonshire and the remerchandising of the space inside of the shopping center. We're just working through a tender package for the demolition of that building right now, and I fully expect we'll get going on that project early next year. That's it for me.

[Operator]

Your next question comes from the line of Sumayya Syed from CIBC.

[Sumayya Hussain, analyst]

Just quickly wanted to touch on your leasing spreads and if the high single-digit level is something I expect to deliver going forward. Or should we expect any upside to that?

[Patrick Sullivan, executive]

I would think based on the history, even going back well before even target left when we had our leasing spread. I think it's fairly -- I think it will be a fairly reasonable number to expect us to be in the 5% to 9% range for tenancies. There are huge gains that you can get from renewing large format tenants that are coming off a relatively low base. For the most part, our average -- our average here, you tenant pace around $40 a foot. So mid-to-high single digits is probably the expected norm.

[Leslie Buist, executive]

Sorry, I was just going to add that in terms of the presentation of that information, leasing spreads are calculated as net leases to net leases. So the leasing spread doesn't capture the return of modified leases to normal standard terms. And that is where, particularly over the next couple of years, we'll see the biggest gains. So it, I guess, structurally underrepresents the amount of growth that we're getting in rent.

[Sumayya Hussain, analyst]

All right. So that will still come through in your same-property numbers.

[Leslie Buist, executive]

They do, yes.

[Sumayya Hussain, analyst]

Okay. Next, I wanted to touch on kind of for the mall. The retail mix there is a bit more productive, but if I can say it's not the typical primaries make where you have more of a value-essential component. Just wondering how do you balance the 2 in exploring potential acquisitions?

[Patrick Sullivan, executive]

I think the merchandise mix at Conestoga -- I mean the main differentiator between Conestoga and the rest of our mall is really it has an Apple store. It's the first Apple store in our portfolio. They've just transacted with Browns, and we don't have any of those. And we have -- they have Aritzia, which we have one of, and Lula, which we're growing our footprint with Lulu. So there's not a material difference from the rest of the work portfolio. Certainly, the Apple and the Aritzia and Lulu and the Browns will drive productivity much higher. But the rest of the tenant mix is fairly similar to the rest of our portfolio. And I think it's going to be a pretty typical merchandise mix that we look for in other malls that we're looking to acquire.

[Operator]

Your next question comes from the line of Tal Woolley from National Bank Financial.

[Tal Woolley, analyst]

I'm just wondering on the kind of Sigma acquisition. You talked up at one of the advantages here is that you're going to be able to bring the backlog onto your management platform. Can you just talk a little bit about what sort of incremental cost savings or synergy you think you can drive out of the packet over time?

[Patrick Sullivan, executive]

Sure. I mean, first of all, we own Gulf, which is in the trade area, StoneRoad, sorry. And we've got some good synergy working with the staff of Consiliand our staff at Stoneroad. We'll be looking for procurement opportunities in that region between Stone road between our other Ontario malls in that region to help drive some cost savings. And then just from a tenant's point of view, just it gives us one more really good mall to use as a negotiating tool when dealing with tenants to cover the trade area. Really, the potential at Conestoga the short-term lines with what we believe to be more vacancies than they should be in a mall of that quality. Not to mention the party -- the mall has been mentioned -- it has been managed by third-party managers, not that there's anything wrong with that. But the mentality of a third-party manager is different than it is for an owner-manager who has a much longer view of the asset than it would be by a third-party manager.

[Alexander Avery, executive]

From a G&A perspective, sorry, I just wanted to add. From a G&A perspective, it would have a very marginal impact because we do have capacity, and we're scaling up. And so we can bolt on the property of that size and magnitude with very, very low marginal cost implications from a corporate G&A perspective.

[Tal Woolley, analyst]

Got it. And then just on the Northland redevelopment progresses and ends, I note that it is somewhat of a different format than your core holdings. Does Northland look like a noncore asset once it's done?

[Raghunath Davloor, executive]

Yes. Yes, it does. It should be -- we're anticipating that the profile of the asset will be one of the best power centers in the country, and that's not our core focus.

[Tal Woolley, analyst]

Got it. And then I just wanted to maybe get a little bit more knowledge around how to think about percentage rent as we sort of move into the back half of the year. When you're thinking about -- given the growth in occupancy, the return on tenant productivity, are you able at this point to kind of give an idea of what sort of lift we might be expecting from percentage rent contribution as we go into the back half of the year?

[Patrick Sullivan, executive]

Percentage rent, as opposed to, say, percentage rent in lieu, percentage rent is trending well above the historical norm. I think we're about almost double what we typically have been historically. And I don't know that I see that falling off. Tenants are well above their breakpoints. And given that a lot of them are midterm releases early in their lease term, their breakpoints are not going to get readjusted. So I think that's a fairly stable number through the end of the year. Percentage rent in lieu, it fell out this quarter simply because we're converting tenants back to net leases, and those conversion backed to net leases are overall much more accretive to NOI than leaving them on a percentage rent structure. The big gain, of course, for us is the recovery ratio and driving it back to a historical norm, which is about 20% higher than -- or 20 basis points higher than it is now. So I think overall percentage of revenue, I think we'll continue to see a decline, but it will be offset by -- more than offset by gains in our recovery ratios in our Phase I.

[Tal Woolley, analyst]

And when you're thinking about the tenants on this temporary retreat from the COVID period. Like, is the math such that like I'm assuming most of these guys would have below-average productivity. And the percentage that you'd be trying to claim on that would maybe a little bit higher than what you would typically see versus percentage rent or because it was a deal, the percentage so the percentage you're trying to take it a little bit lower than average.

[Patrick Sullivan, executive]

There's a lot of tenants that were on these preferred deals that had filed for creditor protection during pandemic, and their terms are extended out for a period of time, and they're due to come off. Some of those deals, the percentage rent that they paid were fairly similar to what their net deal is going to look like at the end. But that's not typical, like there's some, but most are paying well below what they should pay from a Croc perspective going forward. So there is considerable upside in converting these tenants back on a macro basis, but there is the odd tenant where the upside is limited because they do perform exceptionally well.

[Tal Woolley, analyst]

Okay. And then just lastly on the thing opportunities. You sort of mentioned that with the kind of SoC acquisition, you build some relationships with new retailers that you don't have in the rest of your portfolio. Is it a question of, like now that you have that door open, it's really easy to sort of take a tenant like, say [indiscernible] or something like that and move them into space across the portfolio? Or am I overthinking that? And it's just like it is sort of like a one-by-one kind of approach you've got to deal with?

[Patrick Sullivan, executive]

I think you're overthinking it. I think it is our first Apple. We have one other Arizona portfolio, but we know all of the Canadian retailers are well known to us. We have great relationships with Lulu, Aritzia. We all know each other. And it's very -- it's driven by them wanting to do more deals in our portfolio. And we've got ongoing discussions in that respect. But I think what it does do is it gives us a little bit better leverage in dealing with tenants across our portfolio as a whole with a broader range of tenants, ones that don't want to give up the location in Conestoga going forward. So it's really a portfolio play for us as opposed to just trying to use an acquisition to pry a specific tenant into another one of the malls.

[Operator]

[Operator Instructions] Your next question comes from the line of Mark Rocha from Canaccord Genuity.

[Mark Rothschild, analyst]

Most of my questions have been asked already. But Alex, maybe in regards to the asset sales that you're talking about, you noted that the cap rates are going to be slightly higher on some of these assets. To what extent are you okay and comfortable going ahead and selling a relatively large amount of assets, which might be FFO dilutive, but you would probably say would be accretive to NAV? And how does that factor into what you're looking to do?

[Alexander Avery, executive]

Yes, Mark, you raised a good point. I think as we look at the portfolio composition, we're looking to optimize the internal growth profile that we have, and the assets that have the lowest growth would be the ones that come with the highest cap rates. In terms of marketing for sale, any of those assets or alternative cost of capital or sources of capital or investment opportunities don't really factor into that process. But in terms of selecting which assets we might want to sell, it does. And right now, we're in a very fortunate position where if we were to, for instance, sell a property with an evaluation of an 8.5 cap. Now we can buy back our stock at a 10-something implied cap rate. And all day long, that is a trade that we should be doing. And I think the messaging that we included with this quarter's results is effectively that we're moving in that direction.

[Operator]

Your next question comes from the line of Gaurav Mathur from IA Capital Markets.

[Gaurav Mathur, analyst]

Alex, just when you're looking at the acquisition pipeline up ahead and given what you did with the Conestoga Mall, how are vendors thinking about doing transactions through a mix of cash and stock?

[Alexander Avery, executive]

Good morning, Gaurav. I've highlighted it a few times, but I think demonstrating a transaction like we did with Conestoga really helps in terms of prospective vendors understanding what a transaction looks like, and they can see what the composition of consideration looked like. And it really, I think, facilitates discussions. What we've seen since that transaction became public is the discussions that we've been having with multiple parties have generally picked up. And we're optimistic that we'll be able to acquire similar assets. It would be ideal if we could acquire another one this year. But we would hope to acquire several over the next couple of years.

[Gaurav Mathur, analyst]

Okay. Great. And then that leads me to my next question. As you're thinking about capital allocation, is the pecking order still the NCIB development and then acquisitions? Or is that changing over the next sort of 12 to 18 months?

[Alexander Avery, executive]

Yes. I mean when we look at the returns available to allocate our capital to the NCIB is just a tremendous -- it's well north of 50% instantaneously with effectively no risk. And the only real governing factors that we have on investing capital into that are -- that we don't want to increase leverage because we're very committed to our differentiated financial model. And secondly, we want to make sure that we're not shrinking the business. One of the items of feedback that we get from investors is that trading liquidity in our stock is sometimes a challenge for larger investors. What we'd like to do is continue to grow the business. But as we're looking at marginal capital allocation decisions, there's nothing on the table today that remotely compares to the effectiveness of the NCIB.

[Operator]

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

[Claire Mahaney Lyon]

Thank you, Carla. With no further questions, we'll close today's call. On behalf of the Primaris team, we thank you for all you are participating in the call, and we look forward to speaking to you again in November. Thank you, and have a great long weekend.

[Operator]

Thank you. You may now disconnect.