Primaris Real Estate Investment Trust

TSX:PMZ.UN

Earnings Call Analysis

Primaris REIT Sees Growth with Strategic Acquisitions and Strong Occupancy Recovery

In Q3 2024, Primaris REIT demonstrated robust performance with a 5.6% year-to-date growth in FFO per unit and committed occupancy nearing 95%. Notably, they upgraded their FFO guidance to $1.66-$1.68 per unit and reaffirmed their NOI target of $273-$278 million. The acquisition of Les Galeries de la Capitale bolstered their assets, while same-store sales productivity reached $684 per square foot. Leasing activity surged, evidenced by a 4.6% increase in cash NOI. The company anticipates increasing occupancy to historical levels of 96% over the next three years, enabling further rental growth and recovery ratio improvements.

Strong Financial Performance and Revised Guidance

Primaris REIT reported solid results for Q3 2024, driven by strong occupancy rates and a recovery in leasing activities. The company has raised its Funds from Operations (FFO) per unit guidance for the year from $1.66 to $1.68, reflecting confidence in continued financial strength. Cash Net Operating Income (NOI) is also expected to fall between $273 million and $278 million for 2024, which supports the financial stability of the organization moving forward.

Occupancy Growth and Leasing Activity

The company witnessed a significant increase in committed occupancy, which reached 94.8%, up from 92.8% year-over-year. Year-to-date leasing spreads have risen by 4.6%, with most renewed leases reflecting positive growth exceeding 10%. For the quarter, 96 leases were renewed at an average spread of 1.8%, while new deals encompassed 125,000 square feet, contributing to the rising occupancy that is crucial for further rent increases.

Robust Tenant Performance and Sales Productivity

While Q3 tenant sales exhibited some flattening due to seasonal fluctuations, the overall sales productivity for the same properties stood at a healthy $684 per square foot. This indicates robust performance as many tenants are reporting their highest sales figures since their opening. The long-term fundamentals remain strong with low retail space supply and rising population growth supporting sales growth in the upcoming years.

Strategic Acquisitions and Portfolio Enhancement

The recent acquisition of Les Galeries de la Capitale marks an important step in Primaris' growth strategy, enhancing its portfolio of high-quality assets. This property will facilitate opportunities for converting tenants to net rent deals and leasing up vacant spaces, thus boosting potential rental income. The integration of this property into the existing portfolio, retaining experienced management from the acquisition, enhances operational strength moving forward.

Continued Focus on Recovery Ratios and Financial Stability

Management reiterated that improving occupancy rates and converting lease structures will lead to higher recovery ratios, targeting a recovery rate of 87% by 2026, with a long-term goal of returning to historical levels of over 90%. This is seen as a strong opportunity for growth in the medium term while maintaining a conservative financial model characterized by low debt levels and substantial free cash flow.

Positivity in Market Dynamics and Future Opportunities

Despite current economic uncertainties, Primaris is in a strong position to capitalize on potential acquisitions and dispositions worth up to $1.5 billion. The company's profile as a well-capitalized entity enables it to navigate through a challenging market effectively, while efforts to enhance the liquidity of its units continue to benefit unit holders and strengthen market positioning.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to Primaris REIT's Third Quarter 2024 Results Conference Call. [Operator Instructions]

I will now turn the call over to Claire Mahaney, Vice President, Investor Relations and ESG. Please go ahead.

[Claire Mahaney, executive]

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.primarisreit.com.

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

[Alexander Avery, executive]

Thank you, Claire. Good morning. Thanks for joining Primaris REIT's third quarter 2024 conference call. Joining me today are Pat Sullivan, President and Chief Operating Officer; Rags Davloor, CFO; Leslie Buist, SVP, Finance; Morde Bobrowsky, SVP Legal; Graham Procter, SVP, Asset Management; and Claire Mahaney, VP, IR and ESG.

Firstly, let me apologize for releasing Q3 results after the close on Halloween. Somehow we missed that, and I hope it didn't interfere with trick-or-treating.

Fortunately, we made it a pretty clean quarter with a beat-and-raise headline and filled the details with continued growth across virtually all of our metrics. As we noted on our second quarter call, a key driver of the strength we are seeing in our business is the lagged effect of all of the lease conversions we have been executing that are driving our recovery ratios higher. We expect this trend could continue for several quarters.

Year-to-date FFO per unit is up 5.6% when excluding adjustments related to the unsecured bond issuance in August. Committed occupancy is approaching 95%, and you will note the continued and material improvement in our recovery ratios. In addition to our strong financial and operating results, Q3 was very, very busy.

In mid-September, we completed our annual board outreach program, connecting members of our board directly with the investment community in the absence of management. The Board gained valuable insight from these meetings and will continue to incorporate this feedback into their oversight of the REIT.

On September 24, we hosted a very well-attended Investor Day in Halifax, where we discussed our leasing and operations strategies, the ins and outs of mall merchandising, mall lease structures, capital plans, retailer trends, tenant performance, and announced 3-year targets.

We had third-party local and industry experts participate to provide their perspective, including insights from the Mayor of Halifax, the Economic Development Group of Halifax, Halifax Partnerships, and a representative from JLL, who discussed JLL's mall valuation process and the current market dynamics for enclosed shopping centers.

Our goal is to have our attendees walk away with a deeper knowledge of mall operations and a better understanding of the opportunities we have for growth. If you missed it, a video replay is available on our website. It is very comprehensive.

We concluded that day with a tour of the Halifax Shopping Center, our top-performing mall at almost $270 million in annual CRU sales and $1,100 per square foot in sales productivity. The next day, we announced the acquisition of Les Galeries de la Capitale.

This acquisition builds on Primaris' profile as an attractive buyer of large, high-quality assets. We have now transacted with 5 of Canada's 10 largest pensions. Consistent with prior acquisitions, this property enhances the REITs' value proposition with retailers and offers a significant income growth opportunity consistent with the growth that we see ahead for our existing assets.

And finally, subsequent to quarter end, we closed on a $74.7 million treasury and secondary offering enabled by the uniquely structured acquisition of Capitale. This offering enabled Primaris to increase its public float and enhance the trading liquidity of our units to the benefit of all unit holders.

On a sad note, at least personally to me, because of the Treasury offering, we were obligated to halt repurchases under the normal course issuer bid on September 27, ending a streak of 933 calendar days, or 647 consecutive trading days of buying back stock. It was a hell of a run.

When we come out of blackout, we expect to restart our very successful and accretive buyback activity. We continue to be very active in discussions on several acquisitions and dispositions. We have the capacity for well more than $1.5 billion of acquisitions and require no financial conditions on our deals. This profile as a well-capitalized and credible counterparty is a real differentiator in what is currently a challenging market for transactions for many participants.

I'll now turn over the call to Pat to discuss operating and leasing results, followed by Rags, who will discuss our financial results. Pat

[Patrick Sullivan, executive]

Thank you, Alex. As the largest owner and manager of enclosed shopping centers in Canada, measured by mall count, we have very good visibility into the performance of a wide network of stores across many retailers and banners nationwide.

The financial health of tenants continues to be quite favorable, and the dialogue with tenants looking for new and expansion opportunities remains robust.

As Alex mentioned, at our Investor Day in Halifax, we spent a considerable amount of time on rental revenue drivers, expense management, tenants' performance, including GROC and sales productivity analysis, as well as tenant risk mitigation strategies and opportunities. You can access our full Investor Day content in the Events and Presentation section of our Investor Relations website.

On October 1st, we closed on Les Galeries de la Capitale, a market-leading regional enclosed shopping center that exemplifies the type of property Primaris is targeting with its growth strategy. The shopping center sits on 91 acres of land with 26% site coverage, is extremely well located in Quebec City along major highways with excellent accessibility and visibility, and it is home to one of the region's busiest bus terminals with over 400 buses per day. The opportunity for growth at this asset includes the conversion of tenants from variable to net rent deals, as well as leasing up vacant space, including the former Sears department store.

As of today, we have owned Capitale for 30 days, and the team has been busy integrating the Capitale team into our larger national platform. I'm happy to report that we have retained the entire site team, bringing along with them a significant amount of expertise, operating history, and local knowledge.

Our same property, Cash NOI, was up 4.6% for the quarter as compared to Q3 2023, primarily driven by increased occupancy, higher rents, and very strong recoveries. NOI growth in the third quarter continues to be supported by both the strong fundamentals we're experiencing, including low retail supply, strong tenant sales, population growth, and continued tenant demand for quality space, as well as our national full-service platform and team.

Portfolio in-place occupancy was 93.4%, up 2.4% from Q3 last year. Committed occupancy was 94.8% versus 92.8% in the same quarter last year. We remain confident that we will increase occupancy back to historical levels of 96% over the next 3 years given our strong pipeline of leasing activity. Once we achieve higher occupancy rates, we will be in a better position to drive rents further upward and proactively replace underperforming tenants.

Leasing activity remains strong, with 96 leases renewed at spreads of 1.8% for the quarter and year-to-date leasing spreads of 4.6%. Excluding a 35,000 square foot tenant that renewed at lower rents, the Q3 renewal spread would have been 3.8%. The majority of leases renewed during the quarter showed positive rental growth of more than 10%. However, a small number of leases were renewed with generally shorter lease terms and at lower rents in order to maintain occupancy.

In addition, we completed 36 new deals encompassing 125,000 square feet during the quarter. And year-to-date, our team has completed 90 new transactions encompassing 370,000 square feet, which is approximately 100,000 square feet more than through the first 3 quarters of 2023.

Not captured by our renewal leasing spreads is the conversion of leases with preferred rental terms, such as percentage rent in lieu of base rent, back to net leases. The implication being that there are additional rental gains beyond those captured by the traditional net-to-net leasing spread analysis, and our leasing spreads understate the growth we are experiencing.

At quarter end, approximately 7.6% of our tenant base was on preferred rental structures compared to 11% at year-end, and 15% at the beginning of 2023. With a number of other leases completed and commencing before year-end, this figure will continue to decline during the balance of the year, which is having a significant positive impact on our NOI for 2024 and beyond.

Same-property, same-store sales productivity remains very high at $684 per square foot. For the past 24 months, tenant sales have rebounded significantly from their pandemic era lows, with many retailers operating in our properties now reporting their highest 12-month rolling sales figure as a property since opening.

Sales productivity and growth should be viewed over the long-term, not necessarily on a quarterly basis, given ongoing re-merchandising efforts and seasonality of the shopping center business. While overall reported sales productivity figures continue to show growth, our primary focus remains on driving occupancy and NOI higher, not on undertaking actions simply to drive the reported mall productivity figure higher.

Over the long run, we anticipate sales growth at our properties will occur due to the strong fundamentals in the enclosed shopping center industry being a 30-year low in per capita enclosed mall square footage in Canada, coupled with increasing population growth.

While development is not a significant focus for Primaris, we do have several projects nearing completion. Northland Village in Calgary was a 500,000-square-foot Walmart-anchored enclosed mall that has been converted to an open-air mixed-use center.

Approximately 2 acres of land was sold to a residential developer who has completed and leased 220 residential units. The retail portion of the shopping center is expected to be fully open and all tenants paying rent by Q2 2026.

Earlier this year, we completed a transaction with a specialty grocery store for 22,300 square feet and are close to finalizing deals with 2 tenants encompassing 23,000 square feet, which will bring the project close to 100% occupancy. At Devonshire Mall, the former Sears building has now been demolished and we have finalized deals with Sport Chek, Winners, Mark's Work Wearhouse to occupy approximately 46,400 square feet of space adjacent to the former Sears that was chronically vacant.

We anticipate both tenants to be open and paying rent in Q4 2025. Master planning for the 18 acres at the property resulting from the Sears demolition is well underway with significant interest from many types of uses, including retail and hospitality.

Finally, a 16,000 square foot TD Bank pad is nearing completion at Lansdowne Place with rental commencement being Q2 2025.

To conclude, our business is performing very well and we are positioned to capture continued growth within our mall. And with that, I'll turn the call over to Rags to discuss our financial results.

[Raghunath Davloor, executive]

Thank you, Pat, 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.

Given our strong results to date and confidence in the strength of our business, we are raising our FFO per unit guidance range to $1.66 to $1.68 per unit. And consistent with the Capitale press release, we reiterate our 2024 cash NOI guidance range of $273 million to $278 million.

As a reminder, our guidance does not contemplate additional future acquisitions or dispositions. With regards to 2025 guidance and the potential distribution increase, our budget cycle has not yet concluded and as such, will be communicated on a later date.

Further details of our 2024 guidance can be found in Section 4 of the MD&A titled, Current Business Environment and Outlook. Consistent with the strategy, the acquisition of Les Galeries de la Capitale, which included a significant portion of equity and exchangeable preferred equity and the consideration, which we value in our IFRS NAV. This allowed Primaris to maintain its best-in-class financial leverage metrics.

With the addition of the cash election option in this transaction, we were able to effectively redirect precisely the same number of units issuable under the acquisition agreement to a broad audience of investors. Absent this deal structure, Primaris would not issue equity units from Treasury at the current market pricing, significantly below IFRS NAV.

We continue to strive for best-in-class exposure and have provided new and enhanced information on property operating cost recovery ratios and new leasing spread metrics, considering fixed rate options.

During the quarter, we closed on the sale of Sunridge Plaza in Calgary, Alberta for $14.2 million in line with our IFRS fair value. This disposition, in addition to our assets held for sale pool, aligned to our strategy to focus on owning a growing, high-quality portfolio of leading enclosed shopping centers in Canada.

This disposition improves our overall portfolio quality and growth profile, and again, demonstrates Primaris' ability to transact and provides proceeds available to fund future acquisitions.

With regards to disposition, we currently have $218.4 million of assets held for sale and are in various stages of discussions on the majority of the disposition asset pool. The team is continuing to progress on ESG initiatives.

Earlier this month, we received a grand score and are very pleased to report that we achieved a 3 green star rating and a 15-point improvement from last year to 80 from 65.

This improvement is a result of improved data quality and quality through our improved whole building data collection process, as well as improvements to our tenant and employee engagement and satisfaction programs. Year-over-year, we have reduced our environmental footprint with reductions in greenhouse gas emissions, energy, water, and waste through the natural course of business. This is a testament to our very engaged and experienced property management team who are continuously looking for ways to optimize our properties.

For the balance of the year, we are integrating ESG into employee corporate compensation scorecards, improving our tenant engagement program, and working towards initiating the supplier engagement program. We have determined 5 core environmental and social metrics for which targets are being developed, and will be announced by year-end in our second annual ESG report. These metrics include energy intensity, green building certifications, tenant and employee engagement and satisfaction, and our GRESB score.

In 2025, we will continue to work towards formalizing the climate strategy aligning to TCFD and the proposed CSVS S1 and S2 standards, and evaluate the sub-metering pilot program that was initiated earlier this year.

Our operating and financial results for the quarter remain very strong. Tenant count is strong across our portfolio, and our many operating metrics have continued to improve, capturing growth.

For the quarter, FFO per diluted unit, excluding the impact of financing activities related to the $500 million bond issuance was $0.443 as compared to $0.421 for the same quarter last year.

Despite higher interest costs and increased unit count as a result of high-quality acquisitions completed over the last 12 months, FFO was up 5.2%, driven by strong operating results. Our average net debt to adjusted EBITDA was 5.8x and within our range of 4x to 6x.

As a reminder, this range forms part of our executive compensation structure with the top end of the range of 6x. In August, we issued $300 million in unsecured debentures at 4.998% due March 15, 2030, and $200 million in unsecured debentures at 5.304% due March 15, 2032, and repurchased $66.88 million in unsecured debentures.

We repaid and canceled $200 million unsecured syndicated non-revolving term facility and settled the $200 million interest rate swap, which had hedged the underlying variable rate on the credit facilities for a fixed rate of 3.685% per annum for an all-in rate of 4.94% per annum.

Considering that the fees Series B debentures mature in March 2025, Primaris weighted average interest rate and turn to maturity on total debt is 5.39% and 4.5 years, respectively. With unencumbered assets of $3.3 billion, $530 million available on our operating line and the prefunding of our March 2025 debt maturity, we have no unfunded debt maturing until 2027.

As such, we have eliminated refinancing risk in the medium term and have access to significant liquidity. Primaris has been in the market repurchasing units since March 9, 2022, under the NCIB. As of quarter end, we have purchased for cancellation 9.4 million units at an average value per unit of approximately $13.80 per unit or an approximate 36.8% discount to NAV of $21.82 per unit. This program is very accretive to unitholders.

Maintaining a conservative financial model and generating free cash flow after distributions and operating capital is a core focus, which we will not deviate from.

And with that, I'll turn the call back to Alex. Alex?

[Alexander Avery, executive]

Thank you, Rags. Our business continues to deliver strong performance, driven by rising occupancy, higher recovery ratios and strong leasing spreads. We have made material progress on our acquisition strategy with properties that are contributing meaningfully to our financial results and are enhancing our operating platform by increasing our relevance with retailers. We expect to see more capital recycling materialize in coming quarters, providing more capital available for further acquisitions.

Having seen interest rates peak and having termed out our debt portfolio, we expect to see material growth in NAV and cash flow per unit over the coming quarters, driven by internal growth, reinvestments of excess free cash flow and stable valuation metrics. We'd now be pleased to answer any questions from call participants.

Operator, please open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Frederic Blondeau with Green Street.

[Frederic Blondeau, analyst]

Just in terms of your 3-year SPNOI growth target of 3% to 4%, I was wondering what are your views on the recent immigration policy changes? And do you think these changes could put your target at risk at some point?

[Alexander Avery, executive]

Interesting question. I would say, our internal growth trajectory really isn't a function of immigration. We've had this occupancy improvement that's been driving a lot of our internal growth. I think more importantly, we've had the recovery ratios really rising, and that's been the last couple of quarters. It was strong in Q2, we called it out. We called it out again in this quarter.

And as I think we described last time, a lot of that is kind of the lagged impact of a lot of the lease conversions and occupancy improvement that we've been seeing. And when you look through our business to basically the NOI production of our portfolio relative to the sales that our tenants are producing, our GROC ratio has dropped over the last few years to a 200 basis points below the normal.

So we're in the 12% range. And we think in the fullness of time, we can get that back up to 14%, 15%. And so it really isn't a function of immigration. And when immigration was running hot, I think it was good for Canada and good for most businesses.

But certainly, the multi-res businesses definitely benefited from that. Our business is a lot more lagged, and it takes time. So we're not really anticipating a lot of an impact in terms of NOI. But sales certainly, we've noticed sales are flattening out.

[Frederic Blondeau, analyst]

That's great. And then just a second one here. Just in terms of your guidance on the G&A, I was wondering what is driving the increase? And what should we be expecting for the next 6, 12 months or for 2025?

[Raghunath Davloor, executive]

So the increase is really a function of the bonus. So we are running very strong. And so we have not made the full accrual. So we typically make the bonus accruals at the end of the year, and it looks like we like to come in higher. So that's the only reason we bumped up slightly.

As far as going into next year, we're in the process of finalizing our budget. So it would be hard for me to comment. It will go up slightly, but we -- it shouldn't go up significantly.

[Operator]

Your next question is from the line of Sam Damiani with TD Cowen.

[Sam Damiani, analyst]

Just on the acquisition front, I think you said at the Investor Day, there was 5 or 6 acquisitions kind of in your crosshairs and then Les Galeries de la Capitale was obviously announced shortly thereafter. So are we down to 4 to 5 that are in your crosshairs today? I wonder, if you could just update where things sit.

[Alexander Avery, executive]

I think it depends on how you define the crosshairs. But relative to where we were in September, it's actually increased a little bit. Capital obviously comes out of that prospective acquisition bucket, but there's actually an expanding opportunity set that we're looking at.

[Sam Damiani, analyst]

That's all the color we're going to get.

[Alexander Avery, executive]

5 to 6, maybe 7.

[Sam Damiani, analyst]

Okay. #2 is just going to be on the roll down of that 35,000 square foot tenant. Obviously, it was as a small tenant, but it did move the needle considerably. Is that a circumstance that you could see being repeated? Or was it a one-off?

[Patrick Sullivan, executive]

Sam, it was a one-off. It was a tenant that was -- it was a building that was newly constructed 10 years ago, and it was a significant upfront construction cost, and that played a factor in the rent on renewal dialing backwards.

[Operator]

Your next question is from the line of Lorne Kalmar with Desjardins.

[Lorne Kalmar, analyst]

Congrats on the good results this quarter. On the recovery ratios -- yes, of course, on the recovery ratios, Alex, I think you said, it could continue for several quarters. I think your 2026 target is 87%. And obviously, the ultimate goal is to get back to the high 90% average. Would this not imply there's actually quite a lot of runway on this front?

[Alexander Avery, executive]

Yes. Maybe, Pat, you can.

[Patrick Sullivan, executive]

Yes, yes, Lorne. Yes, there's a lot of runway still to come on the recovery ratios. There's a lag really that in terms of us realizing the benefits of the recovery ratio gains, it really is linked to occupancy rising and the conversion of these leases. And those leases have to -- the tenants have to take occupancy. They have to be open for a full year before we even realize the full benefit of gains. So as occupancy rises, so will our recovery ratios, but there will be a lag. So we do indeed have a couple of year runway to experience growth from these ratios going up.

[Lorne Kalmar, analyst]

Okay. So I guess, there's 2 factors, occupancy and the conversion.

[Patrick Sullivan, executive]

Yes.

[Lorne Kalmar, analyst]

Okay. And then just secondly, on the Quebec City acquisition, like you mentioned, you've had it for a month now. I know, it's still early days, but any surprises, either positive or negative?

[Patrick Sullivan, executive]

No. I think we're very pleased with the takeover with all the staff being retained was very important to us given the unique nature of the property. No surprises at all. The roller coaster works fantastic. I haven't had a ride on it yet, but looking forward to soon. Otherwise, no, it's -- transition has gone very well.

[Lorne Kalmar, analyst]

I'm looking forward to that roller coaster ride too.

[Operator]

Your next question is from the line of Brad Sturges with Raymond James.

[Bradley Sturges, analyst]

On the assets held for sale, the -- I guess, the amount of assets increased quarter-over-quarter and you're in various stages of discussion. I'm just curious, it seems to be a positive read-through in terms of maybe the depth of the buyer pool for some of these assets. Just curious, if you could elaborate in terms of what you're seeing in terms of the appetite for some of your noncore assets.

[Alexander Avery, executive]

Yes. We've seen a real uptick in terms of the private market, direct property market liquidity, certainly for assets up to $100 million, $150 million right around the beginning of August, things really started to shift. And I think a lot of it is a combination of things. The Bank of Canada cutting now 125 basis points.

But even in August, you had a couple of cuts and expectations were that cap rates weren't going to get any higher. So people wanted to deploy capital. And we've seen a lot of interest across a number of different assets, some of which were keen to sell and some of which were not.

But certainly, I think you'll see a lot more activity on the disposition side. Our targets that we put out in September, I think, are reasonable, but I think there's probably some upside risk to that over, that 3-year period.

[Raghunath Davloor, executive]

So part of the dynamic that happened is the bump of approximately $100 million really came from a non-solicited bid that we were interested in. So we weren't looking to add more at this point. But because of the strength of the market, we actually got the reverse inquiry, and we were able to -- we believe we can get this deal over the finish line, so we added it to the pool.

[Bradley Sturges, analyst]

Okay. And so it seems like, to your point, over the next couple of quarters, we could see this type of activity accelerate? And what would be the initial use of proceeds if you do execute on further asset sales?

[Raghunath Davloor, executive]

Well, initially, we just pay down debt. So we do have a little bit drawn on the line to fund capital, but then ultimately to try and deploy it into new acquisitions or depending on the pace there, also look at the NCIB.

[Operator]

Your next question is from the line of Mario Saric with Scotiabank.

[Mario Saric, analyst]

My first question might be for Pat. I think, Alex mentioned in terms of tenant sales flattening. Do you have the figures for the portfolio in terms of what average tenant sales growth was like in Q3 and how Q4 is shaping up so far?

[Patrick Sullivan, executive]

Q3 was a bit of a mixed bag in terms of July was a bit soft. September as well a little soft, but August, which is actually the third largest sales month of the year, was actually really strong. So back-to-school was really strong, and that's an important metric.

But overall, I expect the trend to just continue the flattening out. We've seen huge growth in a lot of our sales -- tenant sales over the last couple of years. And the fact that it's flattening out isn't necessarily negative. It's just -- it's more or less an inevitability for some tenants unless they want to upsize their store size.

[Mario Saric, analyst]

Got it. So still a decelerating positive, but not necessarily negative at this point.

[Patrick Sullivan, executive]

Yes.

[Mario Saric, analyst]

Got it. Okay. And then my follow-up, just coming back to the population growth. So I appreciate the commentary in terms of potentially not having an impact. And I think part of the reason might be that new supply has been nonexistent, particularly in the retail or regional mall space for some time. When you're having discussions with tenants today, is the topic of population growth, which was over 3% coming down closer to 0 potentially. Is that coming up at all?

And then secondarily, the government is proposing some pretty drastic changes to nonpermanent resident structures or programs. Are retailers at all expressing concern in terms of availability of labor and things like that in terms of executing their growth strategies going forward? Or is it still too early?

[Patrick Sullivan, executive]

I think it's probably too early. There's been 0 discussion from retailers in terms of the government's change in policy. I think, as I mentioned before, they've experienced such tremendous growth in their sales in the last few years. They're still very bullish on opening stores and expanding their footprint.

A lot of our markets have experienced tremendous population growth over the last number of years and the per capita square footage for shopping centers in Canada isn't all -- is basically at a 40-year low. So the metrics are all moving in the right directions for retailers to continue to expand and we have not heard any -- we have not had any discussion around population policy changes impacting their plans.

[Operator]

Your next question is from the line of Matt Kornack with National Bank Financial.

[Matt Kornack, analyst]

Just quickly on going back to the recoveries. Would you say that this quarter is kind of the new baseline and that you'll see an improvement from here? And also, not only were the recoveries good, but it also seemed like the expense was down in aggregate. And I know you mentioned property tax assessment settlements. Did that have a material impact? And should we expect that expense to go back up in subsequent quarters? Or is there something else to it?

[Patrick Sullivan, executive]

Property tax settlements really didn't have an impact on the recovery ratios. We have -- we're very good at managing our properties, and we've done a great job of controlling our costs and specifically our utilities, we've managed to make some great progress in terms of lowering those costs, especially in Western Canada in the last year, which has helped tremendously. We're still very low compared to our historic number on recovery ratios, and we just expect it to continue to improve. And that's going to go on for the next 24 to 36 months until we're back to a baseline normal, which is in that mid- to upper 90s.

[Matt Kornack, analyst]

Okay. Perfect. That's helpful. And then just a quick accounting one. Straight-line rent, it's been elevated for this year. I think, the forecast calls for 5 million, and you're not far off that number through the first 3 quarters of the year. How should we think about that number in subsequent quarters? And I guess, is the assumption that it will all convert to cash rent?

[Raghunath Davloor, executive]

I mean, when we're bolting on new properties, that's really where we sort of have this bump, right? And as tenants take occupancy at the end of the year, but it shouldn't go up significantly in Q4. But when you move into next year, we should see it go up because we're adding new assets. And we're -- when you're leasing up vacant space, it's just naturally going to happen because if you have a small -- if you have rent-free period or rental bumps on renewals, you will create straight-line rent. But -- so that number is going to keep creeping up is our guess.

[Matt Kornack, analyst]

Okay. So it's normal course. It's not necessarily the development related or Northland related?

[Raghunath Davloor, executive]

No, not. We had a fair bit of -- we had a lot of lease-up in the 2 acquisitions, and that moved to that.

[Operator]

Your next question is from the line of Sumayya Syed with CIBC.

[Sumayya Hussain, analyst]

Just looking at the lease maturities for 2025, and it looks like the large format space rolls at just under $12 of net rents. I think you've gotten about $20 rents on large format renewals. So is it correct to think of the spread here being the $12 going to $20? Or would there be a constraining factor here?

[Patrick Sullivan, executive]

Yes. I don't think you can just make the belief that they're all going to rise up to that. It's just a function of who the tenants are and what properties they're in. But I think there's definitely upside in the renewals next year for the large format guys, but the magnitude will be we'll figure that out over the next few months.

[Sumayya Hussain, analyst]

Okay. And then just on the guidance, you've had last few quarters of upward adjustment. What would you say is the biggest source of uncertainty or what affects the predictability as you forecast your FFO out?

[Raghunath Davloor, executive]

I will start with the other guidance. So part of what's creating the - let's call it the upside is, we underwrite our acquisitions fairly conservatively. So when we do budget on that. We go in with a certain lens. And these acquisitions are coming in stronger and the performance is coming in stronger than we initially underwrote. So that's been part of the upside positive. The recoveries have been really strong and the lag effect and working through it, it's mind-numbing math. And so that has been coming in strong.

G&A, we think we're stabilized on that front. And I think the interest rates that -- understanding the interest rate run rates and all that is basically behind us given that we have next to nothing rolling in the next few years. So it should start to -- we should be able to start tightening up the forecasting. The acquisitions have been, again, a sign of real strength and the recovery ratio. So that's what's creating the upside.

On the downside, we don't see a lot, to be honest. It's -- you really need an economic shock of some form with bad debt or tenant sales really dropping off the table. But we see the pipeline, and we're pretty confident.

[Alexander Avery, executive]

Yes. The recovery ratio dynamic is an interesting one. It's a lagged impact. And so a lot of the work that we've been doing over the last couple of years on occupancy and lease conversions. A lot of the work has been done, but the timing and the magnitude of how it rolls through our NOI has been lagged. And exactly nailing that lag has been a little bit of a challenge.

And frankly, 2, 3 quarters ago, we were surprised that we hadn't seen more of the impact. And now we're starting to see that impact. And we think that, that's going to continue for probably a number of quarters, but that's a big factor.

[Operator]

[Operator Instructions] Your next question is from the line of Loren Kalmar with Desjardins.

[Lorne Kalmar, analyst]

Just quickly, I think it was Cadillac they sold Champlain Place in New Brunswick. It looked like something that might fit your guys' buy box. Just wondering, if that was something you looked at, and why or why not you decided -- if so, why you didn't decide to move forward with it?

[Patrick Sullivan, executive]

Lorne, yes, we did look at it briefly. It was not of interest to us for a number of reasons. One, we already owned 2 malls in New Brunswick and didn't need to have a third, quite happy with the ones we have. And it's a good mall. It has a good tenant mix, but it does have some challenges to it that we weren't really interested in getting into for the long term.

[Operator]

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

[Claire Mahaney, executive]

Thank you, operator. With no further questions, we'll close today's call. On behalf of the Primaris team, we thank you all for participating and look forward to speaking with you again soon. Have a great weekend.

[Operator]

Thank you. You may now disconnect your lines.