Primaris Real Estate Investment Trust

TSX:PMZ.UN

Earnings Call Analysis

Primaris REIT Optimistic on NOI Growth

Following strong fundamentals such as rising occupancy and tenant demand, Primaris REIT reported a same property cash NOI increase of 5.7% for the quarter and 5.4% for the year. The in-place occupancy rate rose to 92.4%, with a trajectory to exceed 95% in the coming years. Sales productivity reached record highs of $624 per square foot, or $672 including Conestoga and Halifax. Lease renewals saw a 1.5% increase over previous rates this quarter and 4.6% for the full year. The REIT signed 30 new deals, pushing committed occupancy to 94.2%. The conversion of leases from percentage rent to net leases is expected to have a substantial positive impact on future NOI. For 2024, Primaris REIT reiterates a cash NOI guidance of $263 million to $268 million and expects Same Property NOI growth of 3% to 4%, with potential to reach the higher end or more.

Consistent Growth amidst a Dynamic Market

The company has continued to deliver very attractive growth, evidenced by a robust increase in same-property Net Operating Income (NOI), mainly driven by raising occupancy and converting leases back to standard terms. With a large scope for growth still ahead, the company positions itself for above-average same-property NOI expansion.

Healthy Tenant Base and Efficient Capital Expenditure

Showing strong fundamentals such as low supply and high demand, the company's tenant health remains strong, contributing to a 5.7% increase in same-property cash NOI for the quarter and 5.4% for the year. With rental growth momentum continuing, new leases and conversions from percentage rent back to net leases bode well for NOI increases for 2024 and beyond.

Projected In-Place Occupancy and Cash NOI Guidance

In-place occupancy is predicted to reach 91% by the end of 2023. Coupled with this, the company reiterates its 2024 cash NOI guidance of $263 million to $268 million, reflecting its confidence in sustaining strong growth.

Capitalization Rates and Asset Valuation Confidence

Transactions occurring across major and mid-sized markets, with both institutional and private investors, provide confidence in the company's International Financial Reporting Standards (IFRS) capitalization rates and property valuations, supporting robust acquisitions and dispositions.

Operational Efficiency and Liquidity Management

The company's operational efficiency has resulted in FFO per unit of $1.59 and AFFO per unit of $1.13 for the year. Additionally, the upsize of the credit facility to $600 million from $400 million improved liquidity, and a proactive unit repurchase program reinforced value for unitholders at a significant discount to the net asset value (NAV) of $21.54.

Stable NAV and Unit Growth Prospects

Despite the volatility in interest rates and property values, the NAV has remained stable at $21.54 per unit. This stability, along with strong same-property cash NOI growth, free cash flow retention, and unit buybacks, counterbalanced the rise in discount rates, ensuring a solid foundation for future NAV growth.

Navigating Interest Rate Challenges and Financial Performance Stability

Despite the modest year-over-year FFO per unit growth from $1.58 to $1.59, underlying strong performance was partially offset by higher interest rate expenses. With a weighted average interest rate of 5.1%, the company is positioned to potentially benefit more positively from refinancing activities compared to its peers, which could further boost FFO per unit growth in the coming years.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to Primaris REIT's Fourth Quarter 2023 Results Conference Call. [Operator Instructions] After the prepared remarks, there will be a question-and-answer session. [Operator Instructions]. I will now turn the call over to Claire Mahaney, Vice President, Investor Relations and ESG. Please go ahead.

[Claire Lyon, executive]

Thank you, Nadia. 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' REITS control that could cause actual results to differ materially from those that are disclosed and/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]

Good morning. Thanks, Claire, and thanks for joining the Primaris REIT, Fourth Quarter 2023 Conference Call. Here with me today are Patrick Sullivan, President and Chief Operating Officer; Rags Davloor, Chief Financial Officer; Leslie Buist, Senior Vice President, Finance; Morici Barowsky, Senior Vice President, Legal; Graham Procter, Senior Vice President, Asset Management; and Claire Mahaney, VP, Investor Relations and ESG.As is evident in our results, our business continues to deliver very attractive growth. We've been driving strong same-property NOI growth across our portfolio through raising occupancy to stabilized levels and converting leases back to standard terms.The scale of this opportunity continues to be very large and we expect it to drive above-average same-property NOI growth over the next few years and potentially longer as we find further opportunities in the portfolio and acquire new properties where we believe we can surface growth. Turning to capital investment, capital allocation and capital recycling. We continue to be highly active pursuing acquisitions and dispositions following our $400 million unsecured bond offering in November and the upsizing of our undrawn $600 million unsecured credit facility, we have robust liquidity and are finding lots of attractive opportunities.We have capacity for more than $1.5 billion of acquisitions and require no financing conditions in our deals. The direct property market transaction activity has picked up in our property type as confidence in enclosed shopping centers continues to build.Recently, we've begun to see the bid-ask spread on enclosed malls narrow as more transactions have begun to take place. In fact, we saw 11 Canadian enclosed shopping center transactions in 2023, totaling $2 billion of volume, of which only 2 involved Primaris REIT.Buyers are both institutional and private investors with asset transactions occurring in both major and midsized markets. These transactions give us further confidence in our IFRS cap rates and the valuations at which we are transacting on acquisitions and dispositions.I'll now turn the call over to Pat to discuss operating and leasing results followed by Rags who will discuss our financial results.

[Patrick Sullivan, executive]

Thank you, Alex, and good morning. In November, we closed on the acquisition of the Halifax Shopping Center Complex. This property exemplifies the quality and market-leading nature of the types of acquisitions Primaris is pursuing.The center is extremely well located in central Halifax adjacent to Halifax Transits Mumford turnable and at the gateway to the Halifax Peninsula with a market-leading position in one of Canada's fastest-growing midsized population centers.With very strong sales performance, this acquisition enhances the REIT's portfolio value proposition with retailers and offers a significant income growth opportunity consistent with the growth we see ahead for existing assets.Opportunities for this property include the reduction of the 20,000 square feet of vacancy and replacement of short-term temporary tenancies with long-term tenants in the mall and continue the Phase 1 master planning application process for approximately 1,800 residential units on excess lands at the Annex. The $54 million redevelopment of the former Sears space at Halifax was substantially completed prior to our acquisition. The redevelopment includes a 56,000 square foot Simons, a 38,000 square foot Winners, 13,000 square foot Dollarama and a 15,000 square foot PetSmart, all of which are expected to open by the end of March. This is our eighth property acquisition in the last 2 years, including the legal properties.The integration of these assets into our platform has been smooth as we are also acquiring the local site teams who have a lot of tenure and history of the respective properties and are able to adapt quickly to the Primaris platform.As a result of the successful execution of our strategy of acquiring leading shopping centers in high-growth midsized Canadian markets, including acquiring 2 of Canada's top 15 most productive malls, we are now the largest owner and manager of enclosed shopping centers in Canada, measured by mall county.The growth in our platform, natural footprint and asset quality has increased our relevance with retailers and allowed us to build relationships with tenants new to our portfolio. We are having very productive conversations as retailers look to service Canadian consumer and gain access to our markets.Our NOI growth outperformance in the fourth quarter is supported by both the strong fundamentals we're experiencing, low supply, rising sales, population growth and increasing tenant demand for quality space as well as our national full-service platform and team.Specifically, growth is coming from a number of sources, including rising occupancy, remerchandising of former anchor premises, increasing sales, following nonrecoverable expenses and improving recovery ratios.As a result, same property cash NOI was up 5.7% for the quarter and 5.4% for the year. In 2023, portfolio in-place occupancy rose to 92.4%, and we have good visibility to reach stabilized occupancy above 95% over the next few years.During the year, occupancy was impacted by the pending demolition of the 185,000 square foot former Sears space at Devonshire Mall in Windsor, Ontario, which has been removed from our available space and portfolio denominator. Excluding the remeasurement of GLA, in-place occupancy would have been 91% at the end of 2023. We are disclosing a few important new operating metrics. We've begun reporting long-term occupancy, which stood at 89% and which includes only tenants with standard lease forms with term exceeding 1 year.We're also introducing short-term occupancy of 3.4%, which includes tenant leases of less than 1 year and specialty leasing. As you will note, the sum of these 2 numbers is our in-place occupancy. By providing more transparency around occupancy, we believe it will give the investment community better information to understand our unique business as the only enclosed shopping center REIT in Canada.Same Property, Same-store sales productivity is at an all-time high of $624 per square foot and including Conestoga and Halifax productivity it rises to $672 per square foot. We are starting to see sales for some tenants stabilize year-over-year, although tenant sales continue to be very strong and our lease negotiations with tenants on new leases and renewals are very robust.Overall, renewal rents have increased 1.5% over previous in-place rents during the quarter and 4.6% for the full year. With tenant sales having risen considerably over the past 24 months and growing occupancy, we anticipate continued positive momentum in rental growth. During the quarter, we signed 30 new deals, which helped drive our committed occupancy up 1.9% or approximately 230,000 square feet to 94.2%. We anticipate a portion of the committed space to open over the course of the next 12 months, including over 100,000 square feet at Halifax Shopping Center.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 there are additional rental gains beyond those that are captured by the traditional net to net leasing spread analysis and our leasing spreads understate the growth we are experiencing.At year-end, approximately 11% of our tenant base was on preferred rental structures compared to 12% in Q3 and 15% at the beginning of 2023. With a number of other leases completed and commencing later in the year, this figure will continue to decline during the balance of the year, which will have a significant positive impact on our NOI for 2024 and beyond. In 2024, we have 1.4 million square feet maturing of which over 1 million square feet of that is CRU. These leases on average are expiring at rents below our CRU weighted average net rent creating opportunity for future strong leasing spreads. Our leasing team is well advanced in discussions with tenants occupying more than 50% of the GLA due to expire in 2024.And with that, I'll turn the call over to Rag to discuss our financial results.

[Raghunath Davloor, executive]

Thanks, 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.Keeping in line with best practice and transparency and reflecting strong results to date and the strength of our business, we are reiterating our 2024 guidance and have added cash NOI for the year of $263 million to $268 million.Further details of our 2024 guidance can be found in Section 4 of the MD&A titled Current Business Environment and Outlook. With regards to dispositions, we are currently targeting approximately $100 million and are in advanced discussion more than half of this asset pool.We added new disclosure during the quarter, including breaking out TRU and large format in place occupancy and long-term occupancy and short-term in-place occupancy which Pat has already discussed.In December, we published our inaugural annual ESG report providing relevant and important disclosures that address our key ESG factors and strategy, enabling our financial stakeholders to assess our progress, strategy and impact. Our operating and financial results for the quarter and year-end remain very strong. Tenant Health is strong across our portfolio and the many operating metrics are continuing to improve, capturing growth.FFO per diluted unit for the quarter and year-end was $0.402 and $1.59, respectively. AFFO per diluted unit for the quarter and year-end was $0.249 and $1.13, respectively. We had a couple of onetime items impacting FFO and AFFO, including a $0.02 onetime charge relating to the sublease of our office space on Wellington Street.We will realize $750,000 in annual G&A savings beginning in 2024 as a result of the sublet deal. Secondly, there was a $0.01 impact from upsizing the credit facility relating to amortized fees in connection with the previous facility.Note that these items have skewed to normal seasonality, investors should expect in our Q4 results, though neither impacted NOI, which more accurately demonstrates the seasonality. The unsecured syndicated revolving term facility was upsized to $600 million from $400 million, significantly increasing liquidity. We are in the process of refinancing 2 joint venture assets and expect to have cash on hand of in excess of $100 million by quarter end. Our exposure to floating rate debt is 0.During the quarter, we incurred an unfavorable fair value adjustment of approximately $36 million, primarily driven by different growth. Given the wide bid-ask spread on development land, we thought it was prudent to have Dufferin Grove externally appraised and took a $33 million impairment.Despite the write-down, there is tremendous amount of value at this property which we will continue to hold until the timing is right to monetize. Unsecured debt now comprises 80% of our total debt with unencumbered assets of $3.4 billion, $150 million mortgage maturing in 2024 and full availability of our $600 million operating line and significant cash on hand, we are well positioned with reduced refinancing risk and access to ample liquidity. Primaris has been in the market continuously repurchasing units since March 9, 2022, under the NCIB. As of yesterday, we have purchased for cancellation 8.5 million units at an average value per unit of approximately $13.82 or an approximate 35.8% discount to NAV. This program is very accretive to unitholders given the current discount to our NAV of $21.54.We're maintaining a conservative financial model and generating free cash flow after distributions and CapEx is a core focus until we will not be [Indiscernible]. With that, I'll turn the call back to Alex.

[Alexander Avery, executive]

Thanks, Rags. As Rags mentioned, our differentiated financial model has allowed us to continue to execute on our corporate strategy, delivering significant growth and value for our unitholders. This growth in value can be seen as follows; firstly, the NAV of a Primaris unit of $21.54 has remained very stable over the first 8 quarters since Primaris spin-off transaction with each of the quarters remaining within 3% of the starting value of $22.11 per unit at December 31, 2021.So, if this NAV is so stable, where is the growth that I just referenced? Our remarkably stable NAV per unit masks 2 significant dynamics. The first is the sharp increase in interest rates over the past 2 years and associated downward pressure on property values that results from upward pressure on capitalization rates.And the second is the REIT's value-creation activities spanning stabilization of property operating and financial performance as well as the impact of the REIT's differentiated financial model of low leverage and a low payout ratio.The valuation metrics used in valuing our portfolio, discount rates, terminal cap rates and going in cap rates have all moved substantially over the past 8 quarters based on market pricing provided by independent third-party appraisals and moved significantly more than those reported by our peers. Over the first 8 quarters of reporting, the discount rate employed in the REIT's NAV rose 71 basis points, which is equal to an approximate $400 million reduction in portfolio value, holding all other factors unchanged. This substantial negative impact was almost completely offset in the NAV per unit by the REIT's value creation activities, strong Same-Property Cash NOI growth, retained free cash flow and unit repurchases.Looking at the next few years, we believe that the headwinds of rising interest rates and valuation metrics are likely behind us, while the tailwinds of value creation continue to offer significant growth for Primaris unitholders.As a result, we expect to see NAV per unit grow over the next few years, driven by internal growth, reinvestment of excess free cash flow and stable valuation metrics. Secondly, similar to the NAV per unit, the REIT's stable FFO per unit in 2023 compared to 2022 masks the underlying dynamics of rising interest rates and strong internal growth.Between 2022 and 2023, higher interest expense reduced FFO per unit by approximately $0.12 per unit. Having delivered $1.58 per unit in 2022 and $1.59 in 2023, the modest 0.5% growth per unit would have been a 5.5% increase in FFO per unit, reaching $1.71 in 2023, excluding the impact of higher interest expenses. There is a silver lining to having seen otherwise strong FFO per unit growth offset by a sharp increase in interest expense. Silver lining is Primaris weighted average interest rate of 5.1%, the highest amongst our peers by a wide margin.Regardless of the path of interest rates in the near future, the impact of refinancing on FFO will be either less negative or more positive for Primaris than for our peers during re-financings over the next few years. This will have the effect of further elevating the REIT's FFO per unit growth, otherwise driven by Same-Property NOI growth, rising occupancy and retained free cash flow. This quarter, we added or expanded disclosure around the positive impact our unit repurchases have had on both NAV per unit and FFO per unit. I won't get into it now, but it's worth exploring and it's a tool that we can use on an ongoing basis because of our low leverage and low payout ratio.To conclude, we spend a lot of time talking about the differentiated financial model because of the very significant advantages it offers to our unitholders, including superior FFO and NAV per unit growth as well as the financial flexibility to execute on the REIT's corporate strategy to grow the scale and quality of our business.We'd now be pleased to answer any questions from the call participants. Operator, please open the line for questions.

[Operator]

Thank you. [Operator Instructions]. Our first question goes to Lorne Kalmar of Desjardins.

[Lorne Kalmar, analyst]

Alex, you mentioned the $1.5 billion of acquisition capacity, but given where leverage is, would it be fair to assume that you guys would need to undertake some dispositions before adding some more malls to the portfolio?

[Alexander Avery, executive]

Well, it's a multifactor discussion. We have a lot of liquidity but you're right, we are very mindful of our leverage and a big factor in the financial capacity or the acquisition capacity that we have is the deal structure.As you know, the last 2 deals included a significant vendor take-back equity component and so we've positioned ourselves to be in the most opportune spot that we can to do more of these transactions by ensuring that we have the undrawn credit facility, cash balances and capacity to execute on that front without financing conditions.But, you're right, the dispositions are a priority for us and we're moving on that front to think about $90 million of assets held for sale at Q4, and it's quite conceivable that over the course of 2024, there could be further assets moved into that bucket.

[Lorne Kalmar, analyst]

And then maybe just as my follow-up. For the asset you are targeting for disposition, what does the buyer profile look like?

[Patrick Sullivan, executive]

I think the target of the assets, we're targeting for sale right now are really our noncore assets and so I think you're looking a lot of private buyers versus institutionals.

[Lorne Kalmar, analyst]

That seems to be the general trend that we've been seeing lately.

[Operator]

And the next question goes to Brad Sturges of Raymond James.

[Bradley Sturges, analyst]

I guess, sticking with the acquisition team and the reference to the mall trades that happened last year, specifically with the 9 malls that did not involve the REIT.I guess I'm just curious to get a read through on those transactions as it relates to Primaris in terms of any read-through on valuation or I guess, the type of malls or the buyer profiles that would have been participating in those deals. Just curiously, I guess to get a little bit more color on how that could be a good read-through for Primaris or not.

[Alexander Avery, executive]

Thanks, Brad. It's a pretty diverse bucket of transactions. We've seen some transactions where you had buyers that wanted to keep a mall as a high-performing malls.The transaction at Von mills would be a good example, a very strong mall, very, I guess, good pricing and I think that, that's one end of the spectrum. At the other end of the spectrum, you've got smaller malls, some that are in the second or third mall in their market where the buyer had more of a residential redevelopment or sort of mixed use vision for the property.And from Von mills all the way down to some of the smaller secondary markets quite a cross-section of buyers. In the case of Von mills, it was an Asian capital partner and JLL, who were the buyer there and then all the way down to some small private syndicators at the other end of the spectrum, and it's a full cross section from sort of sovereign wealth funds all the way down to private syndicators. All of the pricing that we've seen, and we spend a decent amount of time making sure that we're comfortable with our valuations with our third-party appraisers. All of the transactions that were concluded in 2023 or transactions that are included in the background for the appraisals that we get on our portfolio. So, they're all supportive of where our IFRS, NAV is today.

[Bradley Sturges, analyst]

And from the third perspective, I guess it's going to be a mix of, I guess, rebalancing considerations, but also maybe selling noncore assets that have maybe a different use to the buyer?

[Alexander Avery, executive]

I'm sorry, I didn't quite understand the question.

[Bradley Sturges, analyst]

Yes. I guess I'm just trying to understand the motivation from this would be, I guess, in line with some of your previous discussion points in terms of being rebalancing discussions of real estate holdings? And maybe, I guess, just would there be any other driving forces on the seller's behalf?

[Alexander Avery, executive]

Yes. It's a good point, and there have been some developments on that front, I would say. Previously, we've highlighted that some of the vendors are looking to rebalance their portfolios. 10 years ago, 15 years ago, most pension funds didn't own a lot of multi-residential data centers and cell towers and life sciences, office weren't really big property type categories or deeply investable.And that's changed over the last decade and so, there's definitely an appetite from institutional investors to increase industrial, multi-residential cell towers, data centers, et cetera. The other thing that's been quite interesting is that large institutions have asset allocation committees and the committees are generally consistent with the mandate that the pension funds have, which is a long-term mandate.They look to balance their portfolios of various different investment categories and try to be relatively consistent over time. But when you have something like what we've had in the last 24 months in terms of a material change in the interest rate environment, the inflation environment, asset pricing, you do tend to see a little bit more activity from asset allocation committees.And I can't point to any committee in particular but I would say the dialogue that we have with a lot of these groups suggests that there's more activity in terms of rebalancing asset class weightings. Bond values have come down as interest rates have gone up, depending on what part of the equity market you're either down or materially up if you're in the magnificent 7, but there has been a lot of movement there and I think that's part of the driver.

[Operator]

The next question goes to Sam Damiani of TD Cohen.

[Sam Damiani, analyst]

Just wanted to get into the property performance a bit. I noticed the NOI was pretty healthy from the acquisitions and at the same time, you mentioned there was a number of tenants opening up early in 2024. So, is the NOI from Halifax going to be growing as those tenants open up? Or was the sort of 30 days that we saw in Q4, a pretty good run rate for Halifax?

[Patrick Sullivan, executive]

Good morning, Sam. Yes, the NOI from Halifax is going to benefit in 2024 from the tenants opening in the former Sears premises. There's about 100,000 square feet of tenancy that's due to open towards the end of March. In addition, there's some other tenants due to open, but there's a significant driver from that event alone.

[Alexander Avery, executive]

I was just going to say, as you know, 30 days is a pretty small sample. So, annualizing 30 days is fraught with a little bit of risk, but we're very pleased with the performance of the asset so far.

[Sam Damiani, analyst]

Are you not advising that we do that annualizing?

[Alexander Avery, executive]

We're generally cautious in providing guidance.

[Raghunath Davloor, executive]

Yes. Recall that December has the high sales of percent rent, it just got to be a little bit [Indiscernible]. But there is a big offset because of the tenant openings. So, when you annualize that, just recognize that you are dealing with December.

[Sam Damiani, analyst]

And last question for me. Just on the guidance does include some occupancy gain targets. Is that in place or committed? And how does that sort of metric stack in terms of your priorities amongst the various metrics that are included in your guidance?

[Patrick Sullivan, executive]

Yes. I mean, we do have a fair amount of committed space that's due to come on this year, including what I've mentioned previously the space at Halifax.We expect to do a lot more leasing this year. There's a lot of leasing in the queue, some of which will actually open in 2024 as well that we haven't captured in any of our stats right now, and some of it will open into 2025. But we're very confident that our occupancy targets that we laid out are going to be met.

[Raghunath Davloor, executive]

And your question is in place we've committed to be both. We'll be looking for the 80 to 100 basis points uptick.

[Operator]

The next question goes to Ramel Sabat of Scotiabank.

[Ramel Sabat, analyst]

So, my question is outside of your tenant discussions, are there any leading macroeconomic indicators that you pay attention to that may provide insight on the future occupancy trend of your portfolio? And how sensitive do you think that your portfolio occupancy is 2 hours, lately?

[Patrick Sullivan, executive]

We really pay a lot of attention to our sales reports and was done at the overall level of the mall but we really drilled down tenant by tenant.The reality is a lot of the tenants have had a really good run, but everyone's had different kind of sales growth since the pandemic ended. There's been some that really did well right out of the pandemic and there's some that have lagged.For instance, our food courts took the longest rebound, and that was partly due to our traffic levels and the dwell time in the malls being one of the last things to return back to normal and that happened about 6 to 10 months ago. So, that's the primary driver. In terms of what happens if there's a hard line in the economy, our malls are much more diversified than they ever were before. We have a lot more necessity-based users. We're a lot less explosive fashion and the fashion users we have are generally very solid in terms of their financial covenant, and we have a lot of long-term leases in place.Retailers really look at these events in the short term. They build out their stores with a lot of capital and they look at things over the long term. So, our sales reports right now are still showing strength amongst our retailers and their sales levels are generally higher than they've been at any point in the last 5 years.

[Ramel Sabat, analyst]

And my other question is, so we realized that you removed the 25% to 35% debt to asset target for '24. Is there a specific reason why you stopped disclosing it?

[Alexander Avery, executive]

Yes, there is. And it's because that's not really the way that we look at leverage. We're very focused on debt to EBITDA. And one of the challenges with loan to value is that it's a function of value. And what we try to consistently do is avoid creating conflicts of interest and for the same reason, we don't include loan-to-value or NAV per unit in our compensation performance metrics because if you do, you're incentivizing bias in your IFRS fair values and that's something that we don't want.So, we're going to continue to report loan to value but we just don't emphasize it because we're trying to avoid undue influence on our IFRS, NAV. We want it to be meaningful and for it to be meaningful, it needs to be accurate, dynamic and objective.

[Operator]

The next question goes to Gaurav Mathur, Laurentian Bank Securities.

[Gaurav Mathur, analyst]

Just a quick question on the NCIB. Now, you've been very active over the past couple of years, buying back 8.5 million units. Looking forward, how are you balancing future NCIB activity and thinking about it from the perspective of market liquidity for the units themselves?

[Alexander Avery, executive]

It's a good question, Gaurav and it's something that we talk a lot about. If you look at SEDI, you will notice that we ran at about 30,000 units a day for the last 4 months of 2023 and when we rolled over into 2024, we had to go into our automatic unit purchase plan during the blackout that started December 31.And since then, we've been buying back at 2,500 units a day, so a materially reduced volume. And that's not a reflection of any change in our opinion of the value that is available by buying back the units today.It's more a function of our I guess, caution from a capital structure perspective. We did a similar reduction in our NCIB activity ahead of the announcement of the Conestoga transaction. And as we're approaching potential transactions we like to make sure that we've got as much wiggle room as possible from a financing and capital structure perspective.But to your point about the impact on trading liquidity, the way that we have designed or approached the NCIB is that we're going to execute the NCIB subject to 2 conditions. One is that we're not changing the capital structure of the business and so, that means that we can only fund NCIB out of excess free cash flow or proceeds from dispositions, and we don't want to be shrinking the business.So, when we buy back units, we're not actually shrinking the float of the company. We're buying back relatively few units and the equity base of the business is staying the same, which means that the value of the float is the same, it's just fewer units. So, we're doing it at a snail's pace but it isn't shrinking the trading liquidity or the float that's just increasing the value per unit.

[Operator]

The next question goes to Mr. Sumayya Syed of CIBC.

[Sumayya Hussain, analyst]

First, I just wanted to ask about, noting there are some nuances to your leasing spreads disclosure. But would you have a sense of how much of your leases are growth versus on a net rent basis? And if the growth bucket includes leases beyond the 11% on the preferred rent structure?

[Patrick Sullivan, executive]

Yes. The 11% actually includes percentage rent in lieu and gross rent as well. That's down from the 15% at the start of last year, but that includes all those variable rent deals.

[Sumayya Hussain, analyst]

And then, Pat, you noted in your commentary that you have about over 1 million square feet of CRU space expiring level O market, what will be the approximate spread between in-place and market rents currently?

[Patrick Sullivan, executive]

It's about -- I mean at a macro level, we're talking about 10% below market.

[Sumayya Hussain, analyst]

10% for the CRU space?

[Patrick Sullivan, executive]

Yes.

[Operator]

[Operator Instructions] And we have a follow-up from Sam Damiani of TD Cohen.

[Sam Damiani, analyst]

I just wanted to get into some tenant risk. We're seeing a lot of headlines about job losses and whatnot with the sort of still pretty cloudy macro outlook. Are you seeing any increase in the size of your list of tenants on the watch list versus the last quarter, perhaps some retailers like The Source and Body Shop have been in the news over the last little while?

[Patrick Sullivan, executive]

Yes, Sam, I don't know. We've got a risk list more than a watch list. I think there's a number of tenants that we -- because we get the sales reported to us, we can see who's becoming, I'll call it, less relevant or hasn't rebounded in terms of where their sales are compared to their peers from the pandemic.Body Shop has been on that list and we've been actively trying to reduce our weighting with them. However, we have had no discussion with them about them wanting to close stores or reduce the rent. I think we're just taking a proactive approach to some tenants.The Source was an interesting deal. They basically did a license agreement with Best Buy, they're rebranding our number of stores. We had some stores in our portfolio that will close as a result but they were generally due to expire this year, and we had anticipated them closing anyway.So, we're keeping quite a few of the Source stores they're going to invest to consider the amount of capital in those stores and we're actually renegotiating longer-term leases with the stores that are remaining, and we've managed to get higher rents on those renewals, much higher rents.But overall, our watch list hasn't grown but we do have our eye on the same tenants, I would suggest we had our eye on 6 months ago in terms of reducing our exposure over time.

[Sam Damiani, analyst]

And Alex, I guess, for you, just versus a month or 2 ago, how confident are you in Primaris announcing another significant mall acquisition?

[Alexander Avery, executive]

Sorry, compared to a month or 2 ago?

[Sam Damiani, analyst]

Yes.

[Alexander Avery, executive]

I would say there's probably been no real change. As has been the case, pretty much since October 27, 2021, we have a lot of discussions ongoing. They're in various stages of the process and I'm, I would say, optimistic that we will be able to complete significant acquisitions this year.

[Raghunath Davloor, executive]

Yes. We do, I mean, Alex is trying to be cautious, but we do have a lot more transactions that we're underwriting. Let me put it that way. So, where we may have had, call it, $500 million to $600 million of assets that we were underwriting 3, 4 months ago.We're well through $1 billion of assets that we're looking at. They're all at various stages of underwriting and discussions with possible vendors but the level of activity has definitely picked up since the announcement of Halifax.

[Operator]

We have a follow-up from Brad Sturges of Raymond James.

[Bradley Sturges, analyst]

Just one quick follow-up on the lease expiries for '24. I think you said in the opening remarks that I think 50% of the space is under various stages of discussion. I just wanted to get any thoughts on expectations for this as far as this year in terms of retention rate with tenants and leasing spreads? Would it be pretty similar to what the REIT achieved in '23?

[Patrick Sullivan, executive]

Yes. I mean right now, our prioritization is driving NOI higher and until we get our occupancy much higher, I think we're going to focus on retaining tenants even if that means that we're going to have a reduced overall renewal rent or a lower overall renewal rent.There was only a handful of tenants that resulted in our renewal rent being as low as it was in this last quarter. In fact, it was 2 tenants that brought it down considerably that we just chose to keep because it was positive for NOI as opposed to driving a statistic that's really not that important at the moment. NOI is the priority.

[Alexander Avery, executive]

It's a little bit of a frustration for us internally to try and clearly communicate around leasing spreads and what's happening. And in a few conversations in the last 24 hours, we've been discussing one of the ways to look at it is, if you take the change in in-place occupancy or in-place occupied space over the last 12 months and then you layer in the leasing spreads on renewals, you don't get anywhere near 5.4% Same Property NOI growth.And that's what isn't being captured in the way that our statistics are reported and we've talked about it before, but the leasing spreads are exclusively net leased to net lease spreads and where we're delivering all of this extra Same Property NOI growth is the conversion of pandemic era leases from percentage rent blue or gross rent or the greater of, I mean there's a dozen or more variations on these leases but they don't get properly captured in our leasing spreads.So, I think in another way to frame your question, how do we expect to be reporting leasing spreads over the next year or 2? They'll probably continue to be a little bit lumpy, up and down, mid-single digits would be probably the right proximity for them, but they will continue to structurally underrepresent the growth that we're seeing in the portfolio.And you'll see that in the margin, and you'll see that in the Same Property NOI growth, which our guidance for 2024 is 3% to 4%. And if things go well, it could reach the high end of that range or possibly beyond.

[Operator]

And the next question goes to Mark Rothschild of Canaccord.

[Mark Rothschild, analyst]

Maybe just following up with something you discussed that Sumayya asked in regards to converting leases, you've mentioned this a couple of times. Can you give a little more information on the financial impact of this and how this should impact your numbers and how we should think about this?

[Alexander Avery, executive]

It's again, this is part of the frustration that we have. It's very difficult to characterize them because they are all very different and sometimes you convert a gross lease to a net lease and there's no impact.Sometimes there's a 100% lift. It is idiosyncratic across all of them but I think if you wanted to try and characterize it, one way to think about it is in the percentage rent in lieu leases, which are the largest component of that 11% that Pat referenced.A lot of those deals were 8% or 10% of sales, and our ROC ratio that we target would be 14%. So, 14% on 8% or 10% is the right ballpark to think about the lifts that are possible on these lease conversions.

[Raghunath Davloor, executive]

Where you see -- Mark, it's Rags. So, where you see the impact, or can measure the impact is if you look at the margin, the gross margin, you do see the steady tick up in gross margin on the portfolio. So, that's how it's sort of coming through.

[Mark Rothschild, analyst]

I don't fully understand, but at least I hear the answer. Maybe just one more. When you look at buying assets and issuing units to vendors, how do you think about that in terms of increasing liquidity, knowing that most of the time they're not likely to sell for a period of time? Just curious how you think about that and is that something you would like to do more going forward or is it something that you only do in situations where the only way to get a deal done?

[Raghunath Davloor, executive]

There's a lot of embedded questions in there. I would say we have 2 separate and distinct objectives. One is to execute on our business plan, which is, we characterize it as becoming the first call for retailers and that involves acquiring market-leading shopping centers, growing the relevance of the Primaris platform to retailers.And then separate and distinct from that, I think we can all acknowledge that trading liquidity at Primaris or in Primaris units is less than what a lot of larger institutions would love before they build a position. And we would like to see that improve.But we're also very disciplined around what we're willing to do to get that there. If we're going to do acquisitions, the hurdle for us is that we try to make them FFO neutral and at the same time, we want them to be additive to portfolio scale, portfolio quality.At the end of the day, when we execute an acquisition, we want our unitholders, which all of us are included to be neutral at worst, but ideally better off from a value and business strategy perspective, and we do try to anchor to an FFO neutral position. It will be great to have more trading liquidity at the end of the day. I think some of that will resolve if our units trade higher. As they trade higher, there's the possibility that some of the vendors who have taken back units will sell those units.

[Operator]

And the next question goes to Gaurav Mathur of Laurentian Bank Securities.

[Gaurav Mathur, analyst]

Just a quick follow-up on that line of acquisitions that you're looking to underwrite. Would it be fair to say that vendors are now more receptive to the fact that they're looking at cash on stock as a financing mix versus just outright cash in this environment?

[Raghunath Davloor, executive]

Well, when we do these acquisitions, we're not borrowing. So, there is no sort of impact from that perspective. However, we draw down on our off-line and then we sort of term it out to the unsecured market.So, that increase -- so those -- if you look at the research around the unsecured, they do view these acquisitions extremely positive from a leverage perspective and they view them as very credit friendly.So, we have seen a significant tightening in our spreads on our unsecured. So today, just to sort of measure the quote we are getting, if you did sort of a 3-year unsecured would be $1.65 to $1.70 back on a 3-year deal and the mortgage that we're just about to put in place, which is a 3-year mortgage is sort of price stood around $1.55.So now, we're sort of getting into the 10 to 15 basis points differential between secured debt and unsecured, which is a huge improvement from where we were a year ago. That spread differentials who is around 100 basis points. So, I think lenders do view these more of the unsecured lenders to view this program from a very positive perspective.

[Alexander Avery, executive]

And it definitely helps. And just in case you said vendor, not lender on the vendor side, the groups that we're dealing with, I think as a general pool are more knowledgeable about what our deal structure looks like in part, because of the execution of the Conestoga transaction and the Halifax transaction.And I think vendors in general, are looking for cash when they sell things. So, there's a discussion that goes on about what the composition of the consideration is. And as we're talking through that, we have constraints from a leverage perspective and total pricing.So, it's a multivariable discussion but, I would say, as a general statement, there is greater acceptance of the type of transaction that we're doing primarily because we've now done 2 of them and people see how they work and understand it a little bit more.And to contrast that, prior to announcing the Conestoga transaction, especially the first calls with some of these groups, we were a little bit out there. It was a little bit hard to explain what we're up to but with the transactions executed, I think there's been a growing acceptance.

[Operator]

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

[Claire Lyon, executive]

Thank you, Nadia. With no further questions, we'll close today's call. On behalf of the Primaris team, we thank you all for participating in today's call, and we look forward to speaking with you again on our next call. Thank you.

[Operator]

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