RioCan Real Estate Investment Trust

TSX:REI.UN

Earnings Call Transcript 2023-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust First Quarter 2023 Conference Call and Webcast. As a reminder, this conference call is being recorded.

I'd now like to turn the conference call over to Ms. Jennifer Suess, Senior Vice President, General Counsel, ESG and Corporate Secretary. Ms. Suess, you may begin.

[Jennifer Suess]

Thank you, and good morning, everyone. I'm Jennifer Suess, Senior Vice President, General Counsel, ESG and Corporate Secretary of RioCan. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website yesterday evening. Before turning the call over, I'm required to read the following cautionary statements.

In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusion in these forward-looking statements.

In discussing our financial and operating performance and in responding to your questions, we will also be referencing certain financial measures that are not generally accepted accounting principle measures, GAAP under IFRS. These measures do not have any standardized definition prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance, liquidity, cash flows and profitability. RioCan's management uses these measures to aid in assessing the Trust's underlying core performance and provides these additional measures so that investors may do the same.

Additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward-looking statements, together with details on our use of non-GAAP financial measures can be found in the financial statements for the period ended March 31, 2023, and management's discussion and analysis related thereto as applicable, together with RioCan's most recent annual information forms that are all available on our website and at www.sedar.com.

I will now turn the call over to our CEO and President, Jonathan Gitlin.

[Jonathan Gitlin, CEO and President]

Thanks so much, Jennifer, and thank you everyone that’s joined RioCan's senior management team today.

I’ll start the call today the same way that I'm going to end the call with an acknowledgement that the market continues to be volatile. Fear of recession, interest rates, inflation, access to capital, regional banking vulnerabilities, these thoughts are top of mind for all of us. To suggest otherwise would be unrealistic. That said even in the face of these macro level gyrations, RioCan continues to perform exceptionally well. We strategically and responsibly manage every facet of our business over which we have control. Despite the market volatility, I'm proud to reiterate our commitment to the guidance we presented at our February 2022 Investor Day, and the FFO guidance we provided in our last call.

With each successive quarter since our Investor Day, our operating results reflect the precision with which we execute our strategy. So, let's dive into our Q1 operating results. And I'll simply say that these results speak for themselves. They support our confidence in achieving the ambitious growth targets that we set out in our five-year plan.

Just like the quarters that preceded it, the first quarter of 2023 demonstrated our portfolio’s quality, our tenants’ resilience and our team's extraordinary depth and capability. By every measure, RioCan's well positioned assets, stable tenant mix, and development progression drove strong results that translate into predictable outcomes. These results reflect our focus on the pillars that support our five-year plan, resilient retail, customer centrism, intelligent diversification, and responsible growth.

Our commitment to these pillars continues to yield results. Our assets are in Canada's major markets in densely populated areas with high average household income of $135,000 and an average population of 250,000 people within a 5 kilometer radius of your average RioCan property.

RioCan's portfolio has never been more defensive. The percentage of our net rent generated from strong and stable tenants increased 86.8% this quarter. Same property NOI for the quarter grew by 3.4%. FFO per unit was $0.44. This reinforces our competence and our FFO per unit target of $1.77 to $1.80 per unit for the entire year. Healthy, new and renewal leasing spreads results created a lot of -- strong blended leasing spread of 12.3%. Retail committed occupancy was 98% and rent per square foot for new leasing in the quarter was $28.57, well above the average net rent for the portfolio, which is $21.13.

These exceptional occupancy levels, retention rates and leasing spreads continue to be driven by intense demand for RioCan's quality retail space, the sort of retail space that's, well, simply put, in short supply. Your management team will continue to operate with excellent and find strategies that mitigate the impact of current concerns, such as interest rates, and anticipated recession, and more limited access to capital. It's worth taking a moment to unpack these issues in the context of RioCan's business.

In seeking an explanation of how we've maintained and will continue to extract such strong operating results with such a volatile backdrop, I'm going to start with a bigger picture, namely the country within which we operate. Yes, so I'm starting broad but it matters. In today's global context, numerous attributes distinguish Canada as an incredible place to conduct business, and even more specifically, to own and to operate retail property. Consider our banking sector. Canada has a regulated and relatively stable banking system where reputation and relationships matter. RioCan has access to capital and substantial liquidity.

We consistently demonstrate the ability to utilize our established network and track record to access the most efficient forms of financing. The retail landscape in Canada is also vastly different than in much of the world. Compared to the U.S., Canada has far fewer competing tenants per retail category. We also have approximately 40% less square footage of retail per capita than the U.S.

A few factors will continue to temper the supply of retail space including Canada's tight zoning regulations. In addition, the vast gulf between replacement costs and market values makes building new retail a very unlikely proposition. And then, there's our commitment to immigration. Canada is the fastest growing country in the G7 and it's projected to welcome approximately 0.5 million qualified productive newcomers each year. These new Canadians naturally gravitate to transit-oriented major market locations to live and subsequently to shop.

These are the same markets in which retail space is supply constraint. These factors converge to drive demand and create positive tension in lease negotiations for precisely the kind of well-located bricks and mortar spaces that RioCan offers. This was clearly evidenced by the immediate and pronounced demand for our Bed Bath & Beyond locations. While these locations contributed towards less than 1% of RioCan's revenue, I'm highlighting this example as it underscores the demand for the limited available retail space in Canada.

Upon the retailer’s CCAA filing in February, RioCan commenced negotiations with numerous box tenants who expressed interest in all 13 of our locations. Despite the positive progression of these negotiations, several strong retailers chose to take a more secure route, and they purchased locations directly from the receiver who was running the process. In total 10 of RioCan’s locations were snapped up in the auction process run by the receiver. Retailers were unwilling to risk losing these sites. And for RioCan, the process resulted in the ability to fill the spaces with strong tenants, zero downtime, and no outlay of capital.

Regarding our three locations that weren't sold through the CCAA process, we finalized one lease and we're in final stage negotiations for the remaining two. The current supply-demand dynamic is expected to continue for the foreseeable future. This dynamic is one of numerous factors that bolster our confidence. It's also worth noting that as the real estate transaction market starts to pick up, we're seeing an increase in the number of data points that suggests that high quality assets are holding their value. Specifically, in spite of interest rate fluctuations we're seeing limited impact on cap rates from major market open air retail centers. The type of retail that comprises our portfolio is also very relevant.

Our properties generate resilient and growing income from a strong and stable base of tenants, anchored by necessity uses like grocery stores, pharmacy, and value retailers, while these are precisely the uses that perform well and generate organic growth, even in turbulent economic conditions. Simply put, high quality properties plus high quality tenants result in high quality cash flows. These factors in turn support strong valuations.

As you know, RioCan complements organic growth with intelligent diversification. Despite market conditions, our success in this area further supports our confidence. There is considerable detail regarding our development program in our disclosure. However, I'm going to provide a few highlights for you.

We've leased approximately 94% of the total commercial space at The Well, which, as you hopefully all know by now, is our flagship mixed use development in trial, 82% of the retail component is leased, which represents a 10 percentage point increase over the previous quarter. We have an additional 6% in advanced negotiations for a total of 88% of the retail space either leased or an advanced negotiation.

Our six condo townhouse projects under construction are 86% presold, achieving 96% of pro forma gross revenue. We've got significant deposits for these units, which provide security against the unlikely but always possible scenario of homebuyer defaults. Between 2023 and 2026, RioCan will realize approximately $860 million in sales revenue from these projects. Our residential rental revenue also continues to increase. This rental revenue diversifies our cash flows and offers high embedded growth potential.

RioCan Living now has 10 purpose-built residential buildings in operation. Demand for these units continues to be excellent. The NOI generated from our residential rental operations in the first quarter was $4.3 million, an increase of $1.9 million over the same period last year. There is however no question that interest rates are creating unwanted pressure. RioCan has taken meaningful steps to keep that expense as low as possible. We proactively employed various financial taxes including staggering the maturities of long-term debt and limiting the use of floating rate debt to minimize exposure to interest rate fluctuations.

As Dennis will explain to you shortly, we've benefited from hedging activity, where we took advantage of significant dips in the bond market and locked in favorable Government of Canada bond rates for both, future, planned and prior financing activities. These measures are all part of our commitment to responsible growth which, again, Dennis will speak about in a moment.

The last factor that supports my conviction and RioCan’s ability to deliver long-term value cannot be underestimated. It's the team. This team has weathered pandemics, tenant departures, recessions, financial meltdowns and more. This team like our portfolio has demonstrated resiliency and the ability to deliver in any kind of condition. Each day the talent, creativity and commitment drive our strategy forward. I'm grateful for them and I confidently say that your trust is in very good hands.

As always, we're prudently managing risks, maintaining a healthy balance sheet with strong liquidity and access to various financing channels. Our high quality portfolio and operational excellence provide respite against the volatile macroeconomic environment and give us the confidence to reaffirm our guidance for the year. The objectives in our five-year plan were established with purpose and conviction and they're achievable in almost any environment.

There are many words we can use to describe the economic environment, tumultuous, volatile, unstable, I'm going to say it more informally. I mean, it's pretty nonsense [ph] there. But what I want to leave you with is the word to describe RioCan's performance in the same environment, predictable, solid, stable, sustainable. This foundation, strength of vision and demonstrated commitment to responsible growth will continue to serve our unit-holders well and at the same time, position, the Trust for continued success as market stability returns.

With that, I'll turn the call over to Dennis, who will take you through our balance sheet and provide insight into how it continues to support RioCan's quality and growth. Dennis, over to you.

[Dennis Blasutti, CFO]

Thanks, Jonathan, and good morning to everyone on the call.

RioCan’s strong results this quarter were driven by continued operating strength, as seen across a number of KPIs from occupancy to retention ratio to leasing spreads. Over the last number of quarters, RioCan has consistently delivered operating results that are among the strongest in its history. This is a testament to the quality of the portfolio as it stands today, which continues to benefit from the long-term macro tailwinds that have created a supply-demand dynamic that is favorable for our business.

FFO for the quarter was $0.44 per unit, $0.02 or 4.8% higher than the same period last year. Same property NOI growth of 3.4% in our commercial real estate, which is driven by our strong operating performance, increased FFO by $0.02 per unit. And additional $0.02 per unit increase was driven by the ramp up of development and our residential rental operation. We also had lease files for the quarter predominantly related to a single tenant in Alberta that has already been backfilled, which provided another $0.01 per unit.

These increases were partially offset by higher interest expense, which net of higher interest income reduced FFO by $0.01 per unit. Finally, assets sold over the course of last year, net of the benefit of prior year share buybacks reduced FFO per unit by $0.02. This short-term drag on FFO per unit due to asset sale occurred because a large portion of the capital generated from these sales was recycled into development projects that have yet to stabilize. Despite this short-term impact, we firmly believe that recycling capital from the sale of lower quality assets into high quality development assets with greater growth potential will further enhance our portfolio and create substantial value in the medium to long-term.

Turning to our balance sheet. Net asset value per unit at the end of the quarter was $25.83 per unit, an increase of $0.10 per unit from Q4 2022. The NAV increase was driven by retained income after distribution adding to our equity. Our FFO payout ratio of 59.3%, the lowest among our peers, allows us to retain earnings on our balance sheets and reinvest in our business, which we expect will compound value over the long-term. This was partially muted by a modest fair value write-down in the quarter of $70 million, which left our investment property values essentially flat at $14 billion.

Net debt to EBITDA trended downward slightly, ending the quarter at 9.48 times. EBITDA contributions from development deliveries are the primary driver in decreasing net debt to EBITDA with 66,000 square feet of net leasable area delivered in the first quarter out of approximately 600,000 square feet expected to be delivered this year. As development deliveries accelerate over the balance of the year, we expect our net debt to EBITDA to continue with downward trend through this year and into the next.

Increased EBITDA was partially offset by an increase in proportionate net debt of $68 million as we continue to invest in our development properties included related assembly acquisitions, partially offset by $42 million of funds raised through completed dispositions.

As for financing activities, we completed a number in the quarter, evidencing the continued availability of capital in the Canadian market, especially for high quality borrowers like RioCan. In January we refinanced $200 million of bank term debt with three-year bank term debt at 4.93%. In March, we issued $200 million of 4.6 years unsecured debentures at a rate of 5.18%, including the benefit of hedges, a rate that was 43 basis points below the market at that time. Proceeds of the issuance were used to repay existing debentures upon maturity in April. Also in March, we secured $126 million of CMHC financing for our Queen & Ashbridge residential rental project. The debt has a 10-year term and will be drawn over the construction period converted to a term loan upon project completion. The interest rate is fixed at 3.07% and the amortization period is 50 years. This is an example of what RioCan can achieve by incorporating affordability, energy efficiency, and accessibility into its projects.

Finally, subsequent to quarter-end, we extended our $1.25 billion corporate credit line by one year to 2028. This extension was on existing terms. We continue to use interest rate hedging to reduce risk in our plan. During the quarter, we entered into a $300 million bond forward hedge per planned financing activity later in the year, fixing the seven-year Government of Canada bond rate at 2.63%. We also swapped certain construction loans to fix, bring our floating rate exposure down to 5.4% of total debt. Our hedging activity combined with our liquidity of $1.7 billion and our unencumbered asset pool of $8.3 billion mitigates risk and provides us with the financial flexibility in the current market conditions.

In summary, the strong results in the first quarter are testament to RioCan's high quality portfolio, operational excellence, leasing prowess, and development expertise, while our necessity-based tenants and strong balance sheet insulate us from risk.

With that, I'll pass the call to the operator for questions.

[Operator]

[Operator Instructions] First question comes from Sam Damiani, with TD Cowen.

[Sam Damiani, TD Cohen]

Just on the capital markets, are you all finding it much harder to dispose properties today in the current environment? And how would that impact your capital deployment plans over the next few years?

[Jonathan Gitlin, CEO and President]

So, I think it’s an interesting time. I think that there's this view that no one is buying properties these days, and at the same time, no one is looking to sell properties that much these days, because no one is certain as to where appropriate cap rates are. But I think that is starting to dissipate and you're seeing a few more transactions take place, which sets the mark as to where properties should be valued. And I think that's opening up a little bit of a channel in terms of commercial transaction activity.

And so, we're not -- I mean, look, first of all, as you know, it's not a significant part of our plan this year to sell a lot of assets. But to the extent we are looking to sell assets, whether it's from a qualitative perspective or a quantitative perspective, we have a reasonable amount of buyers who are counterparties that we're dealing with in all regards. They come from different stripes and colors, but they're there.

So, I don't think that it is a very strained investment environment. And certainly, there's a little more clarity that's been provided by these data points.

I'm happy to turn it over to Andrew Duncan, our CIO, just to reflect on that, if there's any more reflections. Andrew?

[Andrew Duncan, CIO]

No. I think, John, you're absolutely correct. We're seeing not nearly as much activity as past years, but we're definitely seeing an increase in activity. And to your point, I think the buyer pool is very-diversified. You're seeing privates, you're seeing family offices take advantage of some of the opportunity, where they may not have been players previously.

[Dennis Blasutti, CFO]

Sam, I do think -- Dennis here. I do think it's important to reiterate though that our base case plan does not require us to sell assets to fund our development program. Our retained cash flow plus project-level debt covers off our commitments from a development perspective. So, that part of the plan is covered.

If opportunistically we can sell assets and recycle into other assets, for example, like you've seen in some of our disclosure recently, we'll do that, but it's not a requirement for us at this point. And that's a testament to our low payout ratio.

[Sam Damiani, TD Cohen]

That's great. And I guess, a big part of the capital inflow for RioCan over the next few years is the completion of the condos underway, over $800 million coming back to the REIT. When you look at those sites specifically, those locations specifically, I guess, do the market sales in those neighborhoods give you confidence that that revenue is going to come in for sure?

[Jonathan Gitlin, CEO and President]

Yes. Keeping in mind, Sam, that the vast majority of that revenue is already, call it, locked, and that they are subject to binding purchase agreements with robust deposits in place. So, we feel very confident in the vast majority of that.

With respect to the units that are under development but haven't yet been purchased, we're starting to -- I mean, I think there was a lull in the market at the end of 2022, and it's starting to pick up now as people are -- as buyers are starting to reconcile with the realities of the new interest rate paradigm. So, we do feel confident in that number materializing.

[Dennis Blasutti, CFO]

And what I would add as well, and Jonathan hit this in his comments, is that we're seeing the rates are higher than pro forma on a per square foot or per unit basis. And Jonathan had a comment we sold, I think it was, like, 86% of the units where that represents in the mid-90s percent of the gross -- 96% of the gross profit being locked in. That delta, obviously, is the fact that we've been selling at a higher rate per square foot than the original pro forma.

[Sam Damiani, TD Cohen]

Okay, great. Last one for me. Just on the leasing discussions. Are you seeing it take any longer to get tenants to sign on the dotted line, or any change in the leases, discussions over the last few months that you've seen?

[Jonathan Gitlin, CEO and President]

I'm going to hand that one over to Oliver Harrison, our Head of Leasing and Tenant Experience. Oliver, any commentary to Sam?

[Oliver Harrison, SVP, Leasing and Tenant Experience]

No. We seem to be moving forward at a velocity that's been consistent with the last 12 months. So nothing has changed.

[Jonathan Gitlin, CEO and President]

Yes. So very strong, really good momentum, which echoes what I said about the market in general. Good retail, like the kind RioCan owns, is in short supply right now, Sam. And I think there's no better sound bite than our Bed Bath situation where like, we didn't even have an opportunity really to deal with them because they're in such high demand.

[Sam Damiani, TD Cohen]

Yes. That's a great outcome, and congratulations there. Before signing off, I'll just say that I walked The Well on Monday, and it looks fantastic. So, congratulations.

[Jonathan Gitlin, CEO and President]

Thanks so much, Sam. I always appreciate your views on The Well. I know that you've been paying close attention to it. And we're as excited or, I'd have to say, more excited than you are for that one to be completed.

[Operator]

[Operator Instructions] We now turn to Lorne Kalmar with Desjardins.

[Lorne Kalmar, with Desjardins]

Thanks. Good morning. And congrats on a nice start to 2023. Good morning. Just on the leasing spreads, nice little jump from 4Q. Just wondering, was there some nuances to that number, or is that sort of the new normal, going forward?

[Jonathan Gitlin, CEO and President]

I mean, look, leasing spreads are a pretty volatile metric because, like, it's a pretty small sample size that is utilized each quarter to come up with it. So, you will get swings based on, like, a large lease renewal or a large new lease that was done. So, this quarter was quite favorable.

I think that we said in our five-year plan that our objective is to be in the high single digits. And based on market conditions, we fully intend to adhere to that objective. So, sometimes you're going to see things like this above 12% combined, and sometimes we might see single digits, but we think that the run rate, Lorne, is in that high single digits. And we're very confident behind that guidance.

John, any further insights?

[John Ballantyne, COO]

No. The only thing I'd add, Lorne, is that with our occupancy on the retail side being at 98%, we now have the luxury to really revisit some of our transitional tenants, tenants that we don't deem as strong and probably aren't as high of rent payers. You will see some positive bumpiness over time, where we're taking out some of these deals, which will be lower than market rents and sometimes at points, at more fully net offerings. So we're not going to change our guidance, but we will see a bunch of that over the next year or two, provided our occupancy is maintained at 98%, which we expect it to.

[Lorne Kalmar, with Desjardins]

Okay. So, would it be fair to say kind of 98% is sort of, like, fully stabilized occupancy? It'd be kind of tough to push it anywhere beyond that, materially higher, I guess.

[Jonathan Gitlin, CEO and President]

Yes. From a retail perspective, Lorne, I would say that that is, to us, stabilized. From an office perspective -- I mean, our headline occupancy overall is lower than that 98%. So, there's definitely, let's call it, opportunity on the office segment.

[Lorne Kalmar, with Desjardins]

There is definitely a lot of opportunity in the office segment. On development spend, you guys maintain the guidance. Just wondering if there's -- if you were thinking of starting any new developments of significance this year.

[Jonathan Gitlin, CEO and President]

Well, we've got a lot on the go in the ground, and that's what the guidance for this year speaks to. In terms of greenlighting, it's a tricky environment. Interest rates have obviously, I would say, distorted pro formas a little bit. And what we're going to do is, as always, take a disciplined approach to assessing each of these opportunities. And we have IRR hurdles. And should some new opportunities meet or exceed those hurdles, we're going to consider them, but we also have to consider them in the context of some other uses of capital; meaning, paying down debt, doing acquisitions in some cases which have higher outcomes or better outcomes and more immediate outcomes.

So, it's a bit of a wishy-washy answer to your question, but the bottom line is we're going to assess these one at a time and we're going to take into consideration a number of factors that will lend to that sort of conclusion of whether we greenlight or not. It's a bit more of a risky environment to commence development with this kind of backdrop. So, we're probably not going to be as aggressive as if we had had this conversation 6 months ago or a year ago. But as we've always said, the beauty of RioCan is that should we decide to pause on greenlighting any of our construction, we have very capable, very high functioning shopping centers that are producing income. So, we're not necessarily losing out by delaying any development starts.

[Dennis Blasutti, CFO]

The other thing that happens, Lorne, as you know, is it doesn't take a lot of capital to invest in advancing the ball on the pipeline. So, moving as many of these projects to shovel-ready, getting zoning, dealing with cleaning up any kind of constraints on the projects, and so, our team continues to advance the ball on that, which does add value without putting the kind of burden that you have on the balance sheet when we start getting into construction.

Construction costs have been inflating for a while. The other thing we've seen, though, and you guys, many people on this call, cover the residential REITs, rents are also moving pretty dramatically upward as well.

So, we have to take all of these into consideration.

[Lorne Kalmar, with Desjardins]

Fair enough. And then, last quick one for me. Can you guys give any more color on the Montreal multifamily acquisition you guys announced?

[Jonathan Gitlin, CEO and President]

Yes, sure. It's an asset that we acquired right on the island of Montreal. Very good demographics. Good area. Close to transit. Close to a very strong community. And we feel it fits very well within the RioCan Living constructs of what we want to provide to our constituents. It's not a very large transaction, but it has very good economic attributes to it, namely, we see good rental growth, particularly once we take over the management of it, and we also see a very favorable debt of -- well, a very favorable existing debt scenario there, where we inherited 10-year debt that's at a very favorable rate. So between the two of those elements, we feel that this will have a very good IRR outcome for us.

And as I said, in our five-year plan that we put out in our Investor Day, we were always looking to augment our development program with, we call them, singles and doubles, a few acquisitions from time to time, which we demonstrated last year in our acquisition of market at Laval, and this just represents one of those great opportunities to allow us to get up to that objective of between $55 million and $60 million of residential NOI. So we're quite pleased with it.

[Lorne Kalmar, with Desjardins]

Okay. And are the 124 units, are they stabilized or still in lease-up?

[Jonathan Gitlin, CEO and President]

They are stabilized.

[Oliver Harrison, SVP, Leasing and Tenant Experience]

Majority of them are stabilized.

[Operator]

Our next question comes from Pammi Bir with RBC Capital Markets.

[Pammi Bir, RBC Capital Markets]

Just in terms of the additional retail leasing that was done at The Well, can you provide maybe just some color on some of the new tenants and as well thoughts on leasing up the balance?

[Jonathan Gitlin, CEO and President]

Yes, sure. So I'm going to hand that over to Oliver, who's been overseeing a lot of the retail leasing there. Oliver?

[Oliver Harrison, SVP, Leasing and Tenant Experience]

Sure. I guess, to answer your first question, we had some large users in the furniture space that took over some of the available units.

And second question, in terms of continued momentum, I mean, we're basically -- if we conclude the 6% of deals that are actively under negotiation, we're essentially where we want to be for grand opening, at which point we will then open up the site, even though the site technically is already open, and be able to maximize full value on the space that is remaining.

So, I think we've made the comment a while back that we were taking reservations on the space. I think we're basically at a point now, at close to 90% that we will be taking reservations until we open up en masse in the fourth quarter of the year. And we're very confident that there will be a significant amount of demand for the limited amount of space that remains.

[Jonathan Gitlin, CEO and President]

And I think the opening up basically of the site creates a lot of momentum there. I think just the enthusiasm that tenants are now -- or prospective tenants have towards the prospects has increased dramatically when they can actually walk the site, see the space, see the -- I mean, the texture of it and also see some of these other tenants that are opening up. I mean, success begets success, and that's what we're seeing here.

[Dennis Blasutti, CFO]

Pammi, I think the evidence there is that's a 10% increase in leased space in a single quarter. And that's a very big jump, and that really comes down to people being able to physically walk around and being ready to sign when they see that it's this close to completion.

[Pammi Bir, RBC Capital Markets]

Got it. And I guess, fair to assume then by -- at some point in 2024, this should be, I guess, fully leased and income producing on the retail side.

[Jonathan Gitlin, CEO and President]

Yes.

[Dennis Blasutti, CFO]

Yes. That's right. I think it will be -- well, 80% open and rent paying by our official grand opening -- it will open in phases over the next few quarters and then the official grand opening. So, by the end of the year, the commercial NOI will be north of 90% stabilized. So, when we get into 2024, that's when you get the first full year of effectively run-rate, well income from the commercial side. The residential side will ramp up over the course of the back half of this year and into '24.

[Pammi Bir, RBC Capital Markets]

Right. Okay. And then just on the, I guess, the one Bed Bath -- that you leased and, I guess, the two remaining that are in discussions, what can you share in terms of the types of tenants that are in discussions there or at least are [indiscernible].

[Jonathan Gitlin, CEO and President]

Unpredictable. They're very much like strong existing incumbent users within the Canadian retail landscape. They covet that sort of 20,000-square foot box, and they won't be of a surprise to you when we can announce them. But great -- just to characterize them…

[Pammi Bir, RBC Capital Markets]

Last one. And then just lastly, on the ERP-related costs that you incurred end of quarter, can you provide maybe just some color around that? And also just how much further spending do you anticipate over the year?

[Dennis Blasutti, CFO]

Sure. So an ERP system is like the implementation of a new accounting system, which you typically have to do at any company every 10 years or so. And so, you put this new system in, it will probably cost -- typically cost between kind of $10 million and $15 million, and you have the benefit of that for the next 10 years.

So, we'll see a bit more spending there. It is an interesting kind of point around -- there was a change in IFRS accounting that happened about last year, where these costs used to be capitalized and amortized in the P&L over the course of the life of the asset, which is still the economic reality of the situation. So, from an FFO perspective, we actually adjust that out, and we'll amortize that into G&A over the course of the next 10 years.

The other reason why it's important to address it that way from an FFO perspective is comparability with our U.S. peers. U.S. GAAP did not make the same change that IFRS made. So, when we talk to U.S. investors and U.S. rating agencies, et cetera, it's important to have that comparability. So economic reality and comparability make us do the accounting the way we've done it.

[Pammi Bir, RBC Capital Markets]

Thanks for that color. That helps. I guess there are some differences across some of the peers, maybe even in Canada. Last question for me, just on the NCIB, was obviously quiet in the quarter. I think in the past you've said, if anything, it will be tied to sort of the disposition program. Is it fair to say then you're not expecting to be active at these levels, or just any color you can shed on that?

[Jonathan Gitlin, CEO and President]

I think that's a fair characterization. We're really -- I mean, we're really focused on our balance sheet more than anything. And so, if there's opportunity and excess funds from dispositions, at this point our favorable use would be to pay down debt and/or to recycle through our existing development program or some acquisitions. But that could change if the stock price -- it depends on how the stock price behaves. So at this current time, it's not something that you should -- it's not something that you're going to see a lot of in the next few quarters.

[Dennis Blasutti, CFO]

Yes. I think the other thing, Pammi, that's sort of different between when we did our past NCIB is with the cost of debt where it is, the benefit of NCIB is not as high as, frankly, that it used to be. You just don't have as big of a gap between implied cap rates in the stock and your cost of debt. It's in terms of balance sheet, but then also from an FFO per unit perspective, there's a good advantage to actually utilizing capital to pay down debt.

[Operator]

Our final question comes from Tal Woolley with National Bank.

[Tal Woolley, National Bank]

Last thing, here in Toronto, the city council effectively is going to allow for building of multiplexes across areas zoned for single-family rental. I'm just wondering what, if any, knock-on effects there might be for land pricing for residential projects as a result of some of these zoning-type changes.

[Jonathan Gitlin, CEO and President]

I mean, at this point, we don't really assess it to be any meaningful -- to have any meaningful impact.

[Tal Woolley, National Bank]

Okay. That's fair. And then just on Bill 23, it's still early days, but have you seen sort of any increased motion among sort of the different regulatory bodies that were targeted under this act?

[Jonathan Gitlin, CEO and President]

Andrew, what are your thoughts there?

[Andrew Duncan, CIO]

I think, Tal, your first point is the right one, is that it's early days. I think the municipalities that are being asked by the province to speed up their approval timelines at the risk of losing fees are still adjusting to the environment, and there's still a lot of discussion back and forth between municipalities and the province. But from my purview, the province is not changing their position. So the municipalities are going to have to adjust. But I wouldn't say we've seen a marked increase in municipality willingness and speed to approve projects.

[Tal Woolley, National Bank]

Okay. And then, when you look at your pipeline on the residential side, you've got a fair number of condo projects. Obviously, a lot of the major cities in Canada are short apartments. What are the things that you think need to change right now for you to get comfortable to be positioned to greenlight more apartment projects?

[Jonathan Gitlin, CEO and President]

Well, right now, based on interest rates, even with regular CMHC financing, it's still -- the numbers don't pencil particularly well. But the things that are going in our favor is, one, there is a heightened rental environment, which of course makes the pro forma a little bit more acceptable for us and our unitholders. And two, to your point, like, time, the time that it takes and the cost of these municipal levies is it's very harsh. And hopefully, Bill 23 and other such measures will bring those in a little bit and make these more viable.

So, listen, we as a distributor of recurring income very much favor the model of building apartment buildings. But like, it is difficult in this environment with interest rates going the way they are.

CMHC is doing what they can to utilize programs like the RCFI program, which we disclosed the utilization of for one of our projects in the eastern part of downtown Toronto. If they have the ability to utilize those in a more dramatic fashion, that would really help us. And then, of course, some of the things that we've been talking about for a while, the alleviation or some deferral mechanism for HST on apartment buildings would be a really good -- I think, a very good impetus for allowing a little bit more building.

So, I think there's a few different factors that go into us and developers like us building more purpose-built rental. It is absolutely our objective to do that. I mean, we really have all of the ingredients to make a difference for what I think or what I perceive to be a pretty acute housing crisis. And we're trying our best to make the numbers work so that we can add to our existing portfolio of great assets in that regard. But it's -- we can use some help, for sure, from various governments, banks, et cetera.

[Dennis Blasutti, CFO]

I think it comes down to, Tal, as we keep saying to people, is you've got short-term macro volatility, then you've got long-term macro demographic trends. The long-term trends for this asset class are a huge tailwind. And so, if there's tactical moves that we do in the short term to manage the balance sheet, et cetera, maybe we do that. But the long-term outlook is very, very strong.

[John Ballantyne, COO]

I'd also add, there's a ton of discussion in the industry at large about how to try to make these projects work and how to solve the housing crisis with increased rental -- purpose-built rental supply. There's a ton of discussions with the province. There is an active or more receptive discussion, I believe, occurring at the federal level now. So I remain hopeful that all levels of the government can align on trying to incentivize this asset class so organizations like ours can remain committed to building it, which we are.

[Tal Woolley, National Bank]

Okay. And then just on the balance sheet, you've been able to sort of extend your weighted-average term from the depth of the pandemic to now. I think it's about four years at this point. Just given the shape of the curve and maybe your own internal views on interest rates, like, are you looking to extend term right now? Are you looking to sort of keep things where they are in case rates maybe start to pull back? Like, what's your sort of thought about how to structure the balance sheet for the next five years kind of thing?

[Dennis Blasutti, CFO]

So if we take a five-year view, our objectives are to extend the latter. I mean, that's important for us. And so, that's an objective that we have.

In the short term, there's just been, as you know, Tal, the tremendous amount of volatility, both on the underlying Bank of Canada rate, then also with spreads. To give you an example, we issued our last piece of debt at GoC’s plus 200; it actually traded in by about 5 basis points after that. And then, this U.S. banking crisis -- not crisis, U.S. banking issues came along. I struggle to call it a crisis, but that's an opinion again. And then spreads blew out in the secondaries on those same bonds about 50, 60 basis points, and then since then have come back in about halfway.

So, there's just been a lot of volatility in the unsecured debt market that we're trying to manage, which we're partially dealing with hedges, whereas we've seen a lot of stability in the secured debt and secured mortgage market, where that kind of gap between secured and unsecured has narrowed and now has widened back out a little bit.

So, a long way to say that when you start talking about a five-year objective and longer term, absolutely extend the curve, and that is one of our core objectives. In the short term, it's managing the best within the context of what is quite a large amount of volatility, both within types of debt and across different types of debt.

[Tal Woolley, National Bank]

Okay. And then, just lastly, this is your second apartment purchase in Montreal. Is it part of sort of a bigger strategy there to build a significant residential operation in Montreal?

[Jonathan Gitlin, CEO and President]

We just want a balanced approach, Tal. We are not really developing any apartments in Montreal, which distinguishes it from Toronto, Ottawa, Calgary, Vancouver, because it is a bit of a unique and in some cases difficult environment to build in. So I wouldn't say that it is a strategy that is different than what we've already proposed, which is just, again, a balanced approach throughout the VECTOM markets. We're just going to do it a little bit differently in Montreal by buying instead of building.

[Operator]

I'm showing no further questions at this time. I would now like to turn the conference back to President and CEO, Jonathan Gitlin.

[Jonathan Gitlin, CEO and President]

Well, thanks, everyone, for joining our conference call today. I know it's a very busy earnings day for you all, for the analyst community and for anyone else absorbing the information. So, we appreciate you spending the time with us. And we will look forward to connecting again in the near future. Thanks, everyone.

[Operator]

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.