RioCan Real Estate Investment Trust

TSX:REI.UN

Earnings Call Transcript 2024-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment First Quarter 2024 Conference Call and Webcast. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Jennifer Suess, Senior Vice President, General Counsel, ESG and Corporate Secretary. Ms. Suess, you may begin.

[Jennifer Suess, executive]

Thank you, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel, ESG and Corporate Secretary of RioCan. Before we begin, I am required to read the following cautionary statement.

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 conclusions 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, 2024, and management's discussion and analysis related there to, as applicable, together with RioCan's most recent annual information form that are all available on our website and at www.sedar.com. And now I'd like to pass it over to Jonathan Gitlin, our President and CEO.

[Jonathan Gitlin, executive]

Thanks, Jennifer, and thank you for joining RioCan's senior management team today. The first quarter of this year has been a testament to the sustained demand and attractive growth prospects for RioCan's high-quality retail portfolio. As I've been saying for a while, retail space remains scarce. And in the current condition, it's unlikely that any meaningful amount of new supply will be added to the market. At the same time, we're witnessing substantial population growth, particularly in Canada's major markets. This backdrop, coupled with our emphasis on portfolio quality over the years has put us in a position to fuel long-term organic growth.

Today, I'll discuss our operational highlights for the quarter. I'm going to focus specifically on our standout leasing results. RioCan's portfolio and team have successfully built upon the positive momentum for 2023. RioCan continues to capitalize on its unique combination of ideal locations in Canada's 6 largest and most densely populated cities, superior demographics and its resilient tenant mix. The first quarter saw a sustained momentum in leasing driven by RioCan's high-quality necessity-based retail portfolio.

The committed occupancy of our retail portfolio is 97.9%. Our top-tier team leased 1.3 million square feet of space in the first quarter, nearly $0.5 million of which were new leases. The blended leasing spread stood at 14%, bolstered by new leasing rent spreads of 20%. Renewal spreads were also healthy at 12%. RioCan continues to improve the overall quality of the portfolio with a focus on improving the percentage of strong and stable necessity-based use tenants. A remarkable 98% of the new deals completed in the quarter were with precisely this type of tenant, bringing our portfolio strong and stable penning category to 87.9% of annualized net rent.

The average net rent of the new leasing activity was $23.62 per square foot and an 8% increase over RioCan's average net rent. This is an impressive increase considering that most of the new leasing was for larger spaces. Our leasing efforts are particularly noteworthy as they include the immediate backfill of a significant portion of the vacancies that came online in the quarter primarily due to the failure of bad boy and rooms and spaces. These tenants previously occupied 10 locations in our shopping centers. As of May 7, 6 of the 10 locations have been leased at significantly higher base rents, higher embedded year-over-year growth and with far fewer restrictions. Negotiations are advanced for the majority of the remaining 4 locations.

Vacancy typically raise concerns over tenant weakness, the cost to refit space and foregone income. What I would say is that RioCan's defensive portfolio and exceptional leasing crows turn these temporary issues into opportunities for medium and long-term benefits, shopping center upgrades and space recycling with new tenants. It's worth noting that only 2.1% of our portfolio comprises transitional tenants, which are businesses that can be more susceptible to macroeconomic volatility. When RioCan units do become available, we're perfectly positioned to select relevant, resilient tenants that enhance the cross-shopping opportunities of our centers and contribute to higher rents.

Vacancies also allow us to accommodate the increasing space requirements of tenants such as Loblaw, Metro, Shoppers Drug Mart, Dollarama, and TJX A testament to this is RioCan Centre Kingston, where a 32,000 square foot food basis opened last month in space that was formerly occupied by Home Outfitters. Our leasing achievements for the quarter are impressive. However, they signified more than just strong operating metrics for a single quarter. The nature of this leasing activity has practical impacts. It bolsters the resilience of our portfolio and enhances our income quality. Tenant upgrades also lead to enduring organic growth.

Great retailers attract other great retailers. Moreover, with the demand for our sites surpassing supply, we're negotiating favorable terms that support sustained growth and future flexibility. This includes embedded annual rent increases, reduced overlapping use restrictions, increased flexibility and development rights and the inclusion of green lease clauses. In the short term, this transitory downtime can result in a temporary dilution of same-property NOI, as was the case this quarter, which ended at 0.4% growth. The most significant impact of our new leasing activity for the first quarter will be realized in 2025. However, the ultimate outcome is the addition of grocery and critical service tenants that yield significantly better long-term results.

I'll take a moment to delve into the specifics of our Q1 leasing activity, which contributed to our solid foundation for enduring income stability and growth. RioCan successfully finalized 3 new agreements with grocery stores during the first quarter. These leases are in highly sought-after assets, RioCan Hall in Toronto, RioCan Colossus in van and Grand Crossing in Ottawa. These deals encompass 65,000 square feet at an average net rent that is 50.3% higher than the rents previously paid on this space. We're also on the verge of including negotiations with 2 additional grocery stores, which are expected to be finalised in the second quarter. In addition to the 5 grocery deals I've just mentioned, negotiations are nearing completion for a land lease with Costco for a redevelopment of a large component of Rio Cambrla in the western end of the GTA.

The long-term traffic driving benefits of transitioning space is occupied by tenants such as rooms and spaces and bad boy to grocery uses are evident. The transformation of open-air assets into highly valued grocery-anchored centers also boost net asset value as grocery anchor centers often warrant a lower capitalization rates when valuing the center due to the market's recognition of this stable income potential.

Our development projects continue to deliver a steady stream of diversified net operating income, contributing significantly to our operational performance. Our progress continues to be excellent at the well, our flagship mixed-use development in Toronto's Downtown West. The retail component is 94% leased, with more than half of the space open and operational. We anticipate that the majority of the remaining retail tenants will commence operations in the coming months. There's likely no greater example of RioCan's team's vision and talent then the well. We're excited to advance the evolution of Toronto's boosting with the upcoming opening of Wellington market at the end of this month.

Wellington market will be fully licensed and has more than 50 food and beverage merchants. The diversity of the food offering, together with the planned programming and activation of the market will fuel further excitement for the already busy well. The offering will be further complemented by additional restaurants in the complex that will open in the coming months. In the face of a volatile macroeconomic environment, we recognize the impact of inflation and interest rates on our sector. Our strategy is thus anchored in building a resilient portfolio that ensures steady growth. Quality is our mantra. It mitigates risk and fosters growth.

Our approach is patient at strategic negating the need for has asset sales, rush leases or development under suboptimal conditions. Retail eval. We crafted a portfolio designed to absorb macroeconomic reverberations, a tight leasing market and strong demand for our space, combined with our team's extensive experience fosters positive tension and lease negotiations, safeguards occupancy levels and supports overall productivity and profitability.

I'll now take a moment to discuss our balance sheet. In the quarter, our net debt-to-EBITDA ratio improved to 9.17x, down from 9.28x at the end of 2023. This decrease represents the advancement of the downward trajectory that will take us to our target of 8 to 9x net debt to EBITDA. In a moment, Dennis will provide some details to support our confidence in achieving this target. However, I want to note that beyond the secure plan, we have to reduce net debt to EBITDA to 8 to 9x.

Our portfolio also has a considerable amount of development density and low cap rate properties. These assets provide RioCan with incremental levers such as disposition to further enhance financial flexibility should attractive opportunities arise. While we remain focused on our operations, balance sheet and development pipeline, we're also committed to responsible growth. This has been well evidenced by the numerous accolades we've received regarding our advancements in the areas of sustainability, ethical governance and fostering a positive culture.

And before I turn the call over to Dennis, I reiterate that the dynamics of retail real estate are in our favor, creating long-term demand for our products. Our consistency, vision and demonstrated commitment to responsible growth will continue to benefit our unitholders while ensuring the trust stability. RioCan operates a top-tier retail portfolio in the country's most desirable markets. We remain dedicated to prudent financial management, backed by an exceptional team. And speaking of which, I'll now turn the call over to Dennis.

[Dennis Blasutti, executive]

Thank you, Jonathan, and good morning to everyone on the call. Our business is strong and well positioned to capitalize on Canada's favorable retail real estate market dynamics. RioCan's top quality portfolio is made up of assets located in the country's most densely populated cities, adjacent to public transit and major thoroughfares and offers consumers an ideal mix of retailers for their daily needs.

As a result, we are at the top of tenants call list for their growing space requirements, which is evidenced by our leasing spreads this quarter. Based on the strength and quality of our portfolio, whenever space becomes available at our sites, we have the ability to improve tenant quality and income stability and importantly, to increase rents. Over time, we expect the ongoing improvement in quality of our tenant mix will drive improved earnings growth and increases in net asset value.

Let me now turn your attention to our financial results for the quarter. FFO for the quarter was $0.45, growth of 2.3% over the prior year. Drivers of our FFO growth this quarter includes strong operating performance and the benefits of development deliveries. The delivery of commercial and residential development assets added $0.02 to FFO per unit, and we recognised another $0.05 through gain from our residential inventory projects.

Inventory gains include the sale of an additional 12.5% interest in the 11Yb project, which accelerates the benefit of inventory sales not only in the form of their current period gain but also the buyer assumes their proportionate share of the existing debt on the project as well as future spending obligations. Our strong operating performance was offset by a short-term and expected decrease in our in-place occupancy. This decrease was driven by previously disclosed tenant bankruptcies and tenant rotation in various components of our portfolio. This resulted in a widening of the spread between in-place occupancy and committed occupancy that will narrow as tenants take possession of newly leased space.

Case in point, since quarter end to our results release date, in-place occupancy has already improved by 30 basis points. While this creates a temporary slowdown in same-property NOI, we are fueling FFO and NAV growth for the long term as we are continuously replacing weaker tenants with stronger necessity-based tenants at higher rents. The NAV improvement will be more pronounced where we have added grocery to a center that did not have a grocery tenant previously.

Offsetting the FFO growth was higher interest expense, net of higher interest income, which had an impact of $0.04 per unit. The impact of prior year dispositions, net of acquisitions, reduced FFO by $0.01 per unit. Finally, FFO in the prior year included lease buyouts that did not recur in the current year quarter, an impact of $0.02 per unit. We remain on track towards our FFO guidance for the year of $1.79 to $1.82 per unit.

[indiscernible] guidance remain unchanged, and they are: higher interest rates, a worse-than-consensus economic environment impacting our tenants and the timing of condominiand closings, noting that we do not see a significant risk to the overall amount, but as in all construction projects, minor shift in timing between quarters can occur. Our capital allocation activities also continued to improve our asset quality. In the quarter, we closed previously announced acquisitions, which were funded by dispositions that were completed in late 2023. We also completed $31.1 million of noncore asset sales so far in 2024.

Through this process, capital from lower quality assets such as cinema anchored center in D.C., a secondary market asset in Ontario, a noncore development land in Calgary and an enclosed mall in Winnipeg was recycled into top quality major market assets, including a grocery anchor center in the heart of Toronto and a brand-new purpose-built residential rental assets in Montreal and Calgary.

We also delivered $62.9 million of assets from properties under development to interpreting in the quarter, most notably at a well with retail and residential rental deliveries in the quarter. These completed developments also continuously improve our portfolio quality and growth prospects. As noted previously, this capital recyclable process has reduced FFO per unit in the short term, but we anticipate will drive longer-term growth and improve NAV over time.

In addition, we continue to allocate capital through our lending program, including $68 million of loans in the quarter, bringing the total allocated since the beginning of 2023 to $111.4 million. This is an opportunity in the current environment to allocate capital at solid returns with a diversified pool of loans against strong major market retail and residential assets that we would be comfortable owning in a downside scenario.

Turning now to our balance sheet. The strength of our balance sheet is a top priority, and we maintain our focus on deleveraging. Net debt-to-EBITDA continues to trend downward at 9.17x at the end of Q1 2024 compared to 9.48x at the end of Q1 2023, remaining on track to reach our target range of 8 to 9x. We expect to reach the upper end of this range by the end of this year and the lower end of the range by the end of 2025. We have a clear line of sight to our goal. We are naturally deleveraging with the ramp-up of new EBITDA from recent development deliveries and paying down debt with proceeds generated as we close on condominium sales. In addition, we continue to monitor the market for asset sale opportunities, which, if available, would accelerate our path to achieving our target.

Our liquidity position remains strong at $1.5 billion at the end of the quarter. This is down to a more typical level this quarter from the $2 billion at the end of 2023 when our liquidity was elevated due to the timing of as the dispositions that closed in late December. We also continue to have access to multiple sources of capital and have made significant progress in our 2024 refinancing plan, having completed about $1 billion of financing so far this year. Long-term financing were completed at a weighted average interest rate of 5.3% across a mix of debentures, commercial mortgages and CMHC mortgages inclusive of the benefit of Hedgeye.

Before we open the lines for questions, it goes without saying that macroeconomic volatility and uncertainty has created challenges that impact our industry. The RioCan team has evolved our portfolio to thrive in all economic climates and delivered strong operational performance that will provide future benefits. We remain focused on continuous improvement of our portfolio through tenant quality and capital recycling and to our balance sheet through our conservative payout ratio and disciplined capital allocation. With that, I will now turn over the call to the operator to take questions.

[Operator]

 [Operator Instructions] Our first question comes from Sam Damiani of TD Securities.

[Sam Damiani, analyst]

A great overview. Some of my questions have already been answered. But I guess my first question will be just on the tenancy, the vacancy did increase in the quarter, as you say, it was expected. As we stand here today, is there anything you know that's coming in the next quarter or 2, both in terms of known vacates and potential new tenancies coming online?

[Jonathan Gitlin, executive]

No, I would say that there's nothing -- other than normal course, the tenants that have expirations that are coming up, most of which we already have backfill solutions for. But I wouldn't say there are any failures or large spaces coming back to us on the retail front.

[Oliver Harrison, executive]

Maybe just to add, we do expect...

[Sam Damiani, analyst]

And is your -- sorry, go ahead.

[Oliver Harrison, executive]

 So I just going to say -- this is Oliver there just to add, in terms of the second part of your question, which was new tenants, we do expect to have the balance of the rods spaces advanced boxes at least by the end of the third quarter.

[Sam Damiani, analyst]

And then just on the dispositions, a little light this quarter. Wondering what your outlook is in the near term? And would it include any density to sort of bring down the average yield on the disposition program?

[Jonathan Gitlin, executive]

Nothing immediate, Sam, that we're relying on, as we've said for quite a while. We've done a lot of sales over the last 5 years, which has set us up well where we don't need to rely on incremental dispositions of the density or income-producing properties. We have a number of dispositions that are already embedded through the condo sales process. That all being said, if opportunities arise that are extremely accretive for us to dispose of low cap rate assets or density, then we will absolutely look to action those opportunities. But again, as I said, we do not need to rely on them to put our balance sheet into the state that we're trying to get it to.

[Dennis Blasutti, executive]

 And Sam, one thing I do want to clarify just I'm not sure comes through exactly this way in our disclosure. When we think about 11 YV, that really is a disposition. So we've had a couple of transactions where we've had partial sales of 1Y and these are effectively non-yielding disposition. And we often -- disclose the game. But in addition to that, we've offloaded a proportionate share of the debt. So when we think about this quarter, we recognised a gain on 11YV but also the debt. So it's actually a $60 million disposition. From an asset perspective, same as what we did late last year. So in total on 11YV, that's $120 million of dispositions. And in addition to that, we're avoiding the future spend, which is another $40 million. So the balance sheet impact of those dispositions is $160 million. And it doesn't quite show up that way in our capital recycling disclosure. So I just want to clarify that point as well.

[Sam Damiani, analyst]

Last one for me is in the MD&A, I think for the last -- at least the last couple of quarters, there's been 3 or 4 listed purchase obligations that would, I guess, take place over the next couple of years. I wonder if you could give a sense on the aggregate dollar amount of those and the mix between residential and commercial.

[Jonathan Gitlin, executive]

 So the vast majority is residential. And in terms of the aggregate dollar amount, I'm not sure if we disclosed that. We haven't yet disclosed it. So we will provide more color as they become, well, as they get closer.

[Operator]

Our next question comes from Lorne Kalmar of Desjardins.

[Lorne Kalmar, analyst]

I was just wondering on the TIs. It looked to be up quite substantially at least year-over-year. I was wondering if you could give a little bit more color there and sort of the outlook for the balance of the year. And just was that really the outside of the bankruptcies, the big driver of the quarter-over-quarter decline in NOI?

[John Ballantyne, executive]

 Yes, Lorne, it's John Ballantyne. It is a bit of a timing issue. So there were a bunch of big deals that we did last year, a couple of grocery stores and the replacement of the Canadian Tire box in Ottawa, 140,000 square foot are it's really kind of a bleed of cost year-over-year. The cash actually going out in Q1 rather than last year. Yes. On the balance of the year, we expect this to come back. Now we are putting money, obviously, into the 10 boxes that we disclosed. So I think year-over-year, our total spend should be pretty consistent on the tenant allowance side.

[Jonathan Gitlin, executive]

 Yes. And just to also add to that, Lorne, we're not seeing significant higher demands on from tenants to provide outsized TIs to get deals done. So it really is just a sort of an aggregated number that we had to pay out because of the volume of deals we've completed over the last few months, but it's not to suggest that on a per square foot basis, these demands have heightened from tenants.

[Lorne Kalmar, analyst]

Okay. It certainly wouldn't make sense given the commentary around the leasing environment right now. On the Bad Boy rooms and space, do you expect to receive any settlement income from those?

[John Ballantyne, executive]

Rooms and space is likely -- we will get a bit of a settlement on both, but it will depend from the dollar. And it will take a little bit of time line to us.

[Jonathan Gitlin, executive]

Keeping in mind, too, that we've mitigated -- we've got buyback billing so we don't have a lot of damages to suggest that we could cure.

[Lorne Kalmar, analyst]

Fair enough. Okay, that makes sense. And then just maybe one last one for me. Outside of the condo inventory gains and the $17 million of profit, I guess, was the $12 million this quarter and the $5 million expected next quarter. Is there anything else onetime that's included in the 2024 FFO guidance.

[Dennis Blasutti, executive]

I guess the anything that kind of stands out per say. There's always things that happen throughout the year. But I wouldn't say there's anything else -- anything abnormal necessarily.

[Operator]

Next question comes from Mike Markidis of BMO.

[Michael Markidis, analyst]

The retail backdrop certainly seems favorable. So I guess, unfortunately, for you guys, my questions are going to be focused on some other areas. But just on the first one, maybe a bit of an accounting question here. But I guess the commercial -- the retail component well, I know not everyone is in operation, but I think majority more than 90% are in possession. So I'm just looking at the $200 million fund balance still there. I'm wondering if you could just give us a reminder of the accounting impact as we move forward just as it relates to straight-line rent that is in FFO today and capitalised interest on the remaining a balance that may or may not hit the income statement.

[Dennis Blasutti, executive]

 So most of what's left in the PoD balance is going to relate to building out the balance of the well as well as there's some TIs in there as well as 450 the well getting built up. The PoD transfers will happen as you just go into possession. So we still have some of those transitioning with the largest being the market. So as that opens up, we'll see that transition out over the balance of the next couple of quarters as those tenants begin to pay rent.

[Michael Markidis, analyst]

Okay. So I mean, simplistically, if I assume an average yield on the project, we see a $211 million estimated cost to complete, which there on hub, do we just apply sort of a yield to that in terms of the incremental straight-line rent and then eventually cash rent that comes on?

[Dennis Blasutti, executive]

That's probably a pretty reasonable approach. And then likewise, you've got -- as you roll off the capitalized interest, you've got those balances transferring at like the capitalized interest rate, which is about 3.85 or so that we disclosed in our MD&A.

[Michael Markidis, analyst]

Just with respect to the RioCan Living portfolio. I guess we've seen a little bit of data suggests that market rents for in Toronto, specifically at the high end of the rent per square foot print have maybe softened a little. I think you guys mentioned some turnover you're experiencing at a single building in Toronto. And then I'm not sure if this was a mistake or won't really too much into it, but it looks like when you talked about the lease-up before 450 the well, you had incremental lease-up, but the narrative change from rents being above expectations in line with expectations. So just given sort of that most activity there. I was wondering if you could give us a little bit of expanded color on what you're seeing.

[Dennis Blasutti, executive]

Yes. What I would say is it's in line with higher expectations. So -- and that may be is a point to clarify, when we think about expectations relative to the pro forma, which is what we were often referring to before, we're still well ahead of that. I think the expectations that we're reporting to you in that press release is our current year budget. So we're in -- we're in line with that, which was significantly higher than the original expectation. So in line with higher expectations as maybe[indiscernible]

[Jonathan Gitlin, executive]

And in terms of the overall market, Mike, it is very seasonal gyrates month-to-month. And last month, I would have said there was a little bit of softness in this month, we're seeing a little more strength. So it really is moving around, but I think the trends are still very favorable, particularly in Toronto, but we're also seeing strength in Calgary and Ottawa.

[Michael Markidis, analyst]

And just last one for me to turn it back, and so being a bit been there here on accounting. But just with respect to 11 Yorkville. Dennis, you gave some really good ports, you gave some really good color there with respect to the -- how you look at the capital and disposition volume there. Can you just remind us the residential development game, that's clear. But I think there's a VTB associated with that. Just remind us what the impact of that is and when it rolls off.

[Dennis Blasutti, executive]

Right. Yes. We gave a VTB with as part of the purchase. And so we'll earn interest on that, and it will unwind when the units closed, so at the end of the project. So it's about $20 million of aggregate loans in there that are carrying a rate around 10%.

[Michael Markidis, analyst]

 Correct 2045, mostly, right? So you'll have that benefit throughout this year on the mezz loan.

[Dennis Blasutti, executive]

That's correct.

[Operator]

 And our next question comes from Mario Saric of Scotiabank.

[Mario Saric, analyst]

The first one, just coming back to the 2024 guidance, the impact guidance. Has the mix of recurring FFO for retail and expected residential gains changed at all since you put it out originally? And lastly, just because of the first quarter incremental discretion at 11YV?

[Jonathan Gitlin, executive]

No.

[Mario Saric, analyst]

Coming back to your comments on the Grill Street tenancy specifically, thinking about how it impacts the cap rate on the property. You mentioned that growth improving because of it all is equal. What's your estimation in terms of the cap rate compression, by simply replacing a big box store with a grocery anchor at a property.

[Jonathan Gitlin, executive]

It's a good question and it's a nuanced answer because it really depends on how big the gross relative to the rest of the center and how impactful therefore, it would be to the co-tenancies it creates. And I think, by and large, it is again, anywhere from a 5 basis point compression to a 40 basis point compression based on what we're seeing in the market. But again, before we make these considerations or these changes to our valuations, Mario, as you can appreciate, it gets pretty scientific and we will look at comps in the market relative to what it was previously as a power center and relative to what it is with the grocery anchor just looking at some of the other transactions that have happened or valuations within our own portfolio for similar assets. But I definitely think that's a logical range depending on how big the grocery is.

[Dennis Blasutti, executive]

And I should mention we haven't reflected valuations through our Q1 valuation. None of this is reflected at this point. So it's something that we're going to be working through Q2, and it would come through in those results if we do make a change there.

[Mario Saric, analyst]

And then an associated question. I think you mentioned about a 50% increase in base rent on the 65,000 square feet, again, conversion to grocery that you've done, how should we think about the [indiscernible] return that you're generating on the incremental TI that you're putting in the boxes as John pointed out in his voluntary?

[Jonathan Gitlin, executive]

 Yes. I don't have the exact math for you, Mario, and we can certainly provide that to you. But we think it's somewhere between the high teens...

[Mario Saric, analyst]

 Got it. So that's unlevered high term...

[Jonathan Gitlin, executive]

  20%.

[John Ballantyne, executive]

Yes, return on capital on these deals is very strong. We typically would target any kind of capital we invested a minimum unleaded return of 8.5%. These particular deals are much higher than that...

[Mario Saric, analyst]

Yes. Got it. And just to be clear, John, your returns not levered. Returns...

[John Ballantyne, executive]

This are only unlevered returns.

[Mario Saric, analyst]

 Yes. Okay. My last one, just coming back to the mass program, I'm sorry if I missed it, but I'm not sure if you disclosed it the avenue you're achieving is and how that would compare to the kind of estimated stabilized cap it on the product that you're running against.

[John Ballantyne, executive]

 Kind of broke out, Mario, Could you repeat that?

[Mario Saric, analyst]

Sorry,. I'm asking about your mass program and kind of the average. I may have missed the disclosure, so I apologize, but your average from that loan rate and what you think -- what kind of spread that loan rate looks like relative to your estimation of the stabilised cap rate on the properties that you're running out.

[Jonathan Gitlin, executive]

Yes. So again, our -- the average interest rate is, again, it's double digits, but it's somewhere -- it's probably somewhere between 10% and 12%. And in terms of the cap rates of the properties that we're lending against. I mean, again, our assessment is that there's usually going to be about 400 basis points of cushion anywhere between sort of 200 and 400 basis points position of the -- between the asset value and the coupon amount.

[John Ballantyne, executive]

And I think the thing that's interesting with this program from a risk perspective is that we're seeing in this environment because of this coverage ratios from first mortgages. That first mortgages are getting curtailed back from previously 65%, say, loan-to-value to 50% to 55% loan to value -- so we're doing mezz loans that are stepping up into the filling a gap up to 70. So these aren't be loans up to -- in the 90% level like you may have seen in the past. The second mortgage is basically fill in a gap between 50 to 70. So there's a lot of value cushion there in these loans. And I think our average rate is around -- if we're just looking at disclosures around 11%.

[Jonathan Gitlin, executive]

Yes. And again, all assets that we would be comfortable owning with [indiscernible].

[Operator]

And our next question comes from Pammi Bir of RBC.

[Pammi Bir, analyst]

I just wanted to clarify the commentary on the impact of releasing some of the vacancies that you talked about. How quickly does that ramp up into cash NOI? And I guess maybe more specifically, does the 3% seen property NOI guide for the year, I assume that the bulk of that space is released and cash NOI producing this year?

[Jonathan Gitlin, executive]

Yes, I would say the majority of it in this year, but it depends on the type of tenancy that some of the larger tenants you'd like the grocery store do take a little bit more time to fit out and grant occupancy. So the actual cash rent and some of them will be pushed into early next year. But there is a lot of work being done to ensure that these tenancies get in as quickly as possible, and that is what our 3% guidance is based on.

[John Ballantyne, executive]

I would say, just adding on that, if we were going to identify risk, it's a bit of an air close risk to the guidance is if we are able to get tenants that are higher quality and trade that off for us a bit of a longer picturing period, that is something that could hit that number, so to speak, but to the benefit of multiple future years. So that's -- I guess you could call it a risk when you're thinking about a current year number, but it's a benefit for sure, long term, if that's what happens.

[Pammi Bir, analyst]

Right. Yes, no worthwhile trade in those types of scenarios. I did find that Costco and leaks interesting. I'm just curious if you can provide maybe some more color on how that deal evolved and what made that site work for them.

[Jonathan Gitlin, executive]

I mean, Costco can speak to their own sort of views on this type. But I think obviously, they just didn't have another property in that area that was viable. This one is write-off of the highway. It's got great access and good co-tenants for them. For us, though, it was the opportunity to take what was a -- I would say, a bit of an oversized power center that was built in the earlier 2000s when that was a logical trend, where we were continuously keeping it reasonably occupied, but it always came at an expensive human capital and, of course, financial capital.

And now we have the opportunity to bring in an exceptional tenant, one that will draw a tremendous amount of traffic to the rest of the center, which is also grocery-anchored and restaurant anchored. And I think just up the quality of the portfolio. But also, it just takes away a significant amount of risk in having a lot of these medium and smaller boxes that there was just a little -- few too many of them on that site. So for us, it was a no-brainer. Financially, it works out quite well for us. And again, anytime we can have a Costco, we've seen from other sites, they just make for a tremendous cot.

[Pammi Bir, analyst]

Last one for me. Just with respect to the HBC, sorry, they're closing some additional stores. So can you maybe just talk about what what's the longer-term outlook with respect to the JV that you have with them? And any potential implications for stores in your portfolio?

[Jonathan Gitlin, executive]

We don't believe so. I mean we speak to HBC often as a partner, Remembering, too, that we own the properties with them for virtually every one of our tenancies are embedded in our property where we own a 20% or just about a 20% interest in them, and they own the other 80%. And that real estate, by and large, is very strong, well-positioned real estate. So I don't see them kind of walking away from those stores. They are all according to HBC doing reasonably well. And I think HBC, again, letting them speak for themselves, but they have presented to us their business plan going forward. I think there is room for them or opportunity for them to be a viable business going forward. And I think those stores based on all those characters will be fine. But if they weren't, again, all-premise beyond this JV is that exceptionally strong while located real estate comes back into our hands absent that tenancy. But as I said, we don't have -- we don't see significant risk even though there are, of course, always rumors about that name. But if those risks were to were to happen, we are comfortable with the real estate that underlies those tenancies, which we, of course, are owners of.

[John Ballantyne, executive]

And in particular, a couple of the strong locations, namely Vancouver and Montreal are in a zoning process. So they have, as Jonathan said, extremely well located in those markets and have upside potential through zoning in the future as well. So numerous backstops.

[Operator]

We have no further questions at this time. So I'd now like to turn the conference back to President and CEO, Jonathan Gitlin.

[Jonathan Gitlin, executive]

Thanks, everyone, for joining today, and we look forward to seeing you all soon.

[Operator]

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