RioCan Real Estate Investment Trust

TSX:REI.UN

Earnings Call Transcript 2020-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust Second Quarter 2020 Conference Call. [Operator Instructions] I would now like to hand the conference over to Jennifer Suess, Senior Vice President and General Counsel. You may begin.

[Jennifer Suess, Senior VP, General Counsel & Corporate Secretary]

Thank you, Chris, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel and Corporate Secretary for 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 earlier this morning. Before turning the call over to Jonathan, I'm 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 June 30, 2020, and management's discussion and analysis related thereto, as applicable, together with RioCan's most recent annual information form that are available on our website and at www.sedar.com.

[Jonathan Gitlin, President & COO]

Thank you, Jennifer, for that poetic introduction, and thank you for all of you for joining us today. I know you've been listening to a lot of these quarter end conference calls. I'm just going to jump right into it. Here's what I want to share with you. First, I'm going to give you an update on our second quarter operating metrics and particularly, the impact of COVID-19, but I'm also going to talk about how our strengths are going to help us recover. I also want to talk about what we're doing to support RioCan's stakeholders, including our unitholders, our employees, our tenants and their customers. This is all with a view for giving you our overall vision, for our recovery and our future growth. Let me state the obvious, and say that this pandemic has had a major impact on this quarter's results. We're far from satisfied with them. That said, we fundamentally do not feel that these results are in any way indicative of our long-term performance and underlying value. What we're not doing, is sitting on our hands and waiting for things to turn around. That's not what you've entrusted us to do. For 26 years, we've consistently demonstrated our adaptability, innovation and drive. Here's what I will tell you. What we will do is, leverage our deep experience and our major market portfolio and strong liquidity to innovate, adapt and thrive in the face of all of this. I'll walk you through the Q2 results now, and then I'm going to shift to provide more color on what we're doing both short and long-term to protect and grow the business. I'll start with something that is clearly on the top of everyone's mind, rent collection. For the quarter, cash collected, agreed upon short-term deferral arrangements and anticipated CECRA proceeds collectively represent 87% of billed rent, and this is based on our pre-pandemic rent roll. Our efforts continue to focus on maximizing the collection of the remaining 13%. In the unfortunate event unresolved tenant defaults, we have $29 million in security deposits and another $5.3 million in letters of credit from tenants that can offset rents owed. Shifting to what we've seen so far in the third quarter, there's a positive trend in our cash collection. 85% of July's rent has been collected in cash as of July 28, 2020. And again, this is based on our pre-pandemic rent roll. We expect this upward trajectory to accelerate as more businesses resume operations and our collection and negotiations continue with smaller tenants. 85% of our tenants are now open and operating. Consumers are going out to shop, and most of our tenants are gaining momentum. Let me give some insight into our rent collection process. We work with our tenants to find sensible solutions. We tailored our approach on a case-by-case basis to support their specific set of circumstances. Now in my position, I've had the opportunity to sit down personally with a number of these tenants to try and find a solution, and it's great to see the impact of working something out with them that helps them survive and helps our business in the long term. Now in some instances, where we had healthy tenanted strong covenants, we were open to short-term deferral arrangements, and we're now collecting on these. The duration of the deferrals was typically 12 to 18 months with the vast majority expected to be paid back by mid-2021. In rare instances where abatement was the most practical solution, it was granted in exchange for something of value to RioCan, including the extension of terms or the inclusion of valuable redevelopment rights. In certain instances, RioCan was able to unlock significant amounts of future value to our advantage. The abatement terms all end by December 31, 2020, at which time these tenants will return to full contractual rent. The bottom line is this, every dollar matters to us. We've used our resources and energy to ensure that no rent is left behind. We will continue to execute on this thoughtful strategic approach to driving maximum rent collection. We'll also continue to uphold our position as a responsible Canadian industry leader by appropriately balancing our tenants' needs with the well-being of our unitholders. From the start, we understood the urgent need to provide immediate relief and protect the smaller independent tenants. These tenants form a critical part of the Canadian economy, and they're a key part of the fabric of our retail ecosystem. When the CECRA program launched, we actively participated on behalf of approximately 1,800 qualifying tenant locations. The program provides eligible tenants, which are mostly small businesses with a 75% gross rent reduction for the quarter. As part of the program, landlords take a 25% of the rent, and the government covers 50%, leaving those eligible tenants with the obligation to cover the remaining 25%. For RioCan, the total separate rent abatements are estimated at $9.9 million for the quarter. Now in exchange for our participation, RioCan and the industry will benefit from the long-term survival and sustainability of these businesses. This is simply good business practice. Moving now to our operating metrics for the quarter. Same-property NOI growth was negative 10.8%, and FFO per unit was $0.35. Our major market committed occupancy and leasing spread numbers for the second quarter were healthier -- were healthy, 96.8% and 7.3%, respectively. However, the reality is the COVID-19 related business closures will impact these numbers through the balance of 2020. As we're talking about closures, it's important to note that more than 3/4 of RioCan's annualized rental revenue are from necessity-based and service-oriented tenants. This category of tenants are more resilient to changes in economic cycles. In addition, we've significantly reduced our exposure to the vulnerable fashion category over the last 10 years, such that, it now represents only 8% of our annualized rental revenue. I expect that number to drop even further in the future. Now there's been a lot of CCAA filings since March. But of all the retailers that have filed for CCAA protection, confirmed closures represent only 0.5% of RioCan's total rental revenue. We all understand, however, that CCAA filings allow companies to restructure, and it doesn't mean that all locations simply close up. Often, the restructured business has emerged leaner and more strategically structured to support sustainable growth. There are more restructurings and failures to come. However, as you know, for the last decade, RioCan has concentrated its portfolio in the highest growth regions in Canada. More than 90% of our revenue is generated from Canada's major markets, and more than 52% comes from the GTA. We're going to continue to lean into the desirability and convenience of our locations. Moving now from our commercial portfolio to our residential portfolio, RioCan Living. In the face of COVID-19, the collection of over 99% of our Q2 residential rents is a testament to the desirability of RioCan Living's offering. We have high-quality buildings in prime transit-oriented locations in the major markets of Canada. Residents recognize the efforts of our property managers to keep their spaces safe and to look after their well-being. To date, we're fortunate to report that to our knowledge, there has not been a single incidence of COVID-19 at any of our RioCan Living properties. Leasing continues to progress well in our rental residential properties, including Brio, which is our 163-unit rental residential property in Calgary, and it's our first with partner Boardwalk REIT. The project was completed at the end of March 2020. Arguably, the most unfortunate timing possible for a residential project in the hard-hit Calgary market. But in spite of this, the project is already 31% leased. Results that can be attributed to its location, the quality of the offering and the professional management by our partner, Boardwalk. RioCan Living will continue to add high-quality rental residences to our portfolio over the next few years. In addition to the combined 857 units at eCentral, Frontier and Brio, RioCan Living has more than 2,700 additional purpose-built rental res units under construction, 840 of which are going to start renting in the next 12 months. Most of these units are located in Toronto and Ottawa, and we're confident in these markets and whatever the short-term impact of COVID-19, these markets and our offerings within them will thrive in the long term. We also have 3,500 condo and townhouse units that are either completed or under development. And these include 11 YV in Toronto's Yorkville neighborhood and UC Tower in Oshawa. 11 YV is 98% presold and UC Tower is 87% presold. Construction has commenced at both of these exciting RioCan Living projects. And these projects have much needed high-quality residential inventory into a very tight market, and they also provide RioCan with additional revenue diversification. We'll also diversify through our ongoing urban mixed-use projects such as The Well in Toronto, where construction is progressing nicely. The office components has reached 23 of 36 stories, and approximately 84% of the office space is pre-leased. I can state with confidence that these results validate our continuing focus into mixed-use communities. There's no question rent collection and maintaining the security of our income were our priorities in the second quarter. But running a business isn't just about collecting rent. There are also social issues that impact communities in which we serve. We've got a keen understanding that during uncertainty, the companies that emerge as leaders are those that recognize that this is not the time to abandon corporate citizenship but rather to stand up for change and lead the way. At the end of the second quarter, we made the important pledge to listen and learn from one another and have hard, honest conversations about racism and equality and diversity. To that end, we've taken some important first steps, including committing to assembling a RioCan diversity and inclusivity council and signing the BlackNorth CEO pledge, which was initiated by the Canadian Council of Leaders Against Anti-Black Systemic Racism. Another priority as we move through the stages of opening is ensuring that our customers feel safe. RioCan shopping centers and offices have reopened, and all of our assets are now fully operational. Because of government regulations, retailer reopens have been gradual. We've been proactive in our safety measures and fully compliant with regulations. We opened these spaces with necessary safety protocols to protect employees and customers, and customers and tenants recognize the efforts we've taken to keep them safe, and they've demonstrated the desire and willingness to return to our shopping centers. As it will take time as everyone adjusts, but our outlook is optimistic as we see the weekly cycle of stores reopening, confidence increasing and corresponding increases in consumer traffic. Looking ahead, there's no question that the recovery will be long with the balance of 2020 expected to experience ongoing challenges in our sector. However, as we've consistently demonstrated here at RioCan, we are built for the long-term with 26 years of proof behind us. I'm confident that with one of the strongest, most versatile and seasoned leadership teams at the helm, we'll continue to adapt and evolve and watch that for the new realities and consumer spending patterns. We'll make our sites and shopping centers more relevant in the evolving landscape. The leadership team is thoughtfully exploring the many ways that we can change our portfolio to further diversify our income streams. Our goal is always to provide or to drive the highest and best use from our extremely well positioned real estate assets. RioCan's intensification program is going to continue to unlock the significant value that's inherent in our existing assets, and what it also does is, really improve our business by adding substantial net asset value and diversifying our sources of cash flow. We know that it would be great to intensify and redevelop every single RioCan shopping center. However, that's not realistic nor is prudent nor is practical. We are continuously looking, however, at our established and convenient locations to execute for a variety of new and relevant commercial uses. An omnichannel strategy forms an important part of our retail ecosystem. There's a critical intersection between e-commerce and well-located bricks and mortar. Well-situated space has become a much needed commodity during the pandemic, opening a range of possibilities, including offering our sites as additional means for retailers to manage last mile costs and complexities, form of distribution or micro fulfillment centers and as exceptional community care centers, providing much needed extra space and services to support nearby hospitals. As space requirements within hospitals become more and more constrained, there's been a push, a very palpable push to move many of the noncritical services off-site, and our locations serve as ideal candidates to house such services. We believe this trend will continue. There are many other examples of innovative uses to which our portfolio really does lend itself, and we're carefully considering each of them. We are [ giving trends ] but we also don't sit idle. As we always have, we'll continue to leverage our experience and insight to quickly make sound decisions that lend themselves to sustainable growth. As we move forward, I'm proud of our ability to maintain a high level of responsibility, support and access for all of our stakeholders through this crisis. We have a team, locations and balance sheet. We also have the drive, expertise and relationships to weather the storm and continue to reposition the portfolio for the long-term growth and profitability. Chi, over to you.

[Qi Tang, Senior VP & CFO]

Thank you, Jonathan, and good morning, everyone. Jonathan has provided a fairly fulsome summary of our Q2 results against these unprecedented times. Expanding on value creation and adapting for the future, I will now focus on our discussion on net asset value, capital allocation and liquidity. Given that there were largely no data points for property valuations under the pandemic, we had to look more intensely at a number of factors to estimate the effect of the pandemic on property cash flows and capitalization rate as well as the estimated effects of the downturn of the oil and gas market in Alberta. We reviewed and analyzed individual asset fundamentals, including geographic location, property type, [ loco ] positioning and competition, tenant covenants, rent cash collections, estimated vacancies, timing and cost of retenanting as well as steel pricing. Following our assessment for the quarter, we wrote down 3.1% or $452 million of our IFRS value for investment properties, including assets held for sale. This included a write-down of almost 11% for enclosed centers and 4.8% for our assets in Alberta. As a result of the write-down, our net book value per unit was $24.45 as of the quarter end. The pandemic has and continues to present a unique set of circumstance that would remain fluid and uncertain. The short and long-term impact of the pandemic on RioCan's investment property valuation is difficult to assess and predict, particularly given the relatively low volume of market transactions. As pandemic-related events unfold, further adjustments to our IFRS value of investment properties may be required. It is worth reiterating that aside from a handful of projects with firm agreement for air rights or land sales in place, our current book value does not reflect much of the value of our development density. Specifically, we have 21.5 million square feet of density that we have either accomplished the complex and lengthy process of obtaining municipal zoning or already submitted a comprehensive zoning application. The majority of such density is not valued on our books. Our development projects are nearly all mixed-use developments within Canada's 6 major markets, 73% in the GTA alone. They will provide meaningful value creation when complete. In addition, we also have a number of condominium or townhouse projects under construction or under development that will provide us with strong inventory gains to further boost our net value growth. A good example is our 11 YV project in the prestigious Yorkville area of Toronto. It is estimated to provide $65 million to $71 million inventory gains at our share. We remain committed to our development program and launching and unlocking the significant value inherent in our portfolio. Last quarter, as part of our liquidity enhancement initiatives, we temporarily paused certain new or early-stage projects and lowered our development spend guidance for the year. Considering our quick construction productivity gains after a short slowdown at the outside of the pandemic as well as desired project starts by our committed tenants, our expected development spend has been refined to $400 million range for this year. With respect to dispositions acquisitions, we reported gross proceeds of $33 million from a sale of interest in the income-producing property. There were no acquisitions during the quarter. As of July 28, we have firm or conditional deals to sell assets for gross proceeds of $302 million. These assets are mostly located in the major markets. The dispositions consist of about $220 million income-producing properties and $82 million development properties. The income-producing properties have a weighted average in-place capitalization rate of 4.2% based on firm or conditional deal prices, and the development properties do not have material in-place NOI. These dispositions enable lower cost of capital towards transforming our portfolio. Currently, retail accounts for about 90.5% of the Trust's annualized rental revenues, followed by office at 7.8% and residential at 1.7%. As more RioCan Living residential rental buildings currently underway are completed and stabilized, the residential proportion of the trust portfolio will grow and the mixed-use nature of the Trust portfolio will expand. As for our balance sheet strength, RioCan continues to maintain ample liquidity of $1 billion in the form of cash and cash equivalents and undrawn lines of credit as of the quarter end. Our unencumbered assets stood at $8.7 billion. The unencumbered asset pool generated 62% of our annualized NOI and provided 221x coverage for our unsecured debt. Our debt to adjusted EBITDA metrics was 8.8x, and debt to total assets was 44.4%. During the quarter, we secured additional net mortgage refinancing of 208 -- $264 million while repaying $150 million Series U debentures upon maturity and lowering our revolving line of credit utilization by $50 million.Overall, we further lowered our weighted average effective interest rate by 6 basis points to only 3.29% as of the quarter end. We also further reduced our floating interest debt exposure from 3.5% last quarter to 2.8% this quarter. Our debt structure was 58% unsecured and 42% secured as of the quarter end. Currently, only $82 million in mortgage maturities for 2020 have yet to be refinanced. All have refinanced commitments in place. These mortgages all mature in the latter half of the year and are expected to be refinanced in due course. With a consistently disciplined approach to managing our balance sheet and capital structure, we will maintain strong liquidity and financial strength. Our financial capacity and flexibility position us well to navigate through the current pandemic. With that, I'd like to turn the call over to our CEO, Ed, for his closing remarks.

[Edward Sonshine, CEO & Trustee]

Okay. Thank you, Jennifer, Jonathan and Chi. This has undoubtedly been the most unusual quarter I've experienced in the over 26 years that I've been CEO of RioCan. The reasons are obvious, but it introduced a whole new issue to being a landlord, a time when some tenants simply feel they ought not to be required to pay rent as opposed to traditionally not being able to. However, as Jonathan and Chi have indicated to you, I think RioCan has come through this very difficult quarter quite well from the point of view of rent collection and liquidity. Both, or particularly rent collection, because I know that's everybody's focus, during the remainder of the year will continue to get even better. This belief is not merely a hope but is based on the actual rent collection for July at 85% of pre-pandemic rent roll. And I suspect -- in fact, I know, this will likely end up slightly higher, as our government tenants typically pay at the end of each month rather than the beginning, but at least they pay. In addition, agreements and arrangements involving rent abatements have already been reached with all tenants of consequence and are baked into my views. In fact, my view and strong belief is that for the rest of this year, we will likely average a collection rate in the range of 90% plus of our pre-pandemic rent roll. Subject, of course, to further bankruptcies and the unlikely possibility of going back into any form of shutdown. While the actual rent collection results are, I believe, quite satisfactory, considering the situation, we are certainly not satisfied with the FFO achieved this past quarter. We are quite confident that for the year, RioCan will achieve FFO in the neighborhood of $1.60 plus. This number, while, perhaps, higher than some analysts expect, is also not satisfactory. And we will certainly strive to do better, even this year, and we certainly have opportunities whereupon, this figure can be improved. I believe this is one of the first times that we have actually given this sort of guidance. But we are comfortable in doing so, as all the bad news of which we are aware, such as abatements and retail bankruptcies, have been built in, plus a contingency for unexpected bad news. The reason we are giving this guidance at this time is not only to counter some of the fear and anxiety that is clearly out there but also to reassure our investors of our continued commitment and ability to maintain our current level of distributions. As we have said in the past, we consider our distributions as a promise to our unitholders. And while the Board of RioCan are, of course, the decision-makers on this matter, management currently sees no reason to recommend any changes to our current distribution. In fact, we believe that sometime during 2021, we will be back within our stated goal of having the distribution to be no more than 80% of our FFO. This is due to our confident expectation that 2021 and 2022 will show significant growth from the new disappointing baseline created in 2020. This growth, which I believe will be in the double-digit range, will come as a result of re-leasing the spaces that are being opened up through bankruptcies and terminations as well as reaping the gains inherent in the values we are creating through our rezoning, redevelopment and development programs. These programs, where we expect to invest over the next couple of years in excess of $400 million per annum, will be funded through some sales and through our continuing program of selling 50% interests in development and income-producing properties. After several months of investors hiding in their fossils, investment activity has resumed, albeit, at a slow pace. But it is clear that the GTA is still considered one of the best and fastest-growing markets in the world. Judging by the approaches that we have been getting, it is also understood that with the rezonings completed and underway that RioCan has been so busy with, it is the owner of some of the best redevelopment sites in the GTA. And as Chi has pointed out, these values are not currently reflected in our net asset value calculations. In closing, I would like to differ from all the pundits, who currently predict not only the death of retail, but quite a few the death of office as we know it. What we're going through now is temporary. While no one knows exactly when it will end. It will end. When that happens, human nature, which never really changes, will require gathering places and social interactions and RioCan owns the properties where those will occur. We already see this desire for social interaction today, after only a few months of isolation. And I believe that once people feel a little bit safer, most of life will go back to pre-pandemic normalcy. There will, of course, be some lasting changes, particularly the acceleration of e-commerce's share of the retail dollar. But RioCan is working on several plans to take advantage of those changes rather than suffer from. Finally, I thought I'd throw a word on our residential initiative. The basic premise of our building rental residential buildings, besides the fact that we own some of the best sites in Canada for that, is a basic -- that basic premise was that, tenants will pay a little bit more for slightly smaller premises, if the buildings are new, well designed, have the proper amenities, gets professional management with security of tenure, and perhaps, most of all, the best locations in Canada. I think Brio, as Jonathan mentioned, is such a great example of that, bringing it to market in March, right when the pandemic started, so everything has been done virtually. And being able to have leased already just in a few short months, 31% of the units at more or less budgeted rents that with budget we set quite some time ago, I think, is a great testament to what we're doing. We're actually quite excited within a month, we will be launching our building called Pivot, which is at Yonge and Sheppard, much larger building, about 365 units. And I think, that once again, our basic premise on residential will be proved out. So now I'm happy to open the floor to any questions that there may be, after all the presentations.

[Operator]

[Operator Instructions] Pammi Bir with RBC Capital Markets.

[Edward Sonshine, CEO & Trustee]

Speak a little louder, Pammi, please.

[Pammi Bir, Analyst]

Sorry. I'll try. Just hold on one second. Is that better?

[Edward Sonshine, CEO & Trustee]

Yes.

[Jonathan Gitlin, President & COO]

Yes.

[Pammi Bir, Analyst]

Okay. Just regarding the $220 million of disposition agreements post Q2, can you maybe just provide some color on those assets? That 4% cap rate looks pretty strong. So just curious, some context there would help.

[Edward Sonshine, CEO & Trustee]

I don't think we want to get into individuals. The numbers speak for themselves, Pammi. There are obviously, partial interests as opposed to entireties, because they are some of our better assets. Clearly, when investors in these times come hunting with money, they want quality. We own a lot of quality. But I don't think we want to get into specific transactions until we are able to announce their closing.

[Pammi Bir, Analyst]

Okay. Got it. Just in terms of the rents that were not collected or remained unresolved in Q2, I think it was about 6%, can you maybe -- again, maybe just provide some color there on the types of tenants and what that -- those relate to and how the discussions are going?

[Edward Sonshine, CEO & Trustee]

I'll give an early answer, but I'll let Jonathan provide any details that he wishes to. They're probably largely fashion tenants. And we understand, I mean, fashion was having a lot of difficulties before the pandemic. So we are taking a patient view. But having said that, we're quite confident in the collectability of most, if not all, of those rents, partly because we have some pretty good security deposits we're sitting on, but partly because, their only choice to paying is to go into CCAA. And then they got to pay most of it anyway, if they want to continue. But Jonathan, if you want to add any color to that?

[Jonathan Gitlin, President & COO]

I can only add very little to that. But really, I mean, we prioritized the tenants that haven't paid from largest to smallest and, really, we've made great traction with all of the larger tenants. So by and large, the remaining 6% are that sort of middle-sized tenants that aren't small enough to qualify for CECRA and haven't been at the top of our list, but we are getting to them 1 by 1 and having bespoke conversations with each of them. And we're confident that over time, those rents will be collected or deals we put in place to get the majority of those rents.

[Edward Sonshine, CEO & Trustee]

Yes. Pammi, what you have to appreciate and while we're working them, we have 6,000 tenants. Now about half of them were forced to shut in March. Maybe a little more than half, I'd say about half our space was forced to shut. So it's probably, more like 4,000-plus of those tenants. And the -- it has been the way we've chosen to go at it, basically, the entire company, including myself and Jonathan, had been turned into rent collectors. One by one, conversation by conversation, we did our best. And I think we've been quite successful in trying to keep the relationships. It's very easy to just send out notices of termination. And in some cases, we did do that, when we found we were getting no cooperation. But keep in mind that, 6% that's uncollected is after provisions. So we've already given our best guess. And that's part of the provisions that were taken in the second quarter and why I said I'm confident. We've assumed pretty well, the worst in making our assumptions and why I'm confident that $1.60-plus number is going to happen. And then we're going to collect, most, if not all, of that 6% missing. And that's why I'm also comfortable that not only we're going to end up -- we're going to end up in the 90-plus on a continuing basis, including looking backwards. And one of these days the CRA will even send us the CECRA money. Actually, that's CMHC, sorry.

[Jonathan Gitlin, President & COO]

And I can add to that, that we've actually reached the verbal unfinished, unpaper deals with a lot of the tenants that have not been reflected in these numbers. So that adds to our confidence.

[Pammi Bir, Analyst]

Yes. No, that's helpful. Just last 1 for me. Can you just maybe expand on some of the opportunities that you're talking about with respect to, I guess, participating in logistics, good logistics of RioCan or retailing? There were some comments that you made earlier and also, I guess had in your letter as well.

[Jonathan Gitlin, President & COO]

Yes. I can take this, Pammi. There's a number of opportunities that we're considering, and we've been approached by a number of companies as well. And these are largely either existing retailers looking to set up logistics, I guess, premises or hubs in our well-located shopping centers or taking part of their existing stores and transforming them into that type of micro fulfillment center. But what we've really been focusing on is, working with some of the existing micro fulfillment operators that are largely U.S.-based and are looking to expand into Canada to set up these types of hubs within our properties. And I mean not just one example, but we've also been working on a personal hiccup and delivery system, which would also be in some of our mixed-use and existing retail facilities. That would also facilitate that omnichannel.

[Edward Sonshine, CEO & Trustee]

Yes. What I'd like to add, I think, look, everybody has done a lot of online ordering over the last 3 months, except for me, because I refused to do it. But the -- just on principle. But the -- and even I did it, and I ordered some books, not from a big guy, but from our -- the Canadian representative that sells books. But the fact is logistics and getting stuff delivered and getting stuff into people's homes has been an enormous problem for everybody. And many of our retailers have reached out to us and said, look, you got these great shopping centers. Can you help us? So part of what we're doing is, really being driven by the retailers, being driven by existing technologies. We're not going to become a technology company. We're going to be looking for partners in this. But we have the space and the location to really make a difference in the logistical side of the e-commerce business, and we're going to be -- that's going to be one of our many focuses over the next couple of years.

[Operator]

Our next question comes from Tal Woolley with National Bank Financial.

[Tal Woolley, Research Analyst]

Maybe if you could just talk a bit about in all of these conversations you've had with your tenants over the last little while. What have been some of the surprises, both positive and negative, with respect to maybe the different categories of tenants you're primarily having to deal with right now?

[Edward Sonshine, CEO & Trustee]

Well you know what, let me hit a little of that first. I don't think there were that many surprises for me. I mean, obviously, the types of users that really needed more help were obvious, because, again, because of what was going on with the pandemic, obviously, the ones that were totally shut down and probably won't be able to get back to full operation of their business until who knows when next year. So it wasn't a surprise. For me, the biggest surprise actually was in one of the conversations I had with one of our large fast food retailers, who had adapted their business so quickly to takeout and delivery that actually, they were going to be changing their model of their premise on a go-forward basis because what they found that, even though their sales were only 60%, 70% of what their pre-pandemic sales were, their margins were so much higher because they didn't have a whole dining room to fill up that they were going to focus their business on a go-forward and their new types of premises on having smaller dining rooms and much larger takeout and delivery facilities. So that was a bit of a surprise, because the company has been in business for a long time, but it took this pandemic for them to figure it out. Jonathan, you spoke to a lot of tenants than I did.

[Jonathan Gitlin, President & COO]

Certainly, I spoke to a lot of tenants. But Tal, I would add to that by saying, my biggest surprise was the reaction that we got from tenants that are U.S.-based relative to their U.S. landlords. At the outset, we were expecting to be treated in a similar fashion to the U.S. landlords, if not worse, simply because Canada is not a significantly based as the U.S. is for them. But it actually turned out that in many instances, we were paid in full, well in advance of or under better conditions than our U.S. counterparts, our U.S. landlords. And I've been trying to figure out why that results occurred, and I'd like to say, it's because, we're just such a great landlords. But I think, in large part -- which is true. But I think in large part, it's also because of the regime up in Canada is a little bit different with respect to the rights that landlords have. And I think tenants really focused on ensuring that their business within Canada was sustainable, and they didn't want to risk losing any locations. So we really did, right out of the gate, do quite well with a lot of the U.S. tenants where a lot of people had written them off and suggested that they might not pay their rent to their Canadian landlords. So that was a nice surprise.

[Tal Woolley, Research Analyst]

Okay. My next question, you've obviously provided some FFO -- specific FFO guidance for the first time, which unfortunately now drags you into the conversation about what are some of the assumptions underlying that? Can you give us an idea of where are some of the vacancy and leasing assumptions you're making for the balance of the year to come to that $1.60 guidance?

[Edward Sonshine, CEO & Trustee]

The assumptions are that, generally -- I'm not going to get into numbers with you, Tal, because I don't know them off hand. But the fact is, we expect occupancy to go down to as low as 94% as a result of further bankruptcies and terminations, where we just decide that the deal, the tenant ultimately is offering because, keep in mind, CCAA -- and Jonathan certainly talked on this. They don't just don't all close. In fact, they don't close at all at first, and they keep paying rent. But -- and I don't want to talk about specific tenants, but sort of the first fashion retailer that declared, we had 43 of their stores. They're keeping 30-odd. Now we know on a 5 or 6 of them, we're not going to be able to reach deals. That's what they like to keep that we're satisfied on. So we're expecting to get those 5 or 6 back and ends up keeping probably, just over half of the number of stores we had previously. So that's sort of the occupancy basis of that -- sorry, of that guidance, that $1.60 plus. The other side of it is, any leasing we're doing now, we don't expect to hit this year, hit the bottom line, because it takes time. It takes time to get leasing done, particularly, when nobody can travel to go look at premises. I'm amazed that at the number of leases we are doing, where it's virtual, it's a matter of just people getting on the phone, getting on Teams and giving virtual tours. It's quite remarkable, how the RioCan people have adapted this. So it's getting done. But I don't think we're looking at much new leasing hitting our bottom line in 2020 at all.

[Jonathan Gitlin, President & COO]

No, not a lot at all. And I think that's a philosophical approach where we're not knee-jerking just to fill space, I mean, if there's an opportunity to rid ourselves of a tenant that is less than -- lesser prospect going forward, given the current conditions, we will actually be fine with letting that kind of, just go vacant and then taking the next few months to lease it up, which would reflect in the existing FFO prognostication. And to add that, at this point about some of the assumptions, we were of course, I mean, there's going to be an impact based on ancillary revenue, parking revenue, things of that nature that simply are normal course. But during the COVID-19 crisis, people are not parking. Certainly not in the next few months, I think that will shift, but they're not parking in some of our parking lots. And we're not being able to do some of the programs that we often did carry out during the course of the year, such as pop-ups and farmers markets and things of that nature that actually we're increasing in the prominence with respect to our FFO. So I think a lot of that was stripped out over and above the unfortunate leasing slowdown that we'll see through the course of this year. But I think that next year is certainly going to look a lot brighter in that regard.

[Tal Woolley, Research Analyst]

Okay. And then just my last question on CECRA. This appears to be the program that, it doesn't seem like anybody is really in love with it. And there has been some questions about the execution of it and how proceeds are going forward? They've extended it by a month. If the government clearly is interested in giving this money to people, do you expect that we could see CECRA either the eligibility expanded or continue to extend the term of the program?

[Edward Sonshine, CEO & Trustee]

You know what, I'll -- I can tell you that, it is extremely complex. I don't think I'm exaggerating where I say, we even put together a team of about 25 people, who basically for -- and a lot of part timers on top of that, who spend all their time working on this -- I've heard it pronounce 18 different ways, CECRA Program. CMHC, who is administering it, does want to give away the money. But with everybody working remotely, anybody who says, everybody is just as efficient working from their dining room table with a laptop as they are in an office, doesn't live in the real world. And everything takes longer than it should. More mistakes happen. It took us 2 months to just put together all the information, going out to tenants, because they had to sign an attestation as to what their sales or that had come back. And then it had to be done on a property-by-property basis rather than a tenant-by-tenant basis, so you had to wait for virtually every eligible tenant in that property to have given you the information that you needed to make the application. It was a painful, painful process. Here we are. I think we finally put in the last of hours about a week ago, Monday. But here we are 7 days later, with no cash from them yet. I expect it will come this week or any day, thereafter. So yes, they've extended to July. Nobody is quite sure what that means. Happily, what we seem to have indicated or the indications from our tenants is, very few tenants will actually qualify, if they keep the qualification as having lost 70% of your sales.

[Jonathan Gitlin, President & COO]

Yes. And I think the philosophy behind the 4 months that they put forward was, it was really supposed to bridge tenants, while they were closed. And now as there's increasing openings, I think that the government will likely not bring it forward beyond July, but again, who knows.

[Operator]

Our next question is from Jenny Ma with BMO Capital Markets.

[Jenny Ma, Analyst]

So just an extension on the CECRA. My understanding is that, the July qualification, basically happens for everyone. So does that suggest that there's going to be another $3.3 million of CECRA expense running through Q3?

[Jonathan Gitlin, President & COO]

You're right. It does. Anyone who qualified for the first 3 months can qualify. We have told our tenants that we are going to consider each 1 of them, but it won't be an automatic. We are going to -- we have established our own set of parameters to determine if they qualify for the July component of it.

[Jenny Ma, Analyst]

Okay. So I guess there's some relax...

[Edward Sonshine, CEO & Trustee]

We're not going to give away that 25% of our rent, unless we feel the tenant really needs it.

[Jonathan Gitlin, President & COO]

Right.

[Jenny Ma, Analyst]

Okay. So the max CECRA expense would be $3.3 million, but depending on -- it will probably be less?

[Edward Sonshine, CEO & Trustee]

Yes, it will be something, but it will certainly be far less than the $3.3 million.

[Jonathan Gitlin, President & COO]

That is correct.

[Jenny Ma, Analyst]

Okay. So when we think through the FFO guidance of $1.60, given that bad debt and CECRA was about $0.06 this quarter, does that -- it suggests, it's about $0.40 for the next couple of quarters. Does that mean that there's not much bad debt being baked into the second half of the year?

[Qi Tang, Senior VP & CFO]

Jenny, it's Chi here. So we actually already baked in our best estimate of the future quarters, bad debt and including the potential CECRA abatement for July. So that's already incorporated in $1.60. As you can imagine, of course, even evidenced by our 85% rent collection in July, it's only 28 days after the beginning of the month, as you can imagine. So the provision for the second half of the year on a quarterly basis, is certainly less than the Q2, as you can imagine.

[Edward Sonshine, CEO & Trustee]

We've taken some pretty knockdown assumptions, and that's why we ended up at only $0.35, because we took a lot of forward provisioning.

[Jenny Ma, Analyst]

Okay. I'm just wondering, when you're deciding what is in the bad debt versus the, I guess, unclassified amounts, I'm just wondering like what's the dividing line between actually recognizing it as a bad debt versus -- I know you said it was a small amount, but the portion that was sort of still unaccounted for. Is it the fact that it gets papered and it becomes bad debt? Or is it timing? Any color on that would be helpful.

[Edward Sonshine, CEO & Trustee]

No, no, no. You're partly right. It's not paper yet. As Jonathan said, we're well down the road on that last 5% or 6%. We expect the bulk of it. The only way at this point, I think most of it would be bad -- any of it could become bad debt, is if we agreed to abatements, which generally is a 4-letter word here, which again, if we felt we were going to agree to any abatement. It's already built in. So we're quite confident that, that last little 5% or 6% will get collected.

[Qi Tang, Senior VP & CFO]

And just to further add to Ed's comment, Jenny, we literally did tenant-by-tenant assessment. And for the one service outstanding ARs and tenant by tenant and see, certainly take into account any negotiations, any agreements already in place and also our best estimate on how much or what portion may be collecting, may not be collected. So we provide as a provision that way. So it's a very thorough approach.

[Jenny Ma, Analyst]

Okay. So there were a number of tenants that we understand or heard that had not paid rents, largely because their business models just didn't work well in a pandemic, and you have a handful of them in your top tenant list. Have you addressed the go forward with most of them? And is that being all of them?

[Edward Sonshine, CEO & Trustee]

Jenny, we've addressed the go forward. We're not going to talk about any specific tenants because, it's inappropriate. And quite frankly, we insisted and they insisted on confidentiality, because every single tenancy arrangement has been really specifically tailored between RioCan and them. And -- but everybody in our top 10 has been addressed for the balance of 2020.

[Jenny Ma, Analyst]

Okay. That's also why I didn't name any name. So just a quick accounting question. On the percentage rent for this quarter, it's tiny, but I'm just curious as to why it was negative?

[Qi Tang, Senior VP & CFO]

There was some adjustment, I think, accounting as you know...

[Edward Sonshine, CEO & Trustee]

Probably backward adjustment.

[Qi Tang, Senior VP & CFO]

Yes.

[Jenny Ma, Analyst]

Okay. Okay. Is it fair to say that you will probably be fairly tepid in Q3 and maybe with an improvement in Q4?

[Edward Sonshine, CEO & Trustee]

Yes, I think that's fair to say. The bulk of our percentage rent comes from people like supermarkets.

[Qi Tang, Senior VP & CFO]

Yes. And overall, as you know...

[Jonathan Gitlin, President & COO]

[indiscernible] guys, who are starting to do some pretty good business. So I think that's going to be a fair assessment and characterization.

[Qi Tang, Senior VP & CFO]

And on an annual basis, Jenny, on an annual basis, [ he wants ] -- that is COVID or pandemic, it's never a big dollar again.

[Edward Sonshine, CEO & Trustee]

It's a part of our business.

[Jenny Ma, Analyst]

Okay. And then last question is, Ed, again, not getting to specifics, but can you talk about the buyer profile for the disposition?

[Edward Sonshine, CEO & Trustee]

Say that again?

[Jonathan Gitlin, President & COO]

Buy profile.

[Jenny Ma, Analyst]

About buyer profile. Who was looking at buyer...

[Edward Sonshine, CEO & Trustee]

Buyer profiles. Well actually, the buyer profiles are very interesting. And I'm hoping, over the course of the next 6 to 8 weeks, we'll be able to actually announce deals. And they range from foreigners. Actually, one of the deals that we have under contract is with a foreign entity. One that we're -- that's just in negotiation stage is another foreign entity from different countries, I might add. And the other ones under contract are Canadian institutional investors. So it's a pretty mixed group, and we're seeing a lot of interest.

[Jenny Ma, Analyst]

Okay. And do you have an idea when they might close, if you get a deal done?

[Edward Sonshine, CEO & Trustee]

Yes. Some of them will start closing as early as next month.

[Jonathan Gitlin, President & COO]

Yes. But some of them push off through the fourth quarter.

[Edward Sonshine, CEO & Trustee]

Yes. Some will be in the fourth quarter. I think you'll see a -- in today's uncertain times, quite frankly, we don't want to give specifics or make any specific announcements until the deal actually closes because, what I learnt when I was a lawyer, Jenny, a deal's closed -- this is really old news because you'll hear what I say, that not only you got the check, but the check cleared. Now today, nobody deals in checks anymore, but that's when a deal is closed, and that's when we'll announce the specifics. But you'll see some of that as early as August.

[Jonathan Gitlin, President & COO]

We can make [ ourselves ], by saying, dampening into the registry office

[Edward Sonshine, CEO & Trustee]

I used to say that too.

[Operator]

Our next question is from Sam Damiani with TD Securities.

[Sam Damiani, Director, Institutional Equity Research]

I just wanted to talk about the rent roll pool. Has any -- has there been any changes to leases to modify the rent? So if you're collecting whatever percent of the rent today, like, is that on the same denominator that we had in Q1?

[Edward Sonshine, CEO & Trustee]

Yes. That's why we actually -- we're at pains to talk about pre-pandemic rental. It is the same rent roll that you had in Q1. Let me be very clear about that. Lease modifications, as you call them, we really have done very few, almost, none on a go-forward basis. Not that there weren't a lot of requests, but we were not going to let ourselves be taken advantage of for tenants to modify their leases for the next 5 years. And number one, that didn't happen. There are obviously, the deferrals and abatements are dealing with 2020, period. And we did not change the numbers. We don't indulge in that kind of jiggery-pokery.

[Sam Damiani, Director, Institutional Equity Research]

Okay. I'm just looking at the...

[Edward Sonshine, CEO & Trustee]

[indiscernible]

[Sam Damiani, Director, Institutional Equity Research]

That was good. That was good. And just looking at the bad debt expense. Again, we're not going to obviously name any specific retailers, but there's categories that are clearly more challenged than others, and but we all know who they are that -- fitness and theaters and whatnot, sit-down restaurants. How have those categories factored into your bad debt, relative to some of the other types of retailers?

[Edward Sonshine, CEO & Trustee]

Well I would say, they're more on the categories you mentioned there. They're probably more in the nature of abatements rather than bad debt at this point. And Jonathan and Chi, I think largely the bad debt relates to some restaurants but also, largely fashion.

[Jeff Ross]

Yes. And some smaller gyms. I mean, as Chi mentioned, Sam, we went through it literally tenant-by-tenant, after conversations with those tenants after, in some cases, thorough reviews of their financial statements, and we assess which ones we thought would survive and which ones wouldn't. And some -- so it really did go across categories. I don't think we can characterize them in one specific manner. But largely, some of them were larger national tenants, but only a few, and then a lot of them were in the midsize or smaller regional or local tenants.

[Sam Damiani, Director, Institutional Equity Research]

Got it. Last question is just on the rental residential. The rents at eCentral slipped a little bit in Q2 versus Q1, is there any additional color you can provide either on a month-to-month trend or what was going on?

[Jonathan Gitlin, President & COO]

Yes. I think during the course of the pandemic, when we were deep into it, there was a bit of a slowdown. I think that was just a byproduct of the fact that, people didn't want to leave their houses, people didn't want to do anything. They were somewhat paralyzed. And any leasing we did do was all virtual. And you couldn't even really show off your amenities and things that really stood out.

[Edward Sonshine, CEO & Trustee]

The amenities weren't operating.

[Jonathan Gitlin, President & COO]

Exactly. But what -- and so that, of course, we saw a slowdown in leasing velocity over the course of April, May and even into June. But we're seeing that pick up quite dramatically in the last 4 weeks. And so the rents, again, will fluctuate only moderately based on that velocity. And so we think that recovered in there...

[Edward Sonshine, CEO & Trustee]

Plus we stopped doing increases for the short term. I think we've agreed not to do any increases until October. And quite frankly, there was a little bit of a push to lease-up to get the full stabilization, so we could take down more CMHC money. There, nobody's been more open than that. At 1.8%, that's why we were pushing.

[Operator]

And there are no further questions at this time. I will now hand back over to Mr. Sonshine for closing remarks.

[Edward Sonshine, CEO & Trustee]

Thank you very much. Thank you for staying with us for the full hour. I know there's probably lots of calls going on over the course of the day. And like I said, we think compared to expectations, we did very well. Nonetheless, we are completely unsatisfied with the final results, and we'll do better in the future. Thank you, and talk to you again in a few months. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, you may all disconnect. Everyone, have a great day.