RioCan Real Estate Investment Trust

TSX:REI.UN

Earnings Call Transcript 2023-Q2

[Operator]

Good day, ladies and gentlemen and welcome to the RioCan Real Estate Investment Trust Second Quarter 2023 Conference Call and Webcast. As a reminder, this conference call is being recorded.I would now like to turn the conference call over to Ms. Jennifer Suess, Vice -- Senior Vice President, General Counsel, ESG and Corporate Secretary. Miss Suess, you may begin.

[Jennifer Suess, executive]

Thank you and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel, ESG & 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 then 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 alternative to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance, liquidity, cash flow and profitability.RioCan's management uses these measures to aid in assessing the trust underlying poor 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, 2023, and management's discussion and analysis related there too, as applicable, together with RioCan's most recent annual information form that are all available on our website and at www.sedar.com.I will now turn the call over to our president and CEO Jonathan Gitlin.

[Jonathan Gitlin, executive]

Thanks so much, Jennifer, and thanks to everyone that's joined RioCan's senior management team today. RioCan's team and portfolio have again performed exceptionally well. We continue to strategically and responsibly manage every facet of our business over which we have control, such that we're able to grow and at the same time navigate macro level volatility.With each successive quarter since our February 2022 Investor Day, our operating results reflect the precision with which we execute on our strategy. In light of this, I reiterate our commitment to the 2023 guidance of FFO per unit in the range of $1.77 to $1.80. This commitment is a reflection of the retail environment and the capabilities of our team.Our quality portfolio continues to maintain high occupancy and drive strong leasing activities and leasing spread. Our active development program generated new income through project completions, our key financial indicators were equally strong with same property NOI exceeding our target range. This provides the foundation for reliable year-over-year growth in FFO per unit.The foundation of RioCan's portfolio is resilient retail and our tenant base is tailored to offer consumers a compelling mix of convenience and necessity based goods. The quality of RioCan's tenant base continues to improve in lockstep with improvements in our portfolio of demographic profile.Our assets are in densely populated areas with high average household incomes of $140,000 and then average population of 260,000 people within a 5 kilometer radius. This demographic profile provides an increasingly compelling opportunity for our retail tenants. RioCan's portfolio has never been more desirable or more defensive.SPNOI for the quarter grew by 5.2%, FFO per unit was $0.44. Healthy new and renewal leasing spreads of 11.3% and 8.2% created a strong blended leasing spread of 9%. The result of the new leasing in the quarter highlighted the expanding mark to market between historical and current lease rates.The average rent per square foot of these new deals was $26.90, well above the average net rent for the portfolio of $21.34. And we believe this mark to market will provide a significant upside in the future as an increasing number of contractual fixed rate renewals will burn off.Retail committed occupancy remains steady and 98%, including the backfill of 2 units previously occupied by Bed, Bath & Beyond. Our strong occupancy levels, retention rates and leasing spreads are driven by intense demand for RioCan's quality retail space.Canada's tight zoning regulations and the vast gap between replacement costs and market value make building new retail a very unlikely proposition. Canada is the fastest growing country in the G7 and there's a natural gravitation to transit oriented major market locations to live and subsequently shop. These are the very same markets in which retail space is supply constrained.These factors converge to drive demand and create positive tension and lease negotiations for well-located bricks and mortar spaces. All indicators are that the type of space RioCan offers will continue to be in short supply and more importantly in high demand.Moving now to our development program, RioCan's organic growth is complemented by intelligent diversification, largely driven by this program, which in our view is a significant competitive advantage. Our approach to self-funding development is also a key differentiator. We sell fund projects through retained earnings, project financing, and capital recycling.Our development pipeline focuses primarily on mixed-use opportunities, with emphasis on residential complemented with great retail. It is concentrated in the Greater Toronto Area and the majority is located on a transit route. This pipeline provides a regular cadence of development deliveries that bolsters RioCan's growth by generating new income. Advancing our pipeline through expertise and hard work creates significant future value.With many development opportunities embedded within our existing portfolio we prioritize our efforts on 5 projects, which you will see described in our disclosure materials as the Focus Five. Now the Focus Five sites are large scale transit oriented mixed-use developments in the Greater Toronto Area that we're advancing through the zoning and site plan approval process. These sites have the potential to deliver 20.2 million square feet and 23,126 residential units. We've got the in-house expertise to extract the maximum value from these sites.Now the projects will be built in phases or let me say it differently, they're modular, they provide the flexibility to stagger the construction commencement of the project phases at different sites in response to various market factors. Their scale provides optionality to create value through development, partnerships, air right sales, and outright property sales driving growth for many years.Now RioCan's Scarborough Center in the Golden Mile is one of RioCan's Focus Five sites and is located on one of the premier development corridors in Canada. During the second quarter zoning was achieved for 2 million square feet over the first 2 phases of this site. This is yet another example of us getting projects shovel ready, and in doing so creating value that requires human capital and expertise, but little of the financial capital needed through the physical construction process.Act of construction on our next wave of developments will commence in a manner that maximizes long term value, but only when conditions are appropriate. Projects currently underway and slated for completion by 2026 are expected to provide approximately $43 million and stabilized NOI.Our development program is considerable. That said, I know there's always specific interest in The Well, which is our flagship mixed-use development in Toronto. So let me provide a few highlights to you now.Approximately 80% of the retail component is leased and then additional 7% is in advanced negotiations. We're proud and we're very excited about the ongoing progress of this incredible development and we expect the majority of the retail tenants to be open by November of this year.Pre-leasing at FourFifty The Well, which is the 592 unit rental residential tower developed by RioCan with our partner Woodbourne is progressing nicely. Since FourFifty The Well launched in March of this year over 100 leases have already been signed. The first residents were welcome to their new homes yesterday.There are currently 12 purpose built residential rental buildings operating in the RioCan Living portfolio, and when fully stabilized, these developments have high growth potential and have contributed approximately $9.4 million of NOI so far this year.We've also accelerated our capital recycling program through the sale of condos. The 6 condominium and townhouse projects we have under construction are 86% pre-sold, achieving 96% of pro forma revenue. These projects will generate $860 million in revenue, or $179 million in profits over the next 3 years, which we will undoubtedly put to great use, and they're earmarked for very effective uses, including the repayment of debt.Moving now to our balance sheet, we continue to maintain a solid liquidity position and a conservative and very productive payout ratio. At the same time, we stagger the maturities of long term debt and limit the use of floating rate debt to minimize exposure to interest rate fluctuations, as well as proactively employing various financial tactics.A few examples include preemptively refinancing debentures in 2021 before interest rate hikes, tactically pivoting to more cost effective secured debts in some instances, and effectively hedging risk with bond forwards.Our combined capital market maneuvers had generated interest expense savings of approximately $160 million, or roughly $30 million per year over the average 5.5 year term of our debt issues. These measures are all part of our commitment to responsible growth, which Dennis will speak about in a moment.So before I wrap up, I want to reiterate my conviction and RioCan's ability to deliver long term value. Like our portfolio, this team continues to demonstrate resiliency and productivity. Your management team will continue to operate with excellence and find strategies and mitigate the impact of heightened interest rates.Our consistency, foundation, strength of vision and demonstrated commitment to responsible growth will continue to serve our unitholders well. At the same time, position this trust for continued stability.With that, I'll turn the call over to Dennis to take you through our balance sheet and provide insight into how it continues to support our quality and growth. Dennis.

[Dennis Blasutti, executive]

Thank you, Jonathan, and good morning to everyone on the call. Our second quarter results continued the trend of strong operating performance and development deliveries which generated same property NOI and FFO per unit growth.FFO per unit of $0.44 in the quarter and $0.88 year-to-date represents increases of 2.3% and 3.5% respectively. Strong same property NOI growth of 5.2% contributed $0.03 to FFO per unit growth for the quarter. Development deliveries and ramp up in our residential business contributed an additional $0.02 per unit.We continue to take steps to mitigate the interest rate impacts through hedging, optimizing our financing mix and issuing loan receivable at floating rate. Net of these mitigating steps, higher interest costs had an impact of $0.02 on FFO per unit.In addition to the major drivers that I just mentioned, there are a few items in the quarter that I would like to highlight to provide additional color.First, due to timing, we had no inventory gains in the quarter, but expect inventory gains to ramp up in the second half of the year.Second, our residential rental business continues to grow. Second quarter FFO from this business was $5.1 million, an increase of 51% from last year. We continue to see strong lease up of our new buildings and on a same property bases a 9% average increase in occupied rent per square foot.Third, we recognize an income $4 million relating to the reversal of legacy pandemic related provisions as a result of our team's hard work with tenants to resolve outstanding balances. Excluding this, year-to-date same property NOI growth was 3.2%, on track with our target for the year.We have $10 million provision remaining. While we do not expect to collect all of it, our team will continue to work through this over the balance of the year.Finally, disposition activities over the last 12 months, net of the benefit of NCIB activity had a negative impact of $0.01 per unit on the quarter. This is because we sold some higher cap rate non-core assets to further improve portfolio quality and redeployed a portion of that capital into very high quality development.There is a lag between the loss income from the assets sold and the ramp up of the development income. We believe it is well worth enduring this short term drag on FFO for the long term benefit to our quality and growth.We reported NAV per unit of $26 in the quarter up a minus $0.27 per unit from the beginning of the year. The increase in NAV per unit was driven by retained income in our equity as our payout ratio of 59.7%, the lowest among our peers, enables us to reinvest in our business, adding to equity value. This was partially offset by a year-to-date fair value losses of $28 million. There are a number of moving pieces here, so we need to unpack this further.We recorded fair value losses for IPP assets driven by cap rate adjustments, resulting in a negative impact of $56.5 million partially offset by fair value increases due to strong operating performance of $13 million. Developments drove an increase in value of $15.5 million due to the advancements in our development pipeline. In particular, the successful zoning at our RioCan's Scarborough Center in Toronto's Golden Mile.Our balance sheet reflects development land at $27 per buildable square foot, which we view as conservative relative to land values in the market. Our portfolio cap rate at the end of the quarter was 5.33% with an increased weighted average cap rate assumption of 4 basis points, offset by changes in portfolio composition.Our cap rate movement in the core is consistent with an ongoing trend, where cap rate assumptions have been increased, but are offset by the impact of portfolio composition through the redeploying capital from the sale of high cap rate non-core assets into higher quality and hence lower cap rate acquisitions and development. For example, in 2022, we increase our cap rate assumptions by 17 basis points, while changes in portfolio composition offset despite 13 basis points.Looking back further, we have recognized $672 million of write-downs for the beginning of the pandemic to NAV. As a reminder, we did not reverse much of our pandemic write-downs during 2021 and early 2022 and continue to add to both write-downs over the last 12 months. All to say that we have taken a conservative approach to valuations over the last few years. With that said, we continue to monitor cap rates in the markets where we own property.Like many data points these days, we are faced with contradictory information. For example, we have recently seen reports from brokers showing increasing cap rates in the quarter. However, there also remains a shortage of transactional data points in the market. While there is a scarcity of comparable debt -- comparable transaction to provide clarity on values, there's also a scarcity in strong assets in major markets that are for sale.Given this, where patient sellers are matched with buyers who are taking a long term view solid values can be achieved. For example, we were firm on a contract to sell a non-grocery anchor center in a greater Vancouver suburb at a 4.99% cap rate, significantly below the cap rate shown in industry reports.In summary, our valuations are another reflection on what we see in our business more broadly. Values and cap rates have been negatively impacted by external market factors. Whereas, the factors that we control such as income growth and reinvestment, advancing our development pipeline, and improving asset quality through portfolio composition are driving improvements in these metrics.Turning now to our financing initiatives and balance sheet metrics. Our financing activities in the quarter demonstrate RioCan's continued access to various forms of debt capital. During the quarter we issued $300 million of 6.3 year senior unsecured debentures with an all-in rate of 5.28%, inclusive of that benefit of bond forward hedges.We extended our corporate credit facilities with a consortium of banks by 1 year to a 5 year term on existing terms and conditions. And subsequent to quarter end, we closed the 10 year CMHC mortgage at our Strada property for $15 million at our share at a rate of 4.29%, a spread of 95 basis points over the Government of Canada bond rates.In this volatile interest rate environment, we have utilized hedging to mitigate risks. Over the last 12 months we have settled a $1 billion in bond for contracts for total realized gains of $57.3 million. Most of the gains will be amortized into FFO over a weighted average term of 6.3 years. We have also fixed the majority of our debt.At the end of the quarter only 6.6% of our debt was floated. This includes draws on our corporate revolver which can fluctuate. And excluding a revolver, our floating rate debt exposure is 3.6%.Our net debt-to-EBITDA was essentially flat at 4.4 -- sorry, 9.49x. We expect this to be in a low 9s by the end of the year and expect to achieve our target of less than 9x during 2024 as EBITDA from our development projects continues to add to our earnings.Overall, we continue to see strong operating performance driving results. Our team remains focused on what we control and continues to operate with excellence. Our long term outlook remains positive, as the macro fundamentals of short supply and growing demand provide a tailwind for our business.With that, I will turn the call over for questions.

[Operator]

[Operator Instructions] So our first question comes from the line of Lorne Kalmar of Desjardins.

[Lorne Kalmar, analyst]

Maybe just a quick one. What do you guys -- if you had to put a pin in it an estimate that the mark-to-market on the retail portfolio would be?

[Jonathan Gitlin, executive]

Well, I mean, I think we put out statistics, and I just cited them in my delivery that on average, rents for this quarter were at about $26.90 and on average, our rents across the portfolio are in the mid-21s. I think that's a general indicator of where we think market rents are today and what our actual rents are. So, you know, that, you can use that as a general indicator.Of course, we are hamstrung by certain fixed renewals. So not all of our renewals get to -- or not all of our leases get to go to market. But of course, where they can, we think that this is a great market in order to extract that kind of growth and that kind of mark-to-market in our transactions.

[Lorne Kalmar, analyst]

Okay. And maybe one for Dennis. You're talking a little bit about the release of the pandemic provisions. What do you sort of expect the cadence of the remaining $10 million or whatever it may be to be over the next couple of quarters?

[Dennis Blasutti, executive]

It's really hard to say, Lorne. It's one of those situations where our property management team needs to grind out tenant by tenant through the outstanding balances. So it's an opportunity. It's even hard to say what proportion we'll collect. So I don't really want to give specific guidance.What I will say is over the balance of the year, our team is working through the rest of the tenant kind of issues. But the other thing I would say is we don't need to rely on this collection to make our numbers.

[Lorne Kalmar, analyst]

Fair enough. And then one last quick one, I might have missed it, but what was the fair value gain you guys were able to recognize on the rezoning at Golden Mile?

[Dennis Blasutti, executive]

We had $16 million -- $15.5 million in there. And just in terms of how we do that, I think it's actually an important point. We consider a number of factors, not just zoning, when we kind of work our way through valuation. That's why we've kept the value is a bit lower. So we look at zoning, and that's a big step and recognize value there. But there we'll also look at any tenant incumbrances, site plan approvals, environmental, et cetera. So there is more value to come.

[John Ballantyne, executive]

And specifically on that side, it's John Ballantyne, I think we just recognized an increase in value in the first 2 of 4 phases.

[Operator]

Our next question comes from Sam Damiani of TD Cowen.

[Sam Damiani, analyst]

First question is just on the capital deployment with development getting a little tougher to pencil out. Acquisitions also a little bit tougher to pencil out. How should we think about incremental capital deployment decisions going forward, not -- I guess, really just for the next year or 2 between acquiring rental residential perhaps and kicking off new construction projects.

[Jonathan Gitlin, executive]

So we have been fairly clear about the amount of committed capital to our development pipeline. And this year, we will complete a number of developments and continue on a number of, I should say, construction projects to the tune of somewhere around $400 million.And then going into next year, I mean, some of the -- we said that in our 5-year plan that we're going to spend somewhere between $400 million and $450 million a year. But of course, we govern things on a case-by-case basis. And you're quite right to say that in this environment, things don't necessarily pencil. So that number, there's a fair amount of discretion in how much we spend next year.And I think any new construction starts that we have pegged for the year are going to be under a significant amount of scrutiny because of interest rates and because of other construction costs it is a very difficult proposition in this kind of environment.So it's unlikely -- if conditions remain the same, it's unlikely that we will be aggressively allocating capital towards new construction starts. With respect to acquisitions, it's really only a proposition for us. One, if we're just squaring off an existing assembly, which we've already disclosed this quarter that we've done a little bit of that or if we see something that we feel we can add a tremendous amount of value to. And/or it has existing debt attached to it such as the IRR is robust, in which case, we will take advantage of those opportunities.Outside of that, Sam, we're also looking at certain -- we see it as a very strong market to be a lender. And if there are opportunities where we can invest money in financing propositions where we like the underlying assets, plus we can get some rights out of the borrower, meaning we have some sort of right of first refusal, right of first opportunity or in the best case, is an option to acquire at the end of the loan. That certainly serves our unitholders well and we think it's a very good and safe way to position our capital.But I think the primary focus is to continue to improve our balance sheet. So really what we're doing with incremental capital most significantly is paying down debt as aggressively as we can, and we very much intend on sticking to our goal of getting in between 8x and 9x net debt-to-EBITDA in the medium term. So that's, I mean, a fairly broad answer to your question, but that gives you hopefully a good enough color.

[Dennis Blasutti, executive]

And I'll just add one number, Sam. So and I think we may have mentioned this in prior quarters, but committed development spend for next year is about $250 million to complete what we already have in the ground or to advance those. So as Jonathan had said, anything over and above that would be discretionary and we could determine whether or not it's appropriate to start and add to that.

[Jonathan Gitlin, executive]

And I'll add, I'm sorry, one other thing, Sam, we'll pass the baton back and forth here between Dennis and I. The other thing, I want to make the distinction between development and construction. And what we are not slowing down is the achievement of zoning and the tackling of some of the hurdles that Dennis had alluded to in the last question, which is getting rights over certain tenants, getting environmental situations dealt with because we still feel that, that, call it, sweat equity in the human capital plus, I would say, a very small amount of economic capital that goes into creating shovel-ready sites creates a tremendous amount of value.So that is something that we will continue to allocate both human and economic capital towards. But it's fairly incremental. And I would say -- I'd use the word de minimis in the scheme of things relative to our balance sheet. So that is something we will continue to allocate capital towards.

[Sam Damiani, analyst]

And then just a couple of kind of related questions. I guess, you mentioned the priority of reducing leverage. In the investor deck, even 9.5x debt-to-EBITDA includes 1.8x due to properties under development basically. So how should we think about that as these existing active projects burn off over the next 2 to 3 years? I don't think you're suggesting that your debt-to-EBITDA is going to fall by 1.8x. But where would the REIT sort of stabilize out if no new projects were started?

[Jonathan Gitlin, executive]

Well, I think if we didn't -- if we stop development altogether, which is not a likely proposition, but that is -- that would take us down somewhere closer to 8x, even --

[Dennis Blasutti, executive]

Even below 8x over the next couple of years.

[Jonathan Gitlin, executive]

But I think what we are looking to do is just get between 8x and 9x which gives us a healthy balance of all of these types of growth vehicles. And as we're seeing now, Sam, what developments are providing us with is a supplement to our existing FFO growth. And I think it will in the future as these development projects, which have burdened our balance sheet undoubtedly. But as they are delivered, you're going to see a fairly significant amount of FFO in our balance sheet.So I think for us to protect our future growth prospects, development is still very much a component of our business. But I think, as I said before, we're not going to be aggressive on development starts unless there is a healthy return in doing so.

[Dennis Blasutti, executive]

Yeah. I think, just -- looking at, Sam, our net debt-to-EBITDA, excluding developments today would be below 7x. So that's what you see in our IPP business. So if we just stopped developing all together, which, as Jonathan says on the card, over time or probably 3 years, we would be into the low 7x.

[Jonathan Gitlin, executive]

And the good news is, Sam, that we're getting about $860 million back from our various properties, developments like condos and things like that, that we're going to use to strengthen that balance sheet and that net debt-to-EBITDA number over the next couple of years.

[Dennis Blasutti, executive]

And we'll allow us to stay in that 8x to 9x range, even if we do continue to development, which is a key point going forward.

[Sam Damiani, analyst]

Last one for me is just on dispositions. Any thoughts on the current market for disposing of density, monetizing some of that zoned land that the REIT has so much of on balance sheet today.

[Jonathan Gitlin, executive]

Well, I think right now, the market is very opaque when it comes to land. We're seeing the odd sale, but it's certainly not as vibrant as it was a year ago. So our current business plan for the short term has no reliance on the sale of air rights. But I think that we all believe in the strength of the various markets in Canada, particularly the GTA market. And I do think that over time, as the need for more housing becomes more and more acute, we're going to see enhanced value and enhance demand for that land and for those air rights.But right now, Sam, it's a very distorted market. And I don't think there is -- there are any sound bites that would say that we should be relying on it and should be transacting on it in the short term. So I don't know, Andrew, do you have anything else, any other color to add on that.

[Andrew Duncan, executive]

No, I agree with that, John. I think the one thing I'd add is that, the discrete amount of transactions you are seeing are highly structured and result in a lot of Whitby like structures in those purchases, because the prospective purchasers can't afford to take on that cost now based on trying to deliver an IRR return. So there's a lot of nuance in every deal we see even though there's not a lot of.

[Operator]

Our next question comes from the line of Pammi Bir of RBC Capital Markets.

[Pammi Bir, analyst]

Just maybe starting with the leasing side of things. As you think about the next year or so, are there any tenants or segments that maybe you're a little bit more concerned about? Or maybe on the flip side as well, where you're seeing some of the strongest momentum?

[Jonathan Gitlin, executive]

Sure. So I'll start on the flip side, which is the positive. We're seeing momentum from really a vast majority of our categories. I mean, we focus on tenants that are strong and stable, which means that they have relevant uses and also good balance sheet. And we're really seeing growth in the vast majority of the categories that make up that larger category, grocery, pharma, dollar stores, liquor stores, and then we're seeing a significant push for health and well-being doctors, physiotherapists, things of that nature. Even bank branches there I say, are actually seeking out the appropriate locations and we're seeing some growth in that business.I think where there is any weakness or softness, if I'm to prognosticate going forward, I think what's happened to small business is based on this high interest rate environment is that some of them will suffer and close. So I don't think there's any one category of small business. But I have to think that if you're a smaller restaurant that is not significantly capitalized or a smaller gym or some franchises of various outfits, your balance sheet is going to be squeezed if you've taken on debt, and I think we will see some fallout from those.But again, I think because we have done a good job of limiting our exposure to those and really only bringing in ones that we think are very relevant and very useful for the communities in which we serve, I don't think you're going to see a significant amount of fallout. And the even better news is the moment we do see any fallout, we've been able to release at typically higher rates.So we're not in a position where we have significant red flags up across our portfolio. But Oliver, any other thoughts on tenants of your categories you're concerned about in categories you feel like.

[Oliver Harrison, executive]

Yes, I think it's primarily tennis business revolve around sort of a discretionary concept that they will probably feel a little bit of pain if the economy worsened. But beyond that, no, there's no immediate concerns on the portfolio.

[Jonathan Gitlin, executive]

Yes. And the only thing I will say is we're keeping an eye on what's going on with Lowe's because obviously, they are consolidating with RONA, and I'm sure they're going to reshuffle their store count based on that merging of the 2 banners. We do have some Lowe's in our portfolio, most of which have lengthy terms in them and are well positioned. But that is one that, of course, we have to keep an eye on.

[Pammi Bir, analyst]

And just maybe coming back to the disposition commentary, the pace seems to have picked up after the quarter. I think you'll probably be close to $300 million if some of these deals close. On the additional properties in the pipeline, can you just comment on those? Are they sort of consistent with everything you've done so far?And then I guess it sounds like it's fair to say that buybacks are not necessarily part of the equation in terms of redeploying some of those proceeds, just given your comments around paying down debt.

[Jonathan Gitlin, executive]

Yes. I mean as I watch our share price today, I can't help but be very tempted to do share buybacks. But I do agree. I mean we have prioritized, we made it quite clear that we're prioritizing an improvement in our balance sheet. So that is something we'll focus on.And with respect to the types of dispositions, I mean, I think we've illustrated a pretty good balance between taking advantage of some quantitative disconnect between private and public markets. And when we see an incredible opportunity to raise capital efficiently in the private markets, we will do that as we've demonstrated with that property that is now firm in Surrey.But mostly, any dispositions that we do going forward will be qualitative to, we have some low-growth assets even after our significant portfolio improvement over the last few years, we still do have some low growth assets that we will look to dispose of if the conditions are right.But the great news for us, Pammi, is that we really don't rely on any dispositions going forward. With our payout ratio where it is and I think our controlled spending, we don't need the capital right now. And so we're not going to be forced sellers. We don't have to be, we won't be. And this market, as I said before, is a little bit opaque. So we're really not -- you're probably not going to see any heightened activity around dispositions beyond what we have in the pipeline right now.

[Dennis Blasutti, executive]

And Pammi, just a comment on NCIB. And obviously, we did quite a lot of it over the last year or so. In this interest rate environment, when you sort of run the math on it, the marginal benefit of doing NCIB versus just paying down our lines, it's not as wide as it used to be. Now you get all dependent on the share price and various things. But the incremental benefit of NCIB versus just paying down debt, frankly is just not as wide it used to be, and it is also important to pay down debt and get that debt-to-EBITDA where it needs to go as well.So yes, on a margin basis, it seems like use capital is just paying down debt unless we have some other very compelling different opportunities.

[Pammi Bir, analyst]

And then just maybe lastly, on the -- I think you mentioned $180 million of common profits coming in over the next few years. Just wanted to confirm, based on the disclosure in your materials, will all of those hit by the end of 2025 or some of that possibly leading into 2026. I know it's a while out, but just wanted to maybe speak about --

[Jonathan Gitlin, executive]

Well, we pay close attention to it. I mean, as you know, construction schedules are never reliable. So right now, our best guess is the vast majority of them will hit for 2025. But there's always going to be slippage in the delivery of some of those condo units. And so there might be some leading into 2026, of those, and Dennis.

[Dennis Blasutti, executive]

Yes, I think that's right. I think we will actually expect some of it in '26. So I think like the Queen and Ashbridge project will be over '25 and then into '26. So even though they've been our disclosure, we say completed in '25 or not amount or part of me, but I think that's what we say. But there's move in timing of when tenants take possession. So there's some of that ends up in '26 or in a 5-year point.

[Pammi Bir, analyst]

And again, all this is included in your typical sort of 5% to 10% annual FFO growth target?

[Jonathan Gitlin, executive]

Right. Our FFO growth -- our FFO targets include condos, yes.

[Operator]

Our next question comes from the line of Tal Woolley from National Bank.

[Tal Woolley, analyst]

Dennis, you were sitting on quite a bit of cash at quarter end. Were you holding that for anything in particular?

[Dennis Blasutti, executive]

Yes. It was actually it updated in our lines 2 days after quarter. I know it was just a timing issue of when our debenture closed and when we were able to sell the line.

[Tal Woolley, analyst]

And then just on the ERP project, how much more sort of expense do you expect to incur? And what's the return you're expecting to see out of that project?

[Dennis Blasutti, executive]

I would say it's -- we're about halfway in terms of the project. So we'll see another chunk of expense going during the year. In terms of the return, while we do expect to see some efficiencies, which will be a good thing. At the end of the day, this is a project that we needed to do because our old system was going out of the lease. So it's one of those things that every 10, 12 years, I think, in our case, 14 years, you just have to replace it and get another 10 to 12 years out of it. So that's what we're doing.

[Jonathan Gitlin, executive]

But it's not -- I want to like sort of frame it a little more positively than like it being a carburetor replacement in an old car. I think it is something that will be a significant improvement to our existing system. I think it will allow us to do things quicker, more efficiently, more effectively. And so I can't put a dollar value on exactly what the benefits will be, Tal.But look, I think the system we're designing is going to certainly make this organization far more effective and efficient in the way we report and the way we just, again, process numbers and so many other things. But it's hard to peg a number to it, but it is going to have a significant difference on RioCan and its output.

[Tal Woolley, analyst]

So we should expect maybe another like $8 million to $10 million of expense from that over the balance of the year?

[Dennis Blasutti, executive]

I'm going to say more like stack state and hopefully, our IT team is listening, they're going to stick to that.

[Tal Woolley, analyst]

Just a few, pivot back to the development market too. I was wondering if Andrew is there. I think in the past, you sort of talked about construction costs, sort of breaking or coming under control being one of the real things that would sort of change your mind about whether you advanced more projects or not. Can you just talk a little bit about the -- what you are seeing in construction costs with respect to raw materials versus labor, how that has sort of been progressing over the course, since we come out of the pandemic?

[Andrew Duncan, executive]

Thanks, Tal. I guess what I can tell you is we're actively keeping our fingers on the pulse of the construction cost situation. I would say what we've seen in probably the last 2 quarters is a bit of softening on what we call the front-end trades or the trades that start projects early. So the people that are digging the hole that are doing shoring, that are forming the concrete.And some of the raw materials associated with that in terms of concrete rebar, those costs are leveling off, and in some cases, coming down, very small increments, but coming down, and that's a reflection of less projects going in the ground in some of the big markets.Now the middle trades, so the mechanical electrical trades and the finishing trades, we have not seen any softness yet or significant softness. There's 2 reasons for that. One, those trades are still hard at work finishing projects. And two, a lot of those trades work in more than one asset class.So take a mechanical electrical trade, they can work on institutional buildings, they can work on infrastructure projects. They work on a number of things. Their costs are also indexed to materials costs. So some of those materials on the supply chain on the mechanical electrical side has been getting better, but costs have not come down because they've still got plenty of demand.And the other factor is labor in those markets has been negotiated 2 or 3 years to both labor agreements, and that's not coming down. So we're seeing softness on the front-end trades. We're not seeing softness through the middle and tail end trades. We're keeping an eye on it. We hope it happens.I think there's a couple of factors. Construction costs can level off or come down. And as most, a lot of our mixed-use projects are rental residential projects. Now those residential renting are increasing. So not enough to bake the back of Proforma and make us potential to go, but those are the indexes we're watching. Rental rate increases and construction costs leveling off or decreasing.

[Tal Woolley, analyst]

And when you guys are building out a pro forma on a new project, what's your sort of -- because I mean, I'd say probably more likely than not, it's in Toronto. Like what are the rent growth assumptions you're working on?

[Andrew Duncan, executive]

We're fairly conservative in that regard. We always have been. We usually model that somewhere between 3% to maybe 4% and in some rare cases, 5%. But usually, it's we sort of anchored around that 3% per annum, which has been, obviously, eclipsed in the market over the last little while, but we do 10-year models.I think it's logical to stay in that 3% range. Although with the inflationary environment, we're in probably up that a little bit in our models going forward.

[Dennis Blasutti, executive]

If anything, we do that for the first like 2 years of the model, and then you referred to the 3 years thereafter. But I think to add to Andrew's point, what has changed in the models, if you take 2 years ago, rents put it in the front end and [ escalate ] 3, you just move the whole curve up because you've got today's rent and then [ escalate ] 3 from there. So there is an improvement in the models. But Andrew said, not quite all the way to where we need to be, but we continue to monitor.

[Jonathan Gitlin, executive]

And the good news, Tal, is that because we are now pausing on certain starts, it has given us the ability to go back to various municipalities and enhance our zoning and also try to change the use where we have some insistence on office use, changing that to residential. So we are taking this time to be very productive in the value that we are creating.And I think Andrew and the development team have done a tremendous job in assessing where we have the biggest opportunities and then going back to various municipalities to extract more value out of those.

[Tal Woolley, analyst]

And I guess just lastly on the development side, too. You sort of talked a little bit about the economics of commercial development right now. We've seen some of your peers, the one thing about the retail retails, they all kind of play in all of the asset classes. And some of your peers have sort of said, "You know what, resi is not for us right now. We're going to focus on more commercial stuff". Is there like a tipping point or how are you thinking about whether to put a dollar into resi or a dollar into retail right now?

[Jonathan Gitlin, executive]

Well, I think for us, we have to assess the individual sites that we have. And in some cases, even though the short-term economic output from redeveloping one site might be better if we did it strictly as commercial. Some of the sites are just so prominent and well located that for the long term, it would be sort of wasteful to utilize that landholding to do something that's low rise or that covers 25% of the lot, we'd rather wait until the conditions are right and utilize the lot for something more productive like mixed-use.So it really is on a case-by-case basis. But right now, I mean, it's hard to sort of say, well, like what IRR it takes for us to, well, sorry, we do have hurdles that we've established internally. But as I said, only certain sites would be logical to focus only on retail.Most of them really do suit themselves more towards transit-oriented mixed-use projects. And I think that is in the long term, what will create the most value for our unitholders.

[Dennis Blasutti, executive]

Yes, I think, Tal, the construction costs on the retail side are elevated as well. We've talked about this before, $600 a foot in the GTA to build out new open-air retail space compared to asset values around $350. And to make the math work on that, you need to be getting high 30s, low 40s rents per square foot to do that. And while we can get that in some small shop space, then we'll -- we have been and we will green light a 20,000 square foot strip here and a pad there, et cetera, what we'd be able to extract that kind of rent.The market hasn't quite caught up to the reality that of what it cost to build. And so yes, it's going to be few and far between to make the math work even on the retail side, which then should dovetail into more pressure on, upward pressure on the rent in the existing space.

[Andrew Duncan, executive]

Tal, what I'd add to what Dennis said is we're actively working on retail development and small scale and to run those performance is much easier because you're pre-leasing. You know what the rent growth is. The construction period is shorter. The type of contract you do is shorter, it's a lot more predictable, but it's at a much lower scale, but we retain that expertise and we do it as it comes forward and the return presents itself as an opportunity.So we've got that density on various retail sites that we actively execute on, just not as big from a spending standpoint and not as prominent as some of the stuff you've seen us do in the past. But it's a table stakes and we still do it.

[Operator]

Our next question comes from the line of Jenny Ma of BMO Capital Markets.

[Jenny Ma, analyst]

I wanted to ask about the same property NOI guidance for the second half. It's running above what you're expecting of your target of 3% year-to-date. And I know there's some provisions from COVID that came back into that. But when you look at the second half, are you expecting the organic growth to run sort of in that 3% range or it might take a dip to sort of even out at 3%. I'm just wondering if you're just being a bit more conservative on the organic growth target than sticking closer to your long-term 3% and not really moving it too much around on a short-term basis.

[Dennis Blasutti, executive]

I think on the -- I would say on excluding provision basis, we would be at around the 3% and then the provision that we've brought it as a let's call that a bit of a bonus.

[Jenny Ma, analyst]

So you're sticking to the true organic 3% for this year then, so fairly steady with what you've seen in the first half of the year?

[Dennis Blasutti, executive]

Yes, exactly. Yes, I think it was 3.2% in the first half, and we should be in that area.

[Jenny Ma, analyst]

When we think about your FFO per unit growth target, going back to February of 2022, can you remind me what interest rate environment you're baking into that just because so much has changed. It looks like you've got some other levers that you could pull. But do you think maybe I getting ahead of ourselves, but do you think your target can absorb the current interest rate environment?

[Jonathan Gitlin, executive]

Well, we haven't changed our target. We're monitoring them in the context of all these market dynamics. Obviously, there's been a serious shift in the macroeconomic environment, particularly driven by higher interest rates since early 2022. We're going to focus, as you suggest on what's under our control, and we're going to grow our revenue side of the business as much as we can to counteract what were clearly higher interest rates than we are, quite frankly, anyone would have anticipated. And we're going to provide updates like sort of as they come with respect to our long-term targets in the face of this ever-changing and heightened the interest rate environment.

[Dennis Blasutti, executive]

Yes. I think the scenario that we ran as a reminder, was we did have, we had assumed escalating rates. We had assumed escalating rates of about 4.5% over a few years as opposed to what they did in next 6 months. So there's no doubt that that puts pressure. And as you did point out, and this is what we're assessing as we go through our business plan, we've got other levers that will help offset that and the operating performance has also outperformed our plan.But listen, if we're in a higher for longer interest rate environment, which there seems like even over the last few months, there's a growing consensus where we saw most economists calling for rates declining late this year, early next, just seeing more views flying higher for longer. That is going to be a challenge for real estate owners like us.And so we have to evaluate that as we go forward. So we don't want to sugar coat it. But we also -- as we always do, we're looking at all of the revenue side opportunity as well.

[Jenny Ma, analyst]

If I could step back sort of on the revenue growth front. As you're negotiating new leases today, I know traditionally for retail, it's been sort of a fixed rent step in a low inflation environment. But has there been a shift in how you have these discussions? Like are you able to negotiate rent steps that will give you more protection or rather a greater ability to leverage growth from inflation or is it still very much the traditional sort of 1% to 1.5% rent steps that you see?

[Jonathan Gitlin, executive]

No, I think these paradigm shift along with the market dynamics. And right now, the pendulum is firmly in favor of the retail landlord. And as such, we have more leverage to introduce concepts that are inflationary protection. So we are very much striving for annual bumps as opposed to bumps every 5 years. We are trying to get clauses that have a set increase year-over-year, but the greater of that in CPI, I mean, look, with mixed results depending on the tenant and depending on the situation.But 3 years ago, we would have had no chance to even introduce that concept. But because of the shifting dynamic and the lack of quality supply, we're seeing much more favorable conditions, and we're seeing tenants understand and accept that these conditions are necessary going forward.So negotiations have certainly been a little more nuanced than they would have been a couple of years ago, and we have been seeing a lot more success in getting those types of terms. Oliver, who's much closer to this, am I missing anything?

[Oliver Harrison, executive]

The only thing I'll add is that we are pushing very hard on removing fixed options for new lease deals, which gives us the options to convert rents to market when they expire, which we have had a significant amount of success over the last 6 months in doing. So that's the only thing to add.

[Jenny Ma, analyst]

Are you seeing success in this regard more so tilted towards some of the larger tenants or some of the smaller tenants or is it sort of a mixed case-by-case basis?

[Jonathan Gitlin, executive]

Mixed case-by-case basis. It really depends on the strength of the individual property, how much competition there is and various other market dynamics.

[Oliver Harrison, executive]

Yes. Most notably, it is with the larger tenants, though, because historically, we've always had the ability to influence smaller tenant deals. It's anchor tenant deals where it was table states that if you're doing a deal with an anchor tenant, you're giving them fixed options. But the reality is now we're doing anchor tenant deals where the options are at market, and they understand that, that's the reality of this moment in time. So we're doing our best to take advantage of that situation.

[Operator]

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

[Jonathan Gitlin, executive]

Well, thank you very much for joining us today, and we look forward to speaking to everyone again next quarter. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.