RioCan Real Estate Investment Trust

TSX:REI.UN

Earnings Call Analysis

RioCan Reports Strong Leasing Results and Confirms Guidance

RioCan's Q2 results highlight record-breaking leasing spreads and a significant increase in committed occupancy to 98.3%. FFO per unit decreased slightly to $0.43, but strong leasing and developments bolstered earnings. Key projects like The Well have been completed, contributing to positive NOI, although transitional lease-up effects were noted. Guidance for FFO payout ratio remains at 55%-65%, with development spending projected at $250 million to $300 million. RioCan confirmed its debt-to-EBITDA target of 8-9x by year-end and anticipates further growth driven by resilient market demand and strategic tenant placements.

Operational Highlights: Rising Population and Leasing Success

In the most recent quarter, RioCan Real Estate Investment Trust experienced record-breaking success in leasing, driven by a strategic approach focused on high-quality tenants. The committed occupancy rate increased to 98.3%, reflecting an ongoing demand for its retail space. The company successfully leased over 1.15 million square feet, half of which were new leases. The strength of the leasing strategy is evident in the remarkably high leasing spreads, with new leases achieving an all-time high spread of 52.5%, and blended leasing spreads at 23.4%. This strategic emphasis on securing prominent, stable tenants underscores RioCan's commitment to long-term value creation and robust portfolio quality.

Financial Performance and Projections: Strong Fundamentals Amidst Challenges

RioCan reported Funds From Operations (FFO) of $0.43 per unit for the quarter, slightly down from $0.44 in the previous year. Despite inflationary challenges and higher interest expenses, the company demonstrated resilient performance with organic Net Operating Income (NOI) growth contributing $0.02 per unit. However, the transition period for newly completed projects like FourFifty The Well contributed a drag of approximately $1.5 million on FFO. The company remains confident in its long-term growth potential, reaffirming its annual FFO guidance and projecting FFO payout ratios between 55% to 65%.

Strategic Developments: Boosting Portfolio Value

The second quarter marked several strategic milestones for RioCan, most notably the completion of FourFifty The Well. This development is currently in the lease-up phase, expected to stabilize and contribute positively to FFO by the end of the year. The Wellington market at The Well experienced a successful launch, attracting around 200,000 visitors per week, which bodes well for future earnings from this flagship development. Additionally, RioCan highlights plans to transform several open-air and urban retail assets into grocery-anchored centers, which are expected to enhance long-term portfolio stability and value.

Balancing Growth and Financial Prudence

RioCan is committed to responsible growth and prudent financial management, aiming to reduce its net debt-to-EBITDA ratio to between 8x and 9x by the end of the year. The company has executed several financing activities to cover major refinancing needs for the year and extend the weighted average term to maturity of its debt. With an anticipated reduction in construction spending due to the completion of major projects, alongside proceeds from condo sales, RioCan projects significant debt repayment capacity. Approximately $700 million from condo revenues are expected to be received, primarily from presold units, which will be used to repay construction loans and drive down the net debt-to-EBITDA ratio.

Outlook and Strategic Vision: Continuity and Stability

Looking ahead, RioCan remains focused on enhancing its portfolio quality and financial flexibility. The company continues to recognize the benefits of a diversified, high-quality tenant base, with 88% of annualized net rents coming from stable tenants. Despite the current challenging macroeconomic environment, RioCan's strategic decisions, such as prioritizing quality tenants and engaging in value-enhancing developments, are geared towards ensuring continuous operational strength and growth. The company's approach is grounded in patient, strategic management, positioning RioCan for sustained demand and stability in the long term.

Earnings Call Transcript 2024-Q2

[Operator]

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

[Jennifer Suess, executive]

Thank you, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel, ESG and Corporate Secretary of RioCan.

Before we begin, I am required to read the following cautionary statements. In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the 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 to be 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, 2024, and management's discussion and analysis related thereto, as applicable, together with RioCan's most recent annual information forms that are all available on our website and at www.sedarplus.com.

[Jonathan Gitlin, executive]

Thanks, Jennifer, and thank you all for joining RioCan's senior management team. Today, I'll discuss our operational highlights for the quarter, focusing specifically on our standout leasing results. RioCan's portfolio and teams are successfully built upon sequential quarters of positive momentum, setting new records in leasing results this quarter. These results are a testament to the sustained demand and attractive growth prospects for RioCan's high-quality retail portfolio.

Retail space is scarce and building new supply is currently in a standstill. Canada's major markets are witnessing substantial population growth. RioCan boasts a unique combination of a top-tier team and ideal locations in Canada's 6 largest and most densely populated cities. This backdrop, coupled with our resilient tenant mix and persistent emphasis on portfolio quality are the ingredients for sustained demand and enable RioCan to preserve stability and fuel growth in the long term.

Three key elements drive our leasing results for the quarter. First, our portfolio has never been more desirable or more defensive. Within a 5-kilometer radius of RioCan's assets, the average population is 273,000 people with an average household income of $148,000. In the last year alone, each of these demographic statistics has improved by 5%. Since 2017, the average population and household income within a 5-kilometer radius of RioCan sites has increased by a staggering 77% and 45%, respectively.

Second, our leasing strategy prioritizes strong and stable essential tenants who will drive traffic in any economic backdrop and attract similarly high-quality tenants to our properties. Approximately 88% of RioCan's annualized net rents comes from strong and stable tenants. Third, the current market dynamics include population growth and retail scarcity. The scarcity is due to tight zoning regulations and the exorbitant cost to build. These conditions will not change.

Our retail portfolio's committed occupancy increased to 98.3% in the second quarter, reflecting ongoing demand. We leased more than 1.15 million square feet of space in the second quarter, nearly 0.5 million of which were new leases. The strength of our portfolio, combined with robust market conditions, resulted in record breaking decent spreads. The leasing spread on new deals reached an all-time high of 52.5%, driving blended leasing spreads to 23.4%. Renewal spreads were also healthy at 10.7%.

The average net rents of the new leases was $26.15 per square foot, a 19% increase over RioCan's average net rent. Alongside achieving record-breaking leasing spreads and enhancing the resilience of our income, our Q2 leasing stands out for 2 reasons. Firstly, we preemptively leased 135,000 square foot unit in the GTA to Canadian Tire, which was set to become vacant later this year. Secondly, we released another 2 of the 10 vacant units that resulted from the failures of Bad Boy and rooms and spaces, which previously occupied 261,000 square feet of space in our centers. As of August 8, 8 of the 10 locations or 203,000 square feet have been leased at significantly higher base rent, higher embedded year-over-year growth and fewer restrictions and exclusion. Negotiations for the remaining 2 units are in the final phase.

While vacancies typically raise concerns, our defensive portfolio and leasing prowess turn temporary issues into opportunity for medium- and long-term benefits with shopping center upgrades and space recycling with new tenants. As we recycle tenants, we purposefully and thoughtfully select retailers that enhance the cross shop and convenience of our centers. In doing so, we also accommodate the increasing space requirements of organizations such as Loblaws, Metro, Sobeys, Dollarama, Winners and HomeSense.

Our leasing achievements signify more than just strong operating metrics for the quarter. We've taken a purposeful approach to replace transitional tenants with more relevant and resilient retailers, including signing 6 new grocery leases that will transform 3 previous open air or urban retail assets into highly valued grocery-anchored centers. Tenant upgrades lead to enduring organic growth as great retailers attract other great retailers. Building out spaces for these types of users takes more time than is required if we were to backfill with a lesser tenant. We've intentionally chosen to prioritize long-term quality and growth over short-term same-property NOI. This decision results in transitory downtime, reducing SPNOI for the current year. Consequently, we've adjusted our commercial SPNOI guidance for 2024, excluding provision to 2% to 2.5%, while maintaining our long-term commercial SPNOI guidance of 3%.

I'll briefly illustrate the sequence of this leasing cycle to demonstrate how it impacts our results. First, the space comes back, causing a decrease in occupancy and creating a drag on FFO and same-property NOI. Second, we secure a high-quality new tenant, which brings committed occupancy back up. Third, in recognition of the strength of this new tenancy, NAV improves and due to straight line rent, so does FFO. And fourth, the tenant moves in and the SPNOI improves. Choosing high-quality tenants requires investing time and resources to build out the space to their standards, resulting in a longer gap between steps 2 and 4. Simply put, replacing tenants with higher quality ones that offer better uses as RioCan does typically involves a cycle where there is an initial dip in some metrics followed by stabilization and then significant improvements.

RioCan's results this year showcased numerous examples of our strategic decisions in action. Last quarter, we saw a different occupancy and SPNOI, largely due to the vacancy of the 10 spaces I mentioned a moment ago. RioCan has signed leases for 8 of the 10 spaces. We're now well into the second step of the process, doing the work to get all 8 tenants in place. As a result, occupancy has increased. SPNOI, FFO and NAV impacts will follow as these tenants commence rent and open their doors, driving incremental traffic to our properties and said simply making them better.

We made a conscious, thoughtful and responsible long-term decision to focus on high-quality tenancies to drive sustainable growth in FFO and NAV. Yes, the macroeconomic environment continues to show weakness and some volatility. However, our strategy is anchored in building a resilient portfolio that ensures steady growth. We have crafted a portfolio designed to absorb macroeconomic reverberations and intentionally focused on tenants to fare well in any economic environment. These tenants recognize the quality of our offering and they are increasingly turning to RioCan to fortify their business position in the Canadian retail landscape.

While RioCan remains focused on operations, our balance sheet is also a top priority, particularly within the current elevated interest rate environment. We're well equipped and are taking prudent steps to fortify our future and mitigate interest rate impacts. We're on track to achieve our adjusted net debt-to-EBITDA target range of 8 to 9x. We've charted a clear road map to lower debt, including reducing construction spend by pausing new project starts and repatriating proceeds from inventory property sales. We've begun to recognize the benefits of our inventory portfolio. Looking ahead, inventory proceeds are expected to generate approximately $700 million in sales revenues and are earmarked for accretive uses such as debt repayment.

We recognize that new sales of condominiums have slowed. Fortunately, we presold approximately 90% of the over 2,500 units we will complete through 2026. The majority of these firm deals were secured before prices peaked. Additionally, for all units sold, meaningful purchase deposits mitigate risk as they motivate buyers to close or in the unlikely case of default, can be used to insulate margins on retail. On the other side of our deleveraging equation, we have the ramp-up of EBITDA through a steady stream of diversified NOI from development deliveries such as The Well, our flagship mixed-use development in Toronto's Downtown West. On that note, the launch of Wellington market The Well in May was a resounding success. Traffic to The Well has consistently been in the range of 200,000 visitors a week since Wellington market opened.

Fully licensed and with more than 35 diverse food and beverage merchants, Wellington market has been celebrated for its contributions to advancing Toronto's [ food scene ]. The launch exceeded our expectations regarding traffic, which has remained consistently high since opening.

Before I turn the call over to Dennis, I want to reinforce that beyond our secure plan to reduce net debt to EBITDA of 8 to 9x, our portfolio also has considerable development density and low cap rate properties. These assets provide RioCan with incremental levers such as disposition to further enhance financial flexibility until attractive opportunities arise. A great example of this is our recent agreement to sell an underutilized portion of an open-air retail site in Laval, Quebec. In this transaction, approximately half of the site will be sold to an industrial developer at a market capitalization rate that is in the low 3s based on current income. The sales results in net proceeds that are approximately 84% higher than IFRS carry value.

I will also emphasize that while we remain focused on our operations and balance sheet, we're committed to responsible growth. RioCan published its annual ESG reporting June. I encourage you to read the report illustrating our significant advancements in sustainability, ethical governance and fostering a positive culture. I will summarize by reiterating that RioCan operates a top-tier retail portfolio in the country's most desirable market. The dynamics of retail real estate are in our favor and create long-term demand for our products. Our approach is patient and strategic negating the need for hasty asset sales, rush leases for development under suboptimal conditions. Quality of our assets provides a foundation for growth and mitigates downside risk. We have numerous incremental levers to drive growth, and we remain dedicated to prudent financial management backed by an exceptional team. Our consistency, vision and demonstrated commitment to responsible growth will continue to benefit our unitholders while ensuring the trust's stability.

And with that, I'll turn the call over to Dennis.

[Dennis Blasutti, executive]

Thank you, Jonathan, and good morning to everyone on the call.

Our results reflect the fundamental operating strength of our business as the supply-demand dynamics that we have highlighted for some time continue to bear fruits. This is seen across our operating metrics from record new leasing spreads to a rapid rebound in our committed and input occupancy rates. Strong leasing with top-quality tenants enhances long-term value as this improves portfolio quality and future growth potential.

Our FFO for the second quarter was $0.43 per unit compared to $0.44 per unit in the prior year quarter. Organic NOI growth in our operations and the ramp-up of developments continued to add to our earnings for a combined positive impact of $0.02. Also benefiting FFO this quarter were higher inventory gains, an impact of $0.02, which included the sale of a noncore residential inventory property. This growth over the prior year quarter was partially offset by $0.01 due to a higher provision reversal last year as well as a $0.01 reduction related to various other items that benefited the prior year quarter and did not recur. This provision variance also had an impact on same property NOI, resulting in unit same-property NOI growth of 0.3%. Excluding the permitting impact, same property NOI growth was 2.6%. The higher provision reversal amount in 2023 and the resulting impact on variances in our financial metrics is a hangover from the pandemic, the impact of which we expect will be largely behind us after this year.

Finally, higher interest expense, net of higher interest income had an unfavorable impact of $0.03. Of this $0.03, approximately $0.01 is related to lower capitalized interest. A highlight this quarter was the construction completion of FourFifty The Well. This is a positive step forward, but comes with a temporary impact on results. Similar to all of our residential rental projects, we ceased the capitalization of interest relating to this asset upon completion. While FourFifty The Well is in lease-up, the NOI is positive but is not currently sufficient to cover interest expense. For the quarter, this transitional lease-up effect resulted in an FFO drag of approximately $1.5 million. We expect this property to reach stabilization by the end of this year and generate positive FFO for many years of future.

On a full year basis, we have reaffirmed our FFO printed in the guidance. In addition, our guidance for FFO payout ratio of 55% to 65% and mixes development spending of $250 million to $300 million remain intact. Jonathan already discussed our revision to same-property NOI guidance, which is due to the downtime while new exceptional tenants are fitting out their space. We have also reduced our expected spend on retail infill projects by $20 million to a range of $30 million to $40 million due to permitting delays. This spend will simply shift into 2025.

Turning now to our balance sheet. Net debt to EBITDA of 9.18x is down from 9.28x at the beginning of the year and 9.49x at this time last year. This metric is essentially flat relative to the first quarter of this year as development spending at The Well continued during the second quarter. Spending on this major project will decelerate given that construction is essentially complete. We executed a number of financing activities over the course of this year, covering all major refinancing requirements for the year and extending our weighted average term to maturity from 3 years at the beginning of the year to 3.6 years at the quarter end.

We have an option to call our $300 million Series AI 3NC1 debentures at par on or after September 29 of this year. The interest rate on this debenture is approximately 6.5%. Based on today's pricing, we would expect to exercise the repayment option and refinance at a much lower rate, while further extending the weighted average terms of maturity on our debt. Jonathan reiterated that we are on track to achieve our 8 to 9x net debt-to-EBITDA target, expecting to reach 9x by the end of this year. We expect this to fall further to the lower end of our range based on the ramp-up of EBITDA from operations development, slowdown of spending on major projects and repatriation of a significant amount of capital from contracted cargo sales.

I'll walk through these key drivers. The growth and ramp-up of EBITDA from our existing operations and development deliveries will have a combined impact of approximately half a turn. Importantly, as EBITDA from development deliveries ramps up, construction spending will diminish as projects are completed. The estimated cost to complete for projects currently under construction totaled $294 million, of which $110 million is expected for the balance of this year, $151 million in 2025, and $33 million in 2026. This drops to 0 in 2027 and beyond.

We expect to allocate some capital toward the advancement of our development pipeline through the entitlement process and to additional retail infill opportunities should such opportunities arrive at rents that justify construction, noting that the capital requirements for such projects are much lower than for mixed use projects.

The next driver of expected debt-to-EBITDA improvement is the impact of the $700 million condo revenues that we expect to receive. Given recent news regarding weakness in condo sales, this topic has been top of mind. Because of this, it is worthwhile to take a moment and break down our condo proceeds and the related impact on our balance sheet. Of the approximately $700 million of expected revenue, approximately $600 million released to presold units where the average deposit received to date on these units is 19% of the purchase price. Think of these presold condo units as simply contracted 0 cap rate asset sales.

When the proceeds are received, they will recapitalize their balance sheet as follows. Funds will first be allocated to repaying construction loans. On a fully drawn basis, construction loans associated with condo projects is expected to be approximately $420 million. This results in 1.4x coverage of presold revenues over a construction loan balance. Given that there is no EBITDA currently associated with this debt, it's repayment has an outsized impact on debt to EBITDA compared to the sale of income producing assets. Repaying these loans will improve our net debt to EBITDA ratio by approximately half a turn. The remaining presold proceeds will be repatriated to the corporate balance sheet. As mentioned, the average deposit received to date on units presold is 19% of the purchase price, equating to an average of approximately $150,000 per unit sold. This is a meaningful amount and a strong return against buyers walking away from their investment.

Combined with the fact that purchasers have a legal obligation to close, our assumption is that the vast majority of purchases will be completed on existing terms. In the event that some buyers default, our first option is to retain the deposit and put the unit back on the market. Based on current prices and factoring in sales proceeds combined with retained deposits, we would expect to achieve projected revenue. The impact of this element is approximately another quarter turn on net debt to EBITDA, bringing the total impact related to presold units to approximately 3/4 of a turn.

Finally, we are left with a balance of approximately $100 million of unsold proceeds. We acknowledge that sales are very slow in this market. We note that approximately 80% of the unsold proceeds relate to one building, which is our U.C. Tower 3 project. We should also point out that the financing of this project is combined with U.C. Tower 2 and the combined presold revenues from the 2 towers provided 1.3x coverage over the construction loan. We further note that completion of U.C. Tower 3 is scheduled for late 2025 and into the first half of 2026, but new condo stock is expected to be low.

There is a housing shortage in Canada with population-driven demand outpacing supply. Higher levels of new supply for product projects that are delivering now, which were started a number of years ago, will be absorbed. Ongoing supply shortages will worsen since there has been a low level of construction starts in the current environment. So there will be limited new supply as we move into late 2025 and 2026. If we see further interest rate cuts over the next year, as most economists predict, and which we have started to see recently, our ability to sell these units will be further improved. Given these dynamics, we are being patient and will continue to monitor the market ahead of the late 2025 completion of this project. As this illustrates, the condo revenues will serve as a reliable source for debt reduction in the future.

To conclude my remarks, I want to reiterate that market fundamentals, the quality of our portfolio and our exceptional team have driven our current year operating metrics to levels that are as strong as we have seen over RioCan's 30-year history. This combined with our low payout ratio, disciplined approach to capital allocation and steadily improving balance sheet will support earnings growth and provide us with the opportunity for sustainable distribution increases for many years in the future.

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

[Operator]

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Mario Saric with Scotiabank.

[Mario Saric, analyst]

So the first one just on the impact on '23 same-store NOI from the identified Bad Boy [ spaces ] leases. I apologize if this was provided earlier, but can you give us a sense of what that impact was on '23 and the expected NOI boost on releasing the 10 spaces upon completion? I do recall in Q1, I think you mentioned that the grocery deals were done at 50% above expiring. I'm just wondering on the 10 in total, what your expectation is on the NOI boost and then the impact on the downtime in '23.

[Jonathan Gitlin, executive]

So the impact in '24 there. Yes, so for '24, it's a drag on SPNOI because the leases are written, but the cash won't be coming in until the tenancies are finalized and open. So there's a drag. I can't quantify precisely what that drag is, but then the consequence is that in 2025, there will be a tailwind as a result of those tenancies open for business and the tenants paying rent.

We are reaffirming our 3% SPNOi guidance for '25 in that medium term. And that's largely or partially a result of the impacts of these leases being rent paying. But I don't have a specific quantified amount for the impact for, again, the drag in '24 or the positive influence in 2025 for those 10 leases.

[Dennis Blasutti, executive]

Yes, I would agree, Mario. We've disclosed it on kind of an aggregated basis. So it is one of the larger impacts on that, the change in our guidance for '24, but we do expect a rebound in '25, as Jonathan said.

[Mario Saric, analyst]

Okay. And then maybe a similar question on The Well, which I think Dennis identified about $0.005 or so in terms of the interest capitalization being removed. Maybe we take this offline as well, but what would you estimate the NOI and FFO upon stabilization of the combined retail and residential at The Well? Is that was not in your Q2 NOI FFO run rate. Just trying to understand the upside to both NOI and FFO upon stabilization of both.

[Dennis Blasutti, executive]

We don't disclose the total NOI for The Well. What we do disclose is our stabilized NOI for all of the projects that are delivering. And we would expect that. So if you look at the projects that are in our MD&A that delivered in '23 and '24, we're probably about 80% of that NOI will be ramped up this year and then pretty close to all of it, probably 95% into next year. And I'll give you a sense of the benefit we should see, like specifically FourFifty The Well stabilization at the end of this year. So we'd see a normalized benefit next year. So it would revert from, as you said, a half that negative to a positive contributor.

[Mario Saric, analyst]

Okay. Is there any remaining interest capitalization on the residential at The Well? Is that all?

[Dennis Blasutti, executive]

No, that's done. Yes, our policy there, from an accounting perspective, is that once we're hotel ready, we stop capitalizing altogether. So there's no more interest being capitalized there. So you would have seen a drop off in our capitalized interest for that.

[Mario Saric, analyst]

Got it. And there's been a lot of discussion about maybe some pressure on market rents or residential market rents in Toronto at the high end. Can you talk about some of the trends that you're seeing at FourFifty relative to expectations?

[Jonathan Gitlin, executive]

Lease up, still going according to plan, and certainly in accordance with our pro forma. Like with any market, there's ebbs and flows, some weeks we get a lot more leases done than other weeks. But generally speaking, we're still tracking towards full lease-up by the end of this year. And the rents have held, as I said, generally in line with our pro forma expectations.

[Dennis Blasutti, executive]

Yes, I would just add to that, Mario, we're about 75% leased now. Based on the weekly rate of deals we're doing, we expect to be stabilized there by the end of October. Rents are holding up to pro forma. We're actually very pleased with how some of the larger units are performing, 2 to 3 bedrooms, we've had a lot of demand for those. So all in all, we're happy with the results there as well.

[Jonathan Gitlin, executive]

I think you are commenting a bit more broadly on the market in Toronto, and there has been some impact there. There's been an influx of condos coming onto the market this year, similar to some of our earlier commentary. That is not necessarily putting pressure on rents, but slowing the growth rate slightly and we've seen that throughout the market. But what we also see looking forward is that condo starts have stopped. This new supply is going to be absorbed and dry up. And as we get into '25, there'll be half as many condos as there is this year. And when we get to '26, there'll be virtually no new supply coming onto the market.

So that glide of condo deliveries currently It's creating a bit of a slowdown. We were seeing 25% market rent increases at one point that slowed down a bit, but still healthy.

[Dennis Blasutti, executive]

And the only other thing I'll add, Mario, and this is now specific to The Well, and it's me putting on my promotional hat, but I think I have to, is the fact is FourFifty The Well is part of an environment that has just taken off. I mean, The Well itself, the retail there is now fully open to the public and it's really, really driving a ton of traffic and a lot of notice around The Well. And that is helping us lease up those units at a rapid pace at rents that I would say are above perhaps the competition, even in that same node, simply because you're part of this really vibrant community.

[Mario Saric, analyst]

Yes, that makes sense. I'm sure the addition of the Wellington market will help in that regard as well. My last question just on the Canadian Tire lease, was the 135,000 square foot vacancy anticipated at the start of the year? And then secondly, when you look out over the next 12 months, are there any other large leases that you're aware of requiring to backfill?

[Jonathan Gitlin, executive]

So we had a sense that we would be getting back that space. And I can't recall precisely it was January 1 or before or after, but it was in that range. So, yes, it's something we've been working on for quite a bit of time. In terms of other large vacancies similar to that. I mean, nothing of that scale in the short term.

[Dennis Blasutti, executive]

I think what it does show is we have a number of, we've talked about this before, legacy fixed rate type leases, that when they do expire, there is a big opportunity. We wouldn't expect that every quarter, but we will see more opportunities like this in the coming years.

[Jonathan Gitlin, executive]

Yes, I mean, we've got about 900,000 feet in the next 5 years of spaces over 20,000 feet coming due. So there's a lot of great opportunities similar to this, as Dennis suggests, but nothing of this scale in a single lease coming in the next 12 months or so.

[Mario Saric, analyst]

Got it. Are you able to share the expected rent uplift on the REITs...

[Jonathan Gitlin, executive]

Sorry, on which thing?

[Mario Saric, analyst]

I'm sorry, on the Canadian Tire. That's on the releasing of the 135,000 square foot...

[Dennis Blasutti, executive]

The rent. We don't disclose it individually.

[John Ballantyne, executive]

This is John Ballantyne again. I would say it was significant, Mario, and what you don't see in those numbers as well is just the impact on the rest of the center. In addition to being able to increase the rents fairly significantly, this was actually an old seller's lease that was bought by Target, that was then bought by Lowe's. Very low additional rent as well.

So we were able to almost double our RioCan contribution there, which doesn't impact our bottom line so much. But what it does is it reduces the common expense on the rest of the tenants in that center by 40%. So there is a very tangible impact on rents as those tenants come do as well. So it's all a very good news story.

[Operator]

Our next question comes from the line of Matt Kornack with National Bank Financial.

[Matt Kornack, analyst]

Just continuing on that theme, obviously, this quarter you put up exceptionally strong new renewal, new leasing spreads, the blended figure. Can you give us a sense, like I think that this is anomalous, but just the trend line there. And then maybe in the context, you did a good job of explaining that your portfolio is pretty defensive. But in the context of maybe the retail sales print and a more challenging economic environment, are you still seeing tenants willing to kind of pay what they need to pay to stay in the space? I guess they are. But any comment there?

[Jonathan Gitlin, executive]

Sure, I can start and happy to hand it over to John to fill in. In terms of the spreads, I mean, I think if you look at the last number of quarters, we've shown a pretty constant trajectory of enhanced combined spreads. I mean, if you look from 2020, where we started at 5%, and you now look all the way to 2024, where we're closer to 14.5%, and it's sort of an equal or a nice sustained growth over the course of the last few years, our sense is that that trend line is sustainable.

We do agree this was a standout quarter, but we also, as we suggested to Mario in the last question, we are full of a lot of opportunities within our portfolio to bring our spaces to market. I mean, if you look at our average rent in the portfolio last quarter, relative to the average rent across the portfolio in general, there's a sizable mark-to-market there, and we extract those, our great leasing team extracts, that every time we have an opportunity on a market renewal. So we are pretty confident that the leasing spreads that we have put together over the last number of quarters are sustainable and growing.

And that's in relation to the next question you ask, which is, is this type of growth sustainable? And what I'd say is what we're doing is playing catch up to get to market. The retail industry over the last 10 years has been, I think, favorable for tenants. And now the pendulum has shifted a little bit, as we've been saying it will, largely because one, these tenants have reconciled that their stores are very strong profit makers and they're being used in different ways, and 2, there's simply no supply for them.

And those, the combination of those dynamics in our minds provides a pretty optimal outlook for the demand particularly our space and also keeping in mind that our portfolio is consistently getting better and better through either the advent of new developments or the disposition of some of our weaker properties. So we really do believe that in our portfolio, so I'm not talking about the broader consumer landscape or economic landscape, but in our portfolio, even in the face of some economic slowdowns in Canada, we do believe that the demand will be sustainable. And we also think that a lot of the tenants we cater to, I'm not going to say they're impervious to economic gyrations, but I certainly think they are defensive and that they will be looking to grow their footprints regardless of what the short-term economic state of affairs is. John, anything further to that?

[John Ballantyne, executive]

Yes, I would just add to that the tenants that we're really doing deals with right now that are really demanding space are the essential based retailers that are benefiting from the increase in our population as well.

So with the shortage of space in the market, the influx of population, retailers such as grocers, pharmacy providers, value providers, they're the ones who are really pushing demand, especially for our box space. Of the 8 deals that we did in the 10 boxes, we showed growth there about 21%, which really highlights the demand for that space. And the 6 grocery deals we did came with growth of about 32% in rents.

So that's where we're seeing the push. The pricing obviously is representative of the shortage of supply. And that high demand, I would say also active in the market is fitness still, and I would say it's both the high end fitness. We've obviously done deals with the sweat and tonics of the world and the Atlas, but also kind of the discounted fitness as well. We're seeing a lot of demand for, I wouldn't say there's softness, but where we're not seeing as much active deal making is in the furniture category, and even in the pet category, they're not suffering. But I would say they come off highs from the pandemic. Demand there has decreased a little bit and we're not seeing a huge push for space.

And, if you're looking for, kind of watch list categories, I would say the one category that has a little bit of softness is the independent restaurant, very small, between the 1000 square foot to 1500 square footer, smaller run operations with 1 or 2 locations. We're seeing softness there just with changes in discretionary income from the consumer, they're getting hit a little bit.

[Matt Kornack, analyst]

That's great. I appreciate all that color. And so if I hear all of this, obviously this year, there's been a number of one-time items that have impacted your organic growth. But it sounds like you still have a 3% longer term view on where it should settle. But 2025 is probably going to be above that. But even with what you're saying, maybe that 3% is somewhat of a conservative figure for your portfolio. Is that a fair characterization?

[Jonathan Gitlin, executive]

Well, I think it's measured. We wouldn't put it down unless we thought it was reasonably accurate. You're always going to have ebbs and flows, and the portfolio is going to generate some very good growth. Some of the things that hold us back though are fixed term renewables, which we do have in our portfolio, it makes up quite a bit of our overall leases, and that will hamper growth a little bit. But weigh that against a lot of the space that is coming available. We think that 3% is a nice middle ground for that.

The other thing that we're working on and we think will be a growth generator for SPNOI is ancillary revenue where we've got so many great standout locations that there's a lot of opportunity to bring in media, digital media opportunities and self-service opportunities and kiosk opportunities, things of that nature, which we think will add. But it's variable and it's not something that you can properly predict. And that's why we haven't really fortified that in terms of our SPNOI projections. So 3%, we think, is a good number to put out there for guidance. But look, if we do feel as, we do like to keep our unitholders apprised of where we think we're going, and if we do believe that there is, there was too much of a conservative approach there, we will come out with revised guidance.

[Matt Kornack, analyst]

Fair enough. And then just quickly, on the residential portfolio, I know it is a smaller portfolio overall, but generated almost 9% same-property NOI growth there. Notwithstanding Mario's comments on kind of some concerns around newer product, I think everybody knows that eventually these rent growth numbers are going to slow. But how should we think about that portfolio and why it's doing so well in the context of kind of maybe a little bit of concern about 1 bedroom concentrations of new condos coming on the market?

[Jonathan Gitlin, executive]

Yes. I mean, I think the first thing too that I would highlight around why we think it is successful and why we think it's reasonably sustainable is the fact that our RioCan Living properties; 1, they're all new, they're highly amenitized, but 2, they form part of a mixed use community. And I raised this example with Mario that they are part of The Well, like FourFifty The Well. It's part of a much bigger environment, which is very dynamic. And people I think would make the choice to live there over a standalone residential building or even a residential building with limited retail at rate and so I think that does set us apart.

If you look at some of our projects, both here in Ottawa and in Calgary, they're all part of bigger dynamic retail centers and they're all within close proximity to transit. So even if there is some softness in the overall residential rental market, which I'm not suggesting it will be, because it is a very supply constrained environment, we think that RioCan living buildings will see it last because I really do think that there is an enhanced opportunity for residents to be part of something a little bit bigger.

[Operator]

Our next question comes from the line of Zemin Liu with Desjardins.

[Zemin Liu, analyst]

So just a quick clarification on condos. I'm just wondering whether RioCan or any of your JV partners are seeing any issues on condo closings?

[Jonathan Gitlin, executive]

So there is some softness, as we said in the market, we have spoken to not only our JV partners, but a lot of other condo developers who are delivering projects at this point in time. We don't have a lot of projects delivering right now in this market. But the feedback we're getting is that it's not as bad as perhaps the press is making it to be, particularly in condos that are in great areas that are transit oriented, but there is some fallout, whether it's 5% or in that range. But keeping in mind too, that they turn into a process where it doesn't necessarily mean if someone doesn't show up for closing, it doesn't mean that that's forever a default. Like, there are ways to work through these situations through a combination of perhaps a vendor take back mortgage or just a sort of staggered payment plan. But then again, in our case, if you do get the units back, which we're not suggesting we will, but if we do get any of these units back, as Dennis suggested in his speech, we've got an average of 19% deposits of revenue, 19% of revenue across the board, which is a sizable amount of money. I mean, on average, it's about $150,000 a unit.

So 1, if a purchaser is willing to walk away from that, then that's a sizable move for them. But 2, if they do, that allows us to sell the unit at a fairly discounted rate and still be just fine or 3, RioCan Living has the opportunity or the possibility of just putting it in this rental pool and leasing it out. So there's a lot of mitigants, but truthfully, I mean the crux of your question was around what we're seeing now, and it's not a great market, but it's also not as bad as the perception is in terms of the failure to close.

[Zemin Liu, analyst]

So the second question is that you talked about transforming previously open-air centers and you go through boosting and [indiscernible]. I'm just wondering whether [indiscernible] to results from any temporary compression or solely on the NOI side.

[Jonathan Gitlin, executive]

So I missed part of that, but I think the main part of the question was around the market for open-air shopping centers at this point and if we're seeing cap rate compression, is that the crux of it?

[Zemin Liu, analyst]

Yes, like you talked about transforming previously open-air assets to grocery anchor centers, that would boost the net asset value. I was just wondering whether this benefit comes from any category compressions or solely on the NOI side.

[Jonathan Gitlin, executive]

Yes, we think over time the overall value of our portfolio becomes enhanced with the more grocery anchored centers we have. I think there's definitely a view from the investment market that a grocery anchored shopping center is more valuable. So you will over time see cap rate compressions plus, of course, NOI increases, which enhances our overall NAV as a result of the inclusion of grocery stores in our open-air centers. Andrew, any further color on?

[Andrew Duncan, executive]

No, I think that's bang on, Jon. People in the market looking for these assets are predominantly looking for grocery anchored. That's what the preference is. So you will see some cap rate compression along with the straight NOI increase.

[Jonathan Gitlin, executive]

Just in terms of the core, though, I mean, our cap rates on average is flat. So we, in this environment, haven't been taking any aggressive valuation adjustments. In aggregate, there's always sometimes plus and minuses in the portfolio. But our cap rate was held constant quarter-on-quarter at this point.

[Zemin Liu, analyst]

So lastly, I have question about some media reports about potential sales of Georgian Mall and Oakville Place. So I'm just wondering whether you have any added color or comment on that process.

[Jonathan Gitlin, executive]

Yes, there was a report that was put out. I'm not sure where it came from. We are not aware of any process and we have no intention, I mean, at this point, we have no acute intention to sell those assets. That said, we are always looking at opportunities if the market warrants it to, for capital allocation decisions, selling, buying. But those are not listed, nor are they on the market informally for sale.

[Operator]

Our next question comes from the line of Sam Damiani with TD Cowen.

[Sam Damiani, analyst]

So I appreciated the commentary on debt to EBITDA impacts from various things, which I think added up to about 1.25 turns. And I just want to be clear, I guess what the intention of that was to talk about the targeted debt to EBITDA for the REIT over the next 2 or 3 years. I know in the past you have sort of set some broad targets there, but if you could, if you're able to just clarify exactly what you're guiding to in terms of leverage over the next 2 or 3 years?

[Dennis Blasutti, executive]

Yes. So I think where we expect to get and what we're trying to emphasize is we had a target range of 8 to 9x net debt to EBITDA. We expect to be at the high end of that range or 9x at the end of this year, and we have a clear path to 8x the lower end of that range. So that's what we're focused on right now. We think it's a clear and achievable path to get to that lower end of that target range.

[Sam Damiani, analyst]

And is that meant to occur only once these condo projects are reached completion? So in a couple of years' time or...

[Dennis Blasutti, executive]

Yes. So in terms of timing, we have said that the, we think we can get to the lower end towards lower end in 2025. There is a bit of timing consideration there, depending on how some of those, the timing of some of those late '25 condos shake out. But certainly as we get into 2026, we have a very high degree of confidence of being at that low end.

[Jonathan Gitlin, executive]

And keep in mind, too, that that's right now under the normal course, Sam, that's everything that we have that's really contracted for. But we've got a number of other levers that if we decided that it was in our best interest to get more aggressive in that regard, there are asset sales, there are density sales, there are other things that we can do that we have not included in those prognostications around where we intend on being.

[Sam Damiani, analyst]

Okay, great. And just on the same property NOI, guidance for a change, for this year, just want to be clear, is that only to do with these 10 spaces and the work to release them and whatnot or other factors that drove that change guidance?

[Jonathan Gitlin, executive]

No, I mean, we've got a big portfolio. We've got over 5000 individual tenancies. So it's not just those 10. I think those were, I think, a factor, and I think they were a good factor to highlight because it shows the short-term dilution, but then the long-term strength that it creates in the portfolio. But there's always, there are other things in the portfolio Sam, where we had some smaller vacancies or we had some lease up assumptions that haven't necessarily been fulfilled as quickly as we wanted. So there are a few other factors, but I think those are the ones that we've highlighted. It's a large portfolio, so there's always going to be more than just 10 leases.

[Dennis Blasutti, executive]

That is the biggest driver overall. But in terms of the timing of that ramp up, but yes, Jonathan said there are obviously smaller pluses and minuses that go through.

[Sam Damiani, analyst]

Understood. And I just want to say congratulations on that Canadian Tire lease. I really couldn't imagine a better outcome for that particular shopping center, so congratulations.

[Operator]

Our next question comes from the line of Mike Markidis with BMO.

[Michael Markidis, analyst]

I just want to make sure I had the numbers right. So I think for FourFifty The Well, was it more than $0.005 this quarter that was the drag, or was it a $0.005? I just want to make sure I got clear on that.

[Jonathan Gitlin, executive]

$1.5 million, so which equates to $0.005 drag.

[Michael Markidis, analyst]

Okay, perfect. Yes, okay and just so obviously, that's the negative impact. And then just, what's the positive, like how should we think about the swing factors that stabilizes? Is it as a full penny swing the other direction or you get back to that on top of that?

[Jonathan Gitlin, executive]

Yes, I mean, right now, as John mentioned earlier, Mike, we fully intend on having that fully stabilized by the end of this year, by in fact, even before that. And so assuming that happens, which we're confident based on the current weekly velocity that we're seeing, then, yes it should revert to positive for 2025. I don't know the exact number on that one, Dennis do you?

[Dennis Blasutti, executive]

Yes. You're probably not that far off, but if it's a $0.005 drag, yes it's about that. It's a $0.005 drag this year. It's a $0.005 positive next year. So the net, yes the swing factor is 7. That's correct.

[Michael Markidis, analyst]

And that's on a quarterly basis, not an annual basis.

[Dennis Blasutti, executive]

That's correct. That 1.5 to 1 quarter.

[Michael Markidis, analyst]

Yes. Okay, great. So then just to, so the capitalization is done on 450. Is there any capitalized interest still on the commercial component of The Well, or is that all done at this juncture?

[Dennis Blasutti, executive]

There is still a small amount, although the vast majority has been transferred over, but there are still some units that are filing construction.

[Jonathan Gitlin, executive]

But a lot of them are also now fully income producing, so it's not the same negative impact where in 450 a lot of the units have been filled yet.

[Dennis Blasutti, executive]

That's right, yes. At the commercial side, they're effectively passed suite-by-suite as the units are filled up, so it's just a different accounting policy. We would expect that there'll be no capitalization remaining after this year as what we'd expect will be fully operational and complete, so next year it will be okay.

[Michael Markidis, analyst]

And then just on the, I mean, I guess totally understand the ebbs and the flows on the same-property side. And you did rein in your expectation a little bit this year, but also kept your FFO guidance intact. So just curious, what if anything were the offsets there or is it just a function of that SPNOI is cash versus FFO?

[Dennis Blasutti, executive]

That's the biggest factor there. You're right, Mike. We don't put straight line rent into the SPNOI, but it does go into the FFO. So the impact is much more muted on the FFO side.

[Michael Markidis, analyst]

Okay, great. Last one from me before I turn it back, just on the 400,000 and so new leases that were done this quarter. Great. New leasing spread of 52.5%. How much did the Canadian Tire lease like, does that include the Canadian Tire lease? Because I think that one's probably a pretty significant healthy increase. And I suppose, I guess it would also include some of those Bad Boy rooms and spaces leases at a significant lift as well?

[Jonathan Gitlin, executive]

Yes, it's a combination. We didn't break it down specifically except how much influenced that one lease has on it. But even absent that, I can tell you that it's a very strong number. So I think that if you could view that one as anomalous, which I don't think it's anomalous because I think we have lots of these opportunities in our portfolio. But even if you did, we're still showing some very outsized leasing spreads over the quarter. But we didn't break it out specifically as to what the exact influence is of that one deal.

[Dennis Blasutti, executive]

I think the other thing I would say, Mike, is that we have started disclosing at last 12 months leasing spread figure in our materials simply because there can be these, there can be anomalies in a given quarter and going to be a bit of a volatile number. So the 14.5% blended leases spread over the last 12 months gives you a sense of what that trend line starts to look like.

[Michael Markidis, analyst]

Totally now I understood. And what a great indicator, you said of the future upside on some of these legacy leases. That's all from me.

[Operator]

Thank you. 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]

Thanks everyone for tuning in on Friday in the summer and have a great rest of your day everyone. Thank you.

[Operator]

That concludes today's call. Thank you for your participation. You may now disconnect your line.