RioCan Real Estate Investment Trust

TSX:REI.UN

Earnings Call Transcript 2020-Q3

[Operator]

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

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

Thank you, and good morning, everyone. I'm Jennifer Suess, Senior Vice President, General Counsel and Corporate Secretary for RioCan.Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website earlier this morning. Before turning the call over to Jonathan, I'm required to read the following cautionary 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 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 September 30, 2020, and management's discussion and analysis related thereto as applicable, together with RioCan's most recent annual information form that are all available on our website and at www.sedar.com.

[Jonathan Gitlin, President & COO]

Thank you, Jennifer, and thank you to everyone for joining us today. And in just a moment, I'm going to provide you with an update on our third quarter operating metrics. But before I do, I just want to express my appreciation. It's an appreciation for the confidence, demonstrated by Ed, our Board and the RioCan team in my ability to take RioCan into a new era as CEO. And I'm passionate about this business. The past few months have presented a lot of new challenges, which have really only highlighted the important role that physical spaces are going to play in our lives and the role that RioCan plays as a leader in the Canadian real estate landscape.Now there's volatility in our industry. That's undeniable. But that's what creates openings for true innovation and transformation, continuing to help RioCan to achieve our vision in partnership with the best team in the business. That's a great opportunity. And I honestly -- I can't wait to dive in.And I want to thank Ed once again because he's a real estate legend, and I'm fortunate that following the transition I'll continue to benefit from his mentorship, his advisement and his friendship as he assumes the role of Non-Executive Chairman.Now we're going to have a seamless phased transition over the next 5 months, and this is going to ensure a steady continuity of RioCan's business strategy and vision. Ed and I are going to be fully embedded in our new roles by April 1 of 2021.Now let's focus on our earnings and provide some important context on what we're doing in both the immediate and long-term to protect and grow this business and why we continue to be confident in spite of the market volatility.Now I know rent collection is again on top of everyone's minds. So let me dive right into it. For the quarter, cash collected and sector proceeds collectively represent 93.4% of billed rent. So far in the fourth quarter, the positive trend in rent collection continues with 91.9% of October's rent collected. And of course, there's no further CECRA assistance built into that number. While we clearly prefer to report 100% collection, as we've been able to do during the first 26 years of our operation, we're pleased by the steady upward collection trajectory we've driven since April.We're also pleased to have upheld our position as a responsible Canadian industry leader throughout this crisis. We've balanced our tenants' needs with the well-being of our unitholders. From the start, we understood the need to provide immediate relief and protect smaller independent tenants. And when CECRA launched, we actively participated on behalf of approximately 1,800 qualifying tenant locations in the second quarter. Although CMHC policy dictated that all tenants were eligible in the second quarter -- that all tenants that were eligible in the second quarter would automatically be eligible in the third quarter, RioCan established its own more rigorous criteria. As such, in the third quarter, we actively participated on behalf of approximately 950 tenants. So over that 6-month CECRA period, RioCan abated approximately $14.2 million in gross rents. But in exchange for our participation, RioCan and the industry, while we're going to benefit from the long-term survival and sustainability of these businesses, we view our participation as both good business practice and the right thing to do. So CECRA officially expired at the end of the third quarter. The federal government has since unveiled its new commercial rent relief program. It's called the Canada Emergency Rent Subsidy program or the unfortunate acronym of CERS. And we're still awaiting more details regarding this program. But what we do know is that it will provide direct support on a sliding scale for businesses that have seen a revenue drop. The good news is that it will operate independent of landlord contribution or administration. So we view CERS as a positive initiative. It's going to provide much-needed short-term relief for a lot of very good businesses.Relief programs such as CECRA and CERS are valuable. However, the industry is still facing the most challenging conditions in our history. The bottom line is the same as I discussed last quarter. Every dollar matters to us. We're using our resources, our energy in a thoughtful, strategic approach to maximize rent collection. To the extent we need to make concessions, we continue to negotiate lease amendments with tenants that will benefit the trust over the long term.Now we're keenly focused on the health of retail and the impact of closures on RioCan. There have been a lot of CCAA filings since March. However, as I'm sure you're aware, CCAA filings allow companies to restructure. It doesn't necessarily mean that the locations will close. Often, the restructured business has emerged leaner and more resilient. And it's important to note the relative impact of these filings on RioCan. Of all the retailers that have filed for CCAA protection, confirmed closures represent only 0.9% of RioCan's total revenue and most are predictably from the apparel sector.Now I'm not downplaying the very real struggles within the industry, but I do want to emphasize that to date, the relative impact on RioCan's revenue is far less than what one might believe in light of the ongoing negative retail narrative. RioCan is aided by the stability and diversity of our rental revenue. So let me explain. 78% of RioCan's rental revenue is derived from tenants that we deem to be either strong or stable even in this current environment. Now we collected 96.7% of the rent from these tenants in the third quarter. These categories are comprised primarily of grocery, pharmacy, liquor, essential services and value retailers that have strong covenants and have demonstrated resilience in very volatile economic cycles.Our strong foundation of strong necessity-based tenants with excellent covenants has been invaluable through the pandemic as they deliver stable revenue and long-term value. And the strength and the stability of this core allows our team to focus on the much smaller proportion of tenants within our portfolio that are potentially vulnerable in these current conditions. Now not surprisingly, this category is comprised primarily of apparel, some personal services, gyms, sit-down restaurants and movie theaters. Now although we anticipate the majority of tenants in this category will return to stability after this pandemic. As always, we continue to strategically evolve our portfolio.For instance, when the apparel segment started showing signs of weakness 10 years ago, RioCan initiated a significant reduction of our exposure in this category. It now represents only 7.4% of our annualized rental revenue, and we're going to continue to reduce this number further over time. There are more restructurings and failures to come. There's no doubt about that. This pandemic has created an environment where there is potential vulnerability in unexpected sectors such as restaurants and gyms. However, 90% of the tenants that we've identified as potentially vulnerable, well, they're in well-located major markets and RioCan's major market properties are really always in demand.We've got the strongest leasing team in Canadian real estate. We've got a highly adaptable portfolio. We're going to continue to lean into these attributes to rebalance and mitigate the exposure to these vulnerable categories. We're going to use our well-located space to tap into evolving trends. Even in the midst of this pandemic, RioCan's leasing team negotiated an impressive 63 deals, representing 368,000 square feet of new leases in the third quarter. This is actually more new leasing than we did in the same quarter last year. And the rents we achieved were well above our average rent per square foot across our portfolio.We're signing deals with the kind of resilient tenants with strong covenants that really are emblematic of our overall portfolio. And our third quarter renewals also speak to the strength of our locations. In spite of the unprecedented disruption in the market, RioCan signed 145 renewals, totaling nearly 950,000 square feet in the third quarter. This translated into a retention ratio of 88.4%, very much in line with our historic pre-pandemic results. And the blended new leasing and renewal spread for the quarter was a healthy 5.5%. Our renewal and new leasing spreads demonstrate there is still healthy upside between our average portfolio and market rents. We ended the quarter with 96% committed occupancy. That's a respectable number at any time, but even more impressive in this existing environment.Our Q3 same-property NOI growth was negative 9.1%, so not really growth, but negative 9.1%, but stronger than it was the previous quarter. However, as anticipated, it really was impacted by the short-term influence of COVID-19.So now moving over to RioCan Living, which is our residential portfolio. In the face of COVID-19, the collection of over 99% of our third quarter residential rent is really a testament to the desirability of RioCan Living's offering. Overall, leasing velocity continues to progress well at our rental residential properties, including Brio, which is our 163 unit property in Calgary and our first development with partner Boardwalk REIT. We started leasing units at Brio at the beginning of April. And in spite of launching at the height of the pandemic in the hard-hit Calgary market, Brio is already 53% leased at just shy of pro forma rents.RioCan Living will continue to add high-quality rental residences to our portfolio over the next few years. In addition to the combined 850 plus units at eCentral, Frontier and Brio, RioCan Living has more than 4,500 additional purpose-built rental residential units that are either currently under construction or they're going to be starting by 2022 at the latest. And Pivot, which is our 361-unit building at the intersection of Yonge and Sheppard in Toronto, commenced leasing in late October, with occupancy expected for December of this year.Now Pivot, in our mind, perfectly represents the RioCan Living offering. It's directly adjacent to our newly renovated Yonge Sheppard Centre and it's on intersecting subway lines, which still matters. We're confident that whatever the short term impact of COVID-19, Pivot and our other RioCan Living offerings will thrive in the long term.We've also got 2,900 condo and townhouse units either completed or to be underway by 2022 at the latest. This includes 11YV in Toronto's Yorkville neighborhood, which is now firmly under construction, and it's 99% presold.Last, RioCan Windfield, which is our mixed-use development in Oshawa, is progressing extremely well. U.C. Tower, which is a 503 unit high-rise portion of the site is 95% presold. And U.C. Uptowns, the 153-unit low-rise component, is effectively presold.The first phase of retail at the site, excluding 2 undeveloped pads, is nearly 93% leased to strong necessity-based tenants, such as Sobeys, FreshCo and others. Now this is pretty good in the face of the prevailing beliefs that there's no need for new physical retail locations. Collectively, these projects add much needed high-quality residential inventory into some very tight Canadian markets. In addition, they provide us, RioCan and its unitholders, with additional revenue diversification. While we don't rely on the income generated from these condo and townhouse projects, it will provide a bridge to supplement our core FFO, particularly during this pandemic.RioCan's intensification program will continue to unlock the significant value that's inherent in our existing assets. This program adds substantial net asset value and diversifies our sources of cash flow. It is relevant now, in fact, potentially even more relevant than it was pre-COVID-19.Now our focus has obviously been on managing our business and tapping into growth opportunities to drive resilient, sustainable value, but it's also important to highlight that our commitment to sustainable growth hasn't diminished. We published our second sustainability report in September. Our achievements since last year included achieving the highest GRESB public disclosure score, which is an A rating and improving our GRESB survey score by almost 29% over last year. That makes 3 consecutive years of improvement, and we've also included environmental and social competencies in our Board skills matrix and we've incorporated ESG specific goals in our employee performance review process. Now we know that embedding sustainability in all aspects of our business improves the value of our assets and our organization as a whole. It will continue to be an ongoing focus of ours.We're now well into the second wave of this pandemic. It's clear that recovery will take time. The balance of 2020 will certainly bring ongoing challenges in our sector. We will continue to explore the variety of new and relevant commercial uses that have increased in their viability throughout this pandemic. This includes micro fulfillment, community care centers and alternative retail uses. There are many other examples of innovative uses to which our portfolio lends itself, and we're carefully considering each and every one of them. We're long-term thinkers, and we will proceed responsibly, but quickly, to make sound decisions to drive sustainable growth and, as always, create value.For 26 years, your team here at RioCan has demonstrated its ability to diversify our tenant mix and tap into evolving growth trends. We've done so to drive resilient, sustainable unitholder value. We continue to see proof that our adaptable major market properties are always in demand. We're going to continue to repurpose, always moving towards evolving needs. We're going to rapidly reshape our tenant base to focus more than ever on resilience. We've got the team, the locations and certainly the balance sheet, and we also have the drive, expertise and relationships to weather the storm. As always, RioCan will adapt, and we will thrive.And I will now turn it over to Qi Tang, our CFO, for some more information.

[Qi Tang, Senior VP & CFO]

Thank you, John, and good morning, everyone. I would like to start by congratulating both Jonathan and Ed on their new roles effective next April. The entire RioCan team is running behind John. It's a great pleasure working with him, and I'm confident that he's going to do a great job leading the team as our next CEO. Congratulations, John.Ed built RioCan from the ground up, and he's the driving force behind our successes. I have learned a lot from him over the 4 years that I've been with RioCan, and I look forward to continuing to learn from him in his capacity as our Chairman. Ed, thank you very much for your leadership and mentorship.As Jonathan outlined, RioCan has delivered strong performance for the third quarter within a very challenging environment due to the pandemic. We saw positive rent collection trends, continued momentum in leasing activity and maintained a high occupancy rate. For the quarter, we reported FFO per unit of $0.41, a $0.06 or 17.2% improvement over Q2.During challenging times such as we find ourselves amid a global pandemic, liquidity is of paramount importance. As at the end of the third quarter, RioCan continue to maintain ample liquidity of over $800 million in the form of cash and cash equivalents and undrawn committed revolving line of credit and other credit facilities.In addition, our unencumbered assets stood at $8.7 billion, generating 57% of our annualized NOI and providing 221% coverage for our unsecured debt.Our debt to adjusted EBITDA metric was 9.13x, and debt to total assets was 44.8%. These 2 metrics increased from Q2, driven by the impact of the pandemic, our property operations and valuations for the past 2 quarters. This is particularly notable for debt to adjusted EBITDA, considering it is a 12-month trading measure. We maintain our long-term goal of keeping our leverage and adjusted debt-to-EBITDA within the target range of 42% or lower and under 8x, respectively.However, we expect these 2 metrics to increase marginally in the near term, given the impact of the pandemic on a 12-month trading basis.Our cost of debt continue to decline with the weighted average effective interest of only 3.25%, which compared to 3.44% as of the year-end and 3.29% last quarter end.With respect to capital recycling, during the quarter, we sold a 50% non-managing interest in our mixed-use residential development at Dufferin Plaza in Toronto at approximately $115 per square feet of the zone density. Our new partner, Maplelands, is an affiliate of a large real estate conglomerate based in UAE. This is Maplelands' first entry into the Canadian real estate market and a testament to the attractiveness of our assets not only to Canadian investments but also internationally.Also in the quarter, we sold to Killiam Apartment REIT a 50% co-ownership interest in Luma, at approximately $45 per square foot of loan density plus reimbursement of development costs. This is our third partnership with Killiam. Luma is the first phase of the redevelopment of RioCan's Elmvale Acres Shopping Centre in Ottawa. We have already started construction on the project, which spends a discrete portion of the center that has no existing income.These 2 transactions, combined with 2 small deals, generated a total gross sales process of about $55 million, including development cost reimbursements and $11 million inventory gains for the third quarter.We announced yesterday first agreement to sell a 50% non-managing interest in the residential rental component, eCentral and the commercial component of our ePlace mixed-use property at Yonge Eglinton to Woodbourne on behalf of itself and one of its pension fund clients for $150.8 million, in line with our IFRS value. This valuation represents capitalization rates of 3.5% and 4.5% for the residential and retail components, respectively, based on stabilized NOI.We also agreed to sell to Woodbourne a 50% non-managing interest in our recent residential rental development for $5.4 million at $51 per square foot of zone density plus reimbursed our pre-closing developments and construction costs with some exceptions. Rhythm is the first phase of a multi-phased mixed-use development on a discrete portion of our Westgate Shopping Centre in Central Ottawa.Importantly, our assets with prominent high-growth locations, attractive demographics and superior transit access have drawn interest and commitment from reputable partners here in Canada and abroad. These partnerships' attractive deal pricing and the ongoing momentum of our residential projects during the current global pandemic reflects the demand for well-located high-quality residential assets as well as our established development expertise and the significant value creation opportunities that RioCan's pipeline offers.We will continue our strategy to monetize the value inherent in our portfolio and development pipeline and reduce the amount and cost of capital required to build out our urban mixed-use development.As of yesterday, including the eCentral and recent firm deals I noted earlier, we have firm or conditional deals to sell assets for gross proceeds of about $276 million. These assets are mostly located in the major markets. The dispositions consist of $227.6 million of income-producing properties and about $49 million of development properties. These income-producing properties have a weighted average in-place capitalization rate of 3.6% based on firm or conditional deal prices and development properties do not have a material in-place NOI, of course.We remain committed to our development program and unlocking the significant value in carrying our portfolio. Our development projects are nearly all mixed-use developments within Canada's 6 major markets and will provide meaningful value creation when complete. On Slide 18 of our conference call presentation, we highlight the benefit of our development program. One is asset diversification as we diversify our portfolio into mixed-use residential. Another is NOI and FFO creation with enhanced levered development yield. Assuming our 42% leverage target, development yield is further enhanced by the low CMHC financing REIT for mixed-use residential assets. And then there is the benefit of accelerated net asset growth. Given low cap rate for residential assets, intensifying our existing properties with residential assets provide significant NOI growth compared to that of an equivalent commercial development. Assuming a residential development with 5.5% yield and capitalization of 3.5%, it could generate over 55% NAV growth over cost compared to about 10% NAV growth over cost with commercial development, assuming the same development yield by higher capitalization rate of 5%.Currently, retail accounts for about 90.2% of the trust's annualized rental revenue, followed by office at 8.1% and residential at 1.7%. As more RioCan Living residential rental buildings currently underway are completed and stabilized, the residential proportion of the trust portfolio will grow and the mixed-use nature and net assets of the trust will expand.With that, I'd like to turn the call over to our CEO, Ed, for his closing remarks.

[Edward Sonshine, CEO & Trustee]

Thank you, Qi. Thank you, Jonathan. Thank you, Jennifer, and good morning, everyone. So here we are almost 8 months into a pandemic, the likes of which the world has actually not seen really in just over 100 years. I think the results we released this morning and the presentations by Jonathan and Qi confirm the resilience of RioCan's property portfolio and our people. Notwithstanding that the pandemic is causing greater difficulties for our tenants and accordingly us than we expected as recently as a couple of months ago, not only are our results holding up well, but our progress in filling the holes that are created by bankruptcies and our tenants simply disappearing is extremely encouraging. We exist right now in what I've taken to calling an upside-down world as a result of the pandemic cloud that we are all living under.Rent collection, rather than ability to grow FFO and net asset value, has become the most important metric by which REITs seem to be judged. The formerly irreplaceable and for REITs in Canada, virtually unobtainable, downtown office towers and fortress malls have suddenly become properties that customers and tenants don't even want to go to. Urban retail is hurting while suburban comparably is performing very well. And even that always thought to be bullet-proof sector, multi-residential rental apartments, is being questioned due to a number of factors, not the least of which are government intervention by way of rent freezes and eviction prohibitions, and these from largely conservative provincial governments. And unfortunately, I could go on in showing you that everything that was accepted wisdom in the real estate business only 8 months ago has been turned on its head, even in the face of record-low interest rates and massive government spending. The sole exception to this seems to be the market for new condominium developments and even more so, single-family homes and townhomes. Perhaps that is one sector that is actually reacting the way it should in the current interest rate environment where just yesterday, the Bank of Canada promised us low interest rates well into 2023. And yet, RioCan is getting through this upside-down world even better than I would have thought. In the spring of this year, I warned that occupancy could go as low as 94% by year-end. In fact, as Jonathan has told you, it stood at 96% as of September 30, and we don't foresee much, if any, deterioration in that metric by year-end. Happily, we're leasing space up almost as fast as it disappears -- as it tends to disappear.Unfortunately, no one anymore believes that saying goodbye to 2020 will mark the end of the pandemic or its effects on our business, but it will end. I hope earlier in 2021 rather than later, but this is out of our control. All we can do is ensure that no matter how long it lasts, our liquidity remains robust, which it is and will be, and our amazing team keeps finding new uses and tenancies for the space that inevitably will become available. Based on their performance in their last quarter and for the last 26 years, quite frankly, I have no doubt they will.And when the world writes itself sometime next year, RioCan will continue and resume its growth in ways we are already working on. Of this, I am certain. And those who choose to invest in what is our ridiculously undervalued units will be rewarded and I believe rewarded very well.Finally, I've addressed well over 100 quarterly conference calls, but this is my penultimate call. You only have to put up with me one more time at our year-end call, which I believe is currently scheduled for February 11, 2021.While I will leave for then, any stories, thoughts on the future and lessons learned, I will tell you now that I have complete confidence in the existing team soon to be led by Jonathan Gitlin. I believe they have a portfolio that not only produces great cash flow but is so ripe with opportunities for growth in income and value that it will keep them profitably engaged for at least the next couple of decades.Thank you for dialing in, and we are now happy to take whatever questions you have for us.

[Operator]

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

[Sam Damiani, Director, Institutional Equity Research]

Maybe just to start off on the transaction market. It's encouraging to see the pipeline of dispositions and progress at this time. Obviously, the eCentral and some other development properties form the bulk of it. Can you comment on the market for more traditional stabilized retail properties? How is that shaping up? And do you see the ability for RioCan to cycle out of some of those assets to raise capital in the quarters ahead?

[Jonathan Gitlin, President & COO]

Sure. Go ahead, Ed.

[Edward Sonshine, CEO & Trustee]

Well, I was going to say, you know what, we're actually not looking to sell our traditional assets, traditional retail assets in any really big move, big way. It's a very slow market in any event for those because I think there's just so much uncertainty as to what quite frankly, not only next year but the future of retail. The narrative out there is so negative about the future of retail, which we don't agree with that narrative, obviously. And I think our numbers are showing how incorrect that narrative is that it's a bit of a bad way to raise capital.Instead, we're going to continue with what we've been doing, which is taking in partners in a lot of our development assets, where we've created tremendous value that's quite simply not even on our balance sheet. And when we do sell them, we give up either very little, if any, income, or sell them at a tremendously low cap rate like eCentral. And I think we're going to be focused on that rather than traditional assets. But in any event, the market for traditional assets right now is so slow as to be almost nonexistent.

[Sam Damiani, Director, Institutional Equity Research]

I see. Second question is just on the tenant mix that you disclosed this quarter between strong, stable and potentially vulnerable with really just over 20% in the potentially vulnerable. Like how are the rent collections in there going forward? You've got anything around 85% in the quarter. But given the restrictions that have been imposed by governments in recent weeks, how should we think about that in the next couple of quarters?

[Edward Sonshine, CEO & Trustee]

Well, a couple of quarters is a long time, Sam. I mean, we've seen how we've been going through this world. As we came through, I'll call it, August and even into September, I think we all thought the world was in a pretty good place as you can see from our collections. And even into October, our rent collections in October were, considering what's going on, quite excellent. Again, we always strive for 100%, but maybe we'll get back there again next year. But then in October, we had this 28-day shutdown, which has been extended in Québec. Luckily, our exposure to Québec is fairly small in the overall scheme of things. But even here in Toronto and Ottawa, which are really our 2 biggest individual markets by far, especially when you include the larger GTA NPL, suddenly, there was this 28-day lockdown. And there's only so long that tenants can go without revenue before they start wanting to talk to their landlord.I think this quarter, depending on how -- it all depends how long the lockdown lasts. Premier Ford keeps talking of a good news coming today. We'll see what that is. I think a lot of the tenants are pushing back against these, quite frankly, in my opinion, arbitrary lockdowns. All the tenants, by the way, that have been locked down, are in that vulnerable category. And I would expect that none of them are disappearing in the next quarter or 2. Certainly, I say that with quite confidently when it comes to tenants like Cineplex like GoodLife, and I was talking yesterday to the CEO of Cineplex and there's been a lot of publicity about the gyms pushing back, but he's pushing back too, perhaps not as publicly. He doesn't have a bunch of members that can send letters for him. But as far as he knows, there has been one case that's been traced to a movie theater.So again, arbitrary things happen. I understand government has to react but even Mayor Tory, who I think has -- until fairly recently been a fan of stay home, lock everything down again. I'm probably overstating what he's saying. But even he understands that you're destroying society, not just business, but society when you don't have places for people to go where they can just get out of their apartments or their homes and be entertained and feel a little bit of a normalcy, whether that's a gym, a restaurant or a theater. And that those things, even when it comes to mental health, perform a great service. So I've given you a very long answer to a short question. Comes to numbers, I'll let Jonathan answer.

[Jonathan Gitlin, President & COO]

Well, no, I can add one more approach, which is we also don't know at this point, the extent and the nature of the new governmental assistance program, CERS. And I do think that, that will assist a fair bit of these potentially vulnerable tenants. So until we have that sense, it's also hard to predict what the overall impact will be.

[Sam Damiani, Director, Institutional Equity Research]

That's great. Thank you. I'll turn it back. But before I do so, I'll just congratulate you, Ed and you, Jonathan. All the best.

[Jonathan Gitlin, President & COO]

Thanks so much, Sam.

[Operator]

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

[Tal Woolley, Research Analyst]

I just wanted to follow up on the discussion around eCentral and eCondo. Thinking last night, you -- when the press release came out, I was like, okay, this is a great demonstration of a, what the company can do, the values that you can achieve when you look to sell some of these projects. But at the same time, I kind of wondered is like, okay, you took a lot of time, development risk, financing risk and then you're selling a portion of the project. And so can you maybe talk to me about why this particular project? And maybe just a bit about the run-up into the decision to sell the 50% interest in this because you're sort of already getting to stabilization?

[Edward Sonshine, CEO & Trustee]

Well, and I'll let Jonathan add, of course, what he would like. Keep in mind, until just over a year ago, we only ever owned 50%. And basically, our strategy, if you look at almost all of our residential assets, is to be a 50% owner. And that originally started out, quite frankly, as a way for us to learn the business, where the original partners we took in were people who were already in the multi-res business. Because actually, operating things may not be rocket science, but designing them, figuring out what amenities you want to put in, how they actually operate on a day-to-day basis and to keep them leased at the highest possible rents, now, that's something we have to learn.Lately, what we switched to doing is bringing in more, what I call monetary passive partners, capital partners. And that's a program that if we want to raise capital to keep building new ones is something that's quite frankly essential because we're laser-focused on our balance sheet. We think that the quality of our balance sheet, the very objective -- sorry, subjective -- objective, I had it right the first time, way in which we do our IFRS valuations, the measurements we take, we really think that within our sector, we have just a fantastic balance sheet. And this is one way of keeping it that way and one way that fits in with our overall strategy.

[Jonathan Gitlin, President & COO]

And Tal, I think that's a pretty fulsome answer. I don't have much to add to it other than it also is just a testament to our ability to manage these properties. I mean we oversee -- we'll asset manage this asset. And we're also at the Rhythm property out at Westgate in Ottawa, we will be the manager of that development. So I think there's been a recognition that we've got a great skill set within RioCan. And for us and our ability to really capitalize on that expertise, I think, is a good thing for our unitholders. So I think you will see, as Ed suggested, more and more examples of us being development manager or asset manager to these assets, where we bring in these, call them, capital partners.

[Edward Sonshine, CEO & Trustee]

Yes, I'm going to add a little more because you asked a good question, Tal, because it's something we really thought about a lot internally here before coming to a conclusion that that's the sort of disposition strategy we should follow. And the fact is, what is our expertise? Our expertise is in developing these properties, creating the value, rezoning the lands in the first place and then even marketing the properties. And we create them out of existing shopping centers and existing properties we own. And by selling these 50% interest and not to say that the market is cynical, but it is, we actually prove the value that we're creating to the marketplace. We don't just talk about it. We prove it. And we think that's an important factor, too, in addition to the balance sheet, and cash factors that I mentioned earlier.

[Tal Woolley, Research Analyst]

Okay. And then I guess my next question would be for Qi. We're starting to see ratings agencies take some actions around different sectors in the TSX. Can you just give an update sort of like on maybe when you last spoke and how you're feeling about how they're going to continue to look at credit ratings if that's changed at all?

[Qi Tang, Senior VP & CFO]

Sure, Tal. So I'll first address S&P. As you probably know, I think it's back in May, S&P actually hosted a general industry-wide conference open to all the issuers, talking about their rating methodology. They particularly emphasize they're going to take a long-term view in recognizing that the pandemic is certainly a relatively short-term phenomenon. So they are -- they also not long ago, only a few weeks ago, a couple of weeks ago, issued their report reinstating the BBB rating on us. So S&P is more clearly basically communicating their methodology.DBRS certainly through our discussion with them, they also indicated that they will take a more longer-term view, but there is more dialogue going on, and we actually have some meetings scheduled with them coming up post the quarter. But in the past, from our discussion, they also expressed a view to basically look into more longer term as well.

[Edward Sonshine, CEO & Trustee]

We did meet with DBRS as well and S&P after our second quarter results. So they tend to watch a little more carefully perhaps today.

[Qi Tang, Senior VP & CFO]

Yes.

[Edward Sonshine, CEO & Trustee]

But we certainly see no indication of any issues there.

[Tal Woolley, Research Analyst]

Okay. And then, Ed, you had mentioned probably your #1 question is around collection rates. I would say that's probably #2 for me. Number one question is always about, and I'm sure you can guess what it is, is the distribution. Can you just talk about how the Board thought about distribution versus asset sales, things like that going forward?

[Edward Sonshine, CEO & Trustee]

Yes. And look, it's a question that we discussed at the Board. Well, we didn't use to discuss it as often. But it's something that obviously has been discussed since, quite frankly, April when this whole mess -- that's when the whole country went into lockdown. We advised the Board at that time that from a liquidity point of view, there was no issue, and that's still the case. There's certainly no issue from a liquidity point of view. Is it being valued by the market? I don't know. Probably not. But that's not something we take too much into account. At the end of the day, the Board will have a continuing discussion with management over, quite frankly, is this the absolute best use of our funds? Or are there other things we can do to create more value for unitholders like buying back stock.Now keep in mind, the distribution itself, there's a certain level that we're required to maintain to keep our tax situation being what it is. And I guess the Americans who -- there were lots of REITs down there who just eliminated the distributions. That's never going to happen, I won't say in Canada, I guess, in some cases, maybe some have no choice, but that's never going to happen to any REIT that wants to stay a REIT for tax purposes. So it's something we look at ongoing. Today, there's -- we're not obviously announcing any changes in it. And it's something that is going to be, like a lot of things, depends on how the worlds are looking over the course of -- as the future unfolds, which nobody knows how -- what that will be.

[Operator]

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

[Jenny Ma, Analyst]

Congrats to Ed and Jonathan on your respective career moves. I wanted to ask a question about the composition of your rent collection bucket. If you look at sort of the pie charts that you had from this quarter versus last quarter, there's obviously been a huge improvement. So I'm just trying to understand the moving parts. In terms of the increase in cash rent collected, would you say a lot of that came from the bigger deferral bucket from last quarter that caught up to this quarter or the to-be collected pie -- piece? And then also my second related question is for the provision piece, which is a little bit better, would you say the composition of the leases that are in there are more or less the same?

[Qi Tang, Senior VP & CFO]

Jenny, I'll address that question. So from my understanding of your question, you want to understand what the underlying drivers between the cash collection change improvement between Q2 and Q3. It's really the fundamental of the tenant, the strength of the tenant. We collected, as you can see, this Q2, when we first announced Q2 results, the Q2 collection is only 73%. So since then, of course, we collected more. Part of that collection is relating to the deferrals that used to be deferred in Q2. And now based on the reschedules, it's only a portion, it's due in Q3, so they got paid this quarter. So you will see the drop in deferral from the 7.7% in Q2 when we announced Q2 earnings to only 6.5%. So it's really a combination or collection of the deferral amount as well as additional collections.For Q3, because more and more businesses are open and of course, the strength of the tenant, our collection efforts, you can see we already -- pure tenant cash collection is already above 91%. October, again, that's without any CECRA funding, it's 92%. So really, it's a combination of how many businesses are open between Q2 and Q3 plus the fundamental strength of the tenants as well as our rent collection efforts.The second part of your question, I believe, is on the provision. The Q2 provision, as you know, represent about 6.8% of the total bill rents. Q3 represent about 5.3% and the reason that there is cost you may ask, partly is because there are 2 main factors. One is Q2 provision because we have -- because so many business will closed during Q2, we have agreed, again, back deferring -- to the 7.7% deferral on that. So those, as you can imagine, when we did the Q2 provision, we provided some provisions even relating to deferrals. But based on all the collections in Q3, we're very comfortable with the Q2 provision.Q3, if you look at the cash collection, and the remainder because cash collections, including CECRA is already 93.4%. And excluding the provision, we only have about 1.3% to be collected. That's between deferral. So essentially, all the rest we provide as the provision. And it's really a combination of -- Q2 is relatively lower -- appears to be. It's only because of -- mainly because of the deferral amount.

[Jenny Ma, Analyst]

Okay. Great. That's great color. And I apologize if I missed this, if you discussed it earlier on the call. But as far as the residential inventory gains that were booked in the quarter, what were they related to? And do you expect this to be an item that pops up in the coming quarters.

[Qi Tang, Senior VP & CFO]

Inventory gains? That is the Dufferin Plaza as we announced and disclosed. So that one because we sell the assets, we already anticipate like even several quarters ago, as we disclosed, that property already been moved to inventory because we expect to develop as a condominium project. So when we sell the assets, partial interest, of course, for accounting purpose, that portion relating to the inventory part is recognized as an inventory gain.

[Edward Sonshine, CEO & Trustee]

And the second part of your question is, yes. We were -- the decision has already been made that a portion of a development or in case -- in fact, all of the development is going to be a condominium rather than a rental, we classify it as inventory. And as we bring in partners or dispose of those assets, there will be those kinds of gains. Obviously, varying in amounts and timing. Timing is a bit unpredictable because it depends on zoning, on the market, it depends on a lot of things. But I think you'll see that as a regular part of our FFO over the next quite a few years.

[Jenny Ma, Analyst]

Okay. So just to be clear, Q3 was just Dufferin Plaza?

[Edward Sonshine, CEO & Trustee]

That's correct.

[Qi Tang, Senior VP & CFO]

Plus a little bit of minor adjustment on the others as well.

[Jenny Ma, Analyst]

And then moving to eCentral, can you tell us what the split in the NOI is between eCentral and ePlace? I presume the ePlace piece is relatively small.

[Jonathan Gitlin, President & COO]

Yes. We didn't disclose that split precisely, but it's predominantly -- the vast majority of it is the residential component.

[Edward Sonshine, CEO & Trustee]

I think there's only 28,000 feet of retail. Now it's very well leased retail. Most of it's occupied by TD Bank and the rest by mostly restaurants, QSR restaurants that are, in fact, open. And the exact amount, it was timing.

[Jenny Ma, Analyst]

Okay. And then my final question is for the stabilized NOI at eCentral, ePlace, you've got 92% occupancy now. What is the assumed occupancy in the stabilized number?

[Jonathan Gitlin, President & COO]

Closer to 98%.

[Operator]

Our next question comes from the line of Howard Leung from Veritas Investments.

[Howard Leung, Investment Analyst]

I just want to get a sense of the fair value changes in the quarter. It looks like the adjustments were, I guess, in Q2, you could say they were all aligned in 1 direction. And now there's a bit of variance. And apologies if I missed it in the actual notes to the call, but just wanted to find out why mixed-use urban, there was a write-down there and gains in the grocery-anchored tenants?

[Edward Sonshine, CEO & Trustee]

You know what, the changes while they're looking that up, I'll just tell you the changes were minimal, and write-downs weren't really related to market. Sometimes in the mixed-use urban, we tend to take a very conservative method in some of the mixed-use write-downs, which are relatively small in the scheme of things. Really, we're -- just where our cost to complete went up by $1 million, that gets reflected in the value.

[Qi Tang, Senior VP & CFO]

That's actually pretty much the case. As you know, Q3, we only have about $9 million fair value loss, which is a combination of a variety of little things. So you see some up, some down, it's really fine-tuning of that.

[Edward Sonshine, CEO & Trustee]

There were no major movements in anything, really.

[Howard Leung, Investment Analyst]

Yes. No, understood. So I guess they don't -- these changes don't really relate to, I guess, the second wave lockdowns that we've seen -- I guess, it would be after the quarter, too, right? That will be in October. So if there's any changes, that might not be until Q4?

[Edward Sonshine, CEO & Trustee]

Right.

[Qi Tang, Senior VP & CFO]

Yes, that's right. And also our Q3 rent collection, as you know, is significant proof. So if anything, we -- actually, in our Q2 estimate on the cash flow impact is actually much more severe impact then what...

[Edward Sonshine, CEO & Trustee]

Yes. Right now, I think our IFRS values are on the conservative side. And we took a very conservative view at the end of Q2. By the time we actually sat down to start doing the IFRS calculations for Q3, the lockdowns were starting. So we said, you know what, let's just leave things largely alone and just make the changes that are required by reason of individual change in circumstances in a property.

[Jonathan Gitlin, President & COO]

Yes. And we looked -- when we did the Q2 valuations, we looked very much at Houston location. We went through our properties one by one as we always do. And we focused on enclosed malls and ones that have large theaters or ones that were located in some secondary Alberta markets, which is where there haven't been a lot of trades to evidence it, but our sense is that there would be some diminished values there, and that's what was reflected largely in those Q2 write-downs. And we think that nothing changed between Q2 and Q3 in that regard.

[Howard Leung, Investment Analyst]

Okay. No, that makes sense. And then I guess my other question, I wanted to touch on the question about distributions and Ed's comments there about how, I guess, you looked at the distribution and kind of said, there is kind of a necessary amount of distribution that needs to be paid each year to maintain the tax status. Can you kind of quantify roughly how much that would be, I guess, as a percentage of the current distribution right now?

[Edward Sonshine, CEO & Trustee]

Yes. It's not an exact science because it depends on your go-forward estimates of what's doing. But roughly, it's about, I'd say, 60-odd-percent must be paid of our current distributions. Is that fair, Qi?

[Qi Tang, Senior VP & CFO]

Yes, current year, that will be a fair estimate. It is driven to a quite extent beyond the income from operations, it's also how many transactions we do and how much taxable gain we see in there.

[Edward Sonshine, CEO & Trustee]

Right. So it's a varying number. There's no bright line figure that I could give you. But if you use 60% as a must distribute, you wouldn't be far off, either way.

[Howard Leung, Investment Analyst]

Yes. That's pretty helpful. And I guess when Qi talked about these capital gains, that includes partial dispositions like the ePlace, eCentral, that's part of it as well.

[Qi Tang, Senior VP & CFO]

Yes.[Technical Difficulty]

[Howard Leung, Investment Analyst]

Right. And I guess that kind of relates to the next question about sales. Are you looking at kind of a consistent pipeline or expecting a consistent pipeline of partial dispositions? And what -- I know it's hard to project a range, but if you think about next year, fiscal '21, what range could that be in? Are we talking about $100 million-plus, $200 million-plus?

[Jonathan Gitlin, President & COO]

Yes. I mean, we don't have a specific number in mind. I think there's going to be opportunity, given the strength of our land holdings, as Ed suggested earlier, to do a number of other transactions where we bring in capital partners for development properties while giving up very little in the way of NOI and FFO. But I think it's reasonable to say that there would be a couple of hundred million dollars over the next 12 months or so. But that's again, at this point, an estimate.

[Edward Sonshine, CEO & Trustee]

I mean we're still in the process of finalizing our business plan for next year. We'll be doing that -- quite frankly, we're most of the way there, but quite frankly, in about 10 days or in the next couple of weeks for presentation to our Board at the beginning of December. And I wouldn't be surprised if it contemplates a couple of hundred million dollars of dispositions.

[Howard Leung, Investment Analyst]

Right, right. Yes. And that should free up some liquidity as well. So that's good to know. Thanks for all the -- thanks for answering the questions. That's very helpful. And congrats to Ed and Jonathan.

[Jonathan Gitlin, President & COO]

Thanks so much.

[Operator]

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

[Pammi Bir, Analyst]

All things considered, it looks like the operating metrics were looking a little better in Q3, even if they are still challenged. And I realize this is tough to answer, but how do you see your bad debt and abatements trending over the next 6 to 12 months or so?

[Edward Sonshine, CEO & Trustee]

Yes, it is tough to answer because so much depends on what happens with retailers being open. I mean what we clearly saw as we got through the second quarter and into the third, when retailers are open, they pay rent. I mean they don't just always do it voluntarily, but they're doing business. They may or may not be making a lot of money depending on the particular situation, but they pay rent. So if you can tell me who's going to be open and who's going to be closed, over the next 6 to 9 months, I could give you a real good answer to that. But we're relatively optimistic. I mean I -- but so much of it depends on what goes on medically. I mean if you would have told me that France was going to go into a complete lockdown this weekend after seemingly to have come out of the summer in very good shape, I would have been -- well, I would have been very cynical about that.I think Canada overall is doing very well compared to many other parts of the world, including obviously, the United States. But I also think that there's a real realization amongst the politicians that really matter when it comes to this, which is the provincial politicians, by and large that -- and you can see how they're trying to deal with things, that you can't just keep closing down the world, that it is -- it has more negative impacts and I'm not just talking about business, but on all kinds of things than it does positive. So I'm relatively optimistic that what we saw in the second quarter won't be repeated. And that until the world totally writes itself, we'll be chugging along more or less where we are with our third quarter results, possibly diminished a little, the longer that this lasts as we -- again, I mentioned our business plan. And listen, we're going to build in plenty of provisions because there are going to be ongoing bankruptcies, there are going to be ongoing requests for abatements as tenants just can't get going and we'll deal with them in a fashion that's best for RioCan holders -- RioCan unitholders, which is not always best for them in the short term.

[Pammi Bir, Analyst]

Got it. It's great color. Just maybe thinking about maybe the overall leasing trends. Can you comment on what you're seeing with -- again, coming back to the potentially vulnerable category of tenants, what sort of retention are you seeing? Are you doing percentage rent deals or shorter terms? Any color you can provide there?

[Jonathan Gitlin, President & COO]

Yes. Sure. I think some of those potentially vulnerable tenants are actually the very tenants that are coming out of CCAA protection and largely apparel tenants. And in certain cases, depending on the strength of the location, we're doing -- we're actually retaining the exact terms that they had prior to going into CCAA. But yes, in certain situations, we are reverting to short-term deals that have floors on them. So at least the tenants are covering a certain amount of rent, but there will be some variability in the rental rate. So they are percentage rent deals. But we are keeping those to very short terms.I can't give you an exact percentage as to how much of our portfolio that represents, but it's fairly marginal in the scheme of things. We are trying to keep that variability to a minimum for our own selves for predictability purposes. And we just think it's better business. But there are certainly some of those that are being considered.

[Edward Sonshine, CEO & Trustee]

Yes, largely, they're potentially vulnerable. And I think we've got to emphasize potentially. If you include all the tenants that are mandated closed right now, they're all in that bucket. If you include virtually every apparel retailer that we have, they're all in that bucket. And that pretty well tells the tale. So a lot's going to depend on what percentage of those. We -- I'm actually quite pleased the way Jonathan and all our operating people and leasing people have gotten us through the last 8 months. We have not entered in any long-term negative deals. We haven't had to. We haven't given up any long-term abatements. We haven't been required to. And where we gave any partial abatements, which we have done, and that forms a chunk of the provisions, we've always gotten something back for it, whether that's an extension of term, future growth in rents or quite frankly, control of a site that has great development potential. So there's always -- we don't give away RioCan's money for nothing.

[Pammi Bir, Analyst]

Got it. Last one for me. I think we're getting into over time here, but just nice to see those transactions with Woodbourne and some of the others in the works. When you think about the development program, you've clearly mentioned laser focus on the balance sheet. So just where do you see leverage trending out over the next year?

[Edward Sonshine, CEO & Trustee]

That's a good question. We're focused on our leverage. We want to keep our leverage really not much higher than it is now. That doesn't mean it may not -- and I'm focused more on the net debt to EBITDA number, which is, as I'm sure you know, a much more real and objective number than net -- than the percentage of gross book value because gross book value -- I hate to tell you, but not all REITs' gross book value are created equal. And probably something you already know, but don't write about. But the -- so looking at that net debt to EBITDA, we want to keep it no higher than it is now as best we can. It's one of the things driving the disposition program that we've got. Because we do have a development program, where clearly we're creating huge value, and we don't want to stop it, except to the certain cases, we're certainly going to slow it down. But even while we're slowing it down, it's with that leverage figure in mind.And over the course of the next year or 2, again, going back to my opening remarks, assuming the world in that year or 2 does go back to right-side-up instead of upside-down, we're sticking to the targets that we currently publish, where we want to have our net debt to EBITDA down to that 8 or less area. And I have no doubt that Jonathan will get us there.

[Pammi Bir, Analyst]

Got it. And Jonathan, congrats again, and Ed, congrats to you as well as you enter the next chapter, though, I think we've got still a few more months to go.

[Edward Sonshine, CEO & Trustee]

Thanks, Pammi.

[Jonathan Gitlin, President & COO]

Thanks, Pammi.

[Edward Sonshine, CEO & Trustee]

Okay. Operator, if there's no other questions...

[Operator]

We have one more question.

[Edward Sonshine, CEO & Trustee]

This will be the last one.

[Operator]

Okay. Our final question comes from the line of Dean Wilkinson from CIBC.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Last and least, congratulations to both of you. Ed, it felt like you were just getting started. So I'm...

[Edward Sonshine, CEO & Trustee]

Yes. No, I accept I sort of feel that way. And -- but what I'm looking forward to just as Chair of the Board just being supportive of Jonathan as he takes the ship into all kinds of interesting directions.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Yes, it's in good hands. I just reminded me that when I first met you that you were younger than I am now, so that makes me feel old. I just want -- we're about the same, too. So -- yes. I just wanted to quickly circle back on that issue of debt. Ed, you've seen a cycle or 2 through your career, and you certainly look at things, 3.4 cap rate seems really low, but that's a 300 basis point spread over 10-year bond yields effectively. So I don't know that it is. Well, the last time RioCan units were yielding 10%, it probably cost you 8% plus to borrow. In a world where you can borrow with a 2 in front of it, and if we were to stay like this for a little bit longer, is the optimal capital structure to perhaps have more leverage? Or how do you think about that if the market doesn't sort of get us back on the right side of things?

[Edward Sonshine, CEO & Trustee]

You know what, Dean, I can tell you, first of all, we think about it a lot because certainly, with some of the CMHC product that is coming on stream for us, the number actually starts with a 1 rather than 2. 1.75 for 10 years is the kind of numbers that are being thrown at us. So that's why I used the phrase a year or 2 to get back to our targets. Might we, over the course of months and quarters rather than years, let it move up a little if we find that there's a really good use for those funds. I think the answer to that is we're going to talk about it internally. All within the context of going back through all the crisis and issues and meltdowns that I've lived through and survived, the strength of your balance sheet is what differentiates you from others. Our unit values, I'm not sure that, right now, the market is focusing on that. But as we come through this pandemic and lenders, which I think is already starting to happen, become a little more picky as to who they're prepared to fund, having that very strong balance sheet is critical to the long-term prosperity of an entity like RioCan. And so yes, we might let it move up a few ticks on the net debt to EBITDA or the gross book value percentage in the short term, just to take advantage of what are historically low interest rates. And yes, borrowing money at 2% or less is rocket fuel for any company. But ultimately, there's a price to pay for it. And generally, notwithstanding what others may think, we're pretty conservative when it comes to debt.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Great. That answers it fully. Again, thanks, congrats, and I'm sure we're going to see you for a long time still anyway.

[Edward Sonshine, CEO & Trustee]

Dean, thank you very much. Well, you may see me, but you won't hear me on these calls.Okay. I think that's the end of it. Operator, thank you very much, and everybody who has dialed in, thank you very much. This will be the end of RioCan's Q3. And I look forward to talking to you for the last time in February. Everybody, keep well, stay safe and bye-bye.

[Jonathan Gitlin, President & COO]

Bye-bye.

[Qi Tang, Senior VP & CFO]

Bye.

[Operator]

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