RioCan Real Estate Investment Trust

TSX:REI.UN

Earnings Call Transcript 2021-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust Third Quarter 2021 Conference Call. [Operator Instructions] I would now like to hand the conference over to Jennifer Suess, Senior Vice President and General Counsel. You may begin.

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

Thank you, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel and Corporate Secretary for RioCan. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website yesterday evening. Before turning the call over to Jonathan, I'm required to read the following cautionary statement. In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusion in the forward-looking statements. When 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, 2021, 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. I will now turn the call over to Jonathan Gitlin.

[Jonathan Gitlin, President, CEO & Additional Trustee]

Thanks, Jen, and thanks to everyone who called in today. I really appreciate the opportunity to speak to you all. I'm here not by myself, but with RioCan's executive leaders, and we're all happy to share our third quarter results with you. The impact of the pandemic on our day-to-day lives is thankfully and finally dissipating. Now that our tenants can fully participate in commerce, RioCan is perfectly positioned to capitalize on pent-up consumer demand. We are again firing on all cylinders. RioCan's story continues to be one of reliable, high-quality income and steady, responsible growth. Our quarter end results are strong, clean and sustainable, with positive momentum on leasing activity, ESG, development deliveries and balance sheet improvements. We've successfully navigated the pandemic because the retail bedrock of our portfolio remains solid and high-performing. The majority of our revenue comes from retail tenants that provide the products and services that consumers need every day, including grocery stores, pharmacies, liquor stores and banks. Experiential uses like gyms and restaurants, while they limped through the pandemic, but they're finding their legs. They're becoming viable again. And as they did before the pandemic, they produce vibrancy and they give us foot traffic to all of our retail and mixed-use properties. Ancillary revenue, including parking, digital advertising and event activation will similarly ramp up as traffic steadily returns to our properties. Our demographic profile continues to improve as well. You can literally stand at virtually any prominent intersection or community in Canada's major markets, and there's a RioCan property in close proximity. Our retail to give up these penetrating locations that serve as efficient ways to distribute goods. They're also looking to expand into such spaces. And that's why retail assets such as those that comprise RioCan's portfolio will continue to strengthen operationally and financially. Favorable commercial conditions, while they're great for RioCan, but they don't stand alone. We support our business activities by staying in front of changing market dynamics in a thoughtful and responsible manner, and that's why I'm going to lead today with a discussion about ESG. RioCan's commitment to environment, social and governance isn't an initiative. Best practices in ESG are truly embedded in our DNA. I make this statement with such conviction because we're supporting our commitment to sustainability leadership through good, old-fashioned measurement and reporting. Based on these processes and results, we received the top rating of 5 stars in the GRESB Real Estate Assessment for the second year in a row. Notably, we ranked second in North America amongst our peers. And in addition, we ranked first amongst our Canadian peers for public disclosure. We were also named regional sector leader for mixed-use development in our first-ever submission in the GRESB Development Assessment. Our commitment to ESG has been driven by recognition for our efforts, although they are now. It's driven by a deep understanding that it's essential to responsible growth, and it's important to our tenants, our unitholders and our employees. We focus on ESG because it makes good business sense, supports long-term value creation and will accelerate the positive momentum we saw in this past quarter. Speaking of which, let's now reflect on our operational results for the third quarter.Essentially, all of RioCan's tenants are open across the country. With approximately 98% of rent collected in the quarter, our collection continues to resemble the pre-pandemic state. Given the composition of our portfolio, the productivity our tenants have shown since reopening and the introduction of new stimulus programs, we really don't anticipate our rent collection to be materially impacted by the lifting of governmental support. With the trend back to normalcy, I'm sensing that was the case for the first 26 years of our existence, our rent collection shouldn't be a significant metric of focus moving forward. As our overall committed occupancy continues to rise, it increased to 96.4%, our same-property NOI results will also continue to steadily recover. FFO per unit for the third quarter was $0.40 and these metrics still reflect the direct effects of COVID-19 and pandemic-related provisions. However, as occupancy trends back to historic norms, the impact will continue to lessen. Ongoing leasing momentum reflects a favorable tension. Recall that before we -- sorry, recall that we were hard at work selling lower-growth assets long before this pandemic, and these efforts resulted in a strong tenant mix and a strong asset base. Tenant's eagerness to capture market share in this omnichannel environment is intersecting with the attractiveness of our high-quality locations and compelling demographic profiles. Well-capitalized forward-thinking retailers are seizing on the opportunity to lease well-located space which RioCan has in abundance. This is evidenced by the fact that we completed nearly 1 million square feet of new and renewal leasing during the quarter and signed 217 new leases. But it's not just the number of leases that we should note here today, it's the breadth and the quality of these tenants that will support our growth and resilience moving forward.Lease rates continue to trend positively with blended spreads of 7.5%. Our new and renewal leasing spreads continue to demonstrate the healthy upside between our average portfolio and market rents and our ability to grow rents even in the most volatile of environments. We're confident that our leasing and operating metrics and our dogged pursuit of efficient operating practices will continue to result in organic growth. While we continue to drive this growth through our entire portfolio, our attention never wavers from our long-term strategy and commitment to maximize the vast number of growth opportunities at our fingertips. I'm now going to focus on the capital recycling activity that we benefited from recently. The transaction market has rebounded and the cadence of transaction activity is projected to exceed pre-pandemic levels. RioCan is well positioned to thrive in this market as there is increased demand for convenience-based, well-located retail sites, particularly those with future development potential. We just witnessed a 20-month stretch where the retail landscape, it couldn't have possibly have been more stressed and challenged. In defiance of the retail narrative that prevailed through this period, we're sitting with occupancy and rent collection close to historic norms. The security of the income generated by these strong properties result in cap rate compression within the market for assets, typical of those in our portfolio. The desirability becomes even more pronounced when the solid income is complemented by the intensification opportunities throughout our portfolio. As more proof points surface, we will continue to see enhanced net asset values. We're taking the opportunity to benefit from the disconnect though between the private and public markets to trade our assets at attractive pricing relative to the net asset value discount reflected in our current unit price. The capital raise will work hard for our unitholders as this disposition program effectively repatriate capital from low growth or vulnerable assets and allocate it to more beneficial uses, strengthening the balance and funding higher -- the balance sheet and funding higher yielding, more diverse, mixed-use development sites. The valuation of our assets in the private market are a proof point in our proposition and a strong precursor to the values that we believe will continue to be recognized in our organization. Turning now to RioCan Living and RioCan's ongoing development. We are known as industry leaders in obtaining zoning entitlements. And as a result, we've got one of the country's largest and most advanced development pipeline. Our pipeline translates into lucrative opportunities to convert properties for their optimal use, a proven cycle that will continue to pay off in 2021 and long into the future. This pipeline fuels the diversification of our income through the delivery of mixed-use projects and the creation of NAV over the longer term. Development proceeded essentially unabated through the pandemic, particularly for mixed-use and residential construction in select markets where housing remains in short supply. The trust's purpose-built residential rental portfolio continued to expand, and there's a dramatic acceleration in leasing activity since the province has progressed in their reopening initiatives. RioCan Living's residential rental portfolio currently includes almost 1,500 completed units across 5 buildings and an additional 1,300 units, which are now under development. We're going to deliver approximately 290,000 square feet of new space by the end of this year, including 2 mixed-use properties in highly coveted Toronto neighborhood. Those are Litho at Dupont & Christie and Strada at College and Bathurst.Once stabilized, these new spaces will contribute meaningfully to sustainable growth in NOI and NAV creation. We continue to demonstrate that we have the expertise to create value in a variety of ways. As our press release detailed, RioCan Living also saw robust sales activity in new condo projects. One example, in July, RioCan Living launched the sales for the first phase of Verge, our mixed-use project located on The Queensway in Toronto. We presold 96% of the 176 first phase units that were released, and the second phase is selling at similar velocity. Now I believe the implications of the recent residential leasing and condo sales momentum expand further than our multifamily residential portfolio. The enhanced demand for urban, transit-oriented mixed-use property signifies a validation of RioCan's growth strategy, and it's a testament to the strength and resiliency of these great communities. I have complete confidence that RioCan Living will thrive in the near and long term. The total NOI from our residential rental operations will continue to increase as we complete new projects throughout this year. With that, I'm going to turn the call over to Dennis Blasutti now, who as most of you know, joined RioCan as our CFO in September of this year. And Dennis has already demonstrated that his breadth of financial knowledge, leadership and corporate strategy experience will be a tremendous asset to the trust. So now for the first of hopefully many, many more presentations, I give you Dennis.

[Dennis Blasutti, Chief Financial Officer]

Thank you, Jonathan, and good morning to everyone on the line. First of all, I have to say that I'm very excited to be speaking with you in my first quarter as CFO of RioCan. As Jonathan mentioned, our business performed very well during the quarter and the last 20 months have proven the quality and resiliency of our portfolio and our tenants. We have also advanced a number of our development projects, which are a significant growth lever that is embedded in our portfolio. Turning first to our results. FFO for the quarter was $126.9 million or $0.40 per unit compared to $0.41 per unit in the third quarter of last year. These results were driven by strong operational performance, resulting in a 6.6% increase in same-property NOI as compared to the prior year quarter. Our same-property NOI increase was the result of strong cash collection from our tenants, which enabled us to record a much lower, pandemic-related provision of $2.9 million compared to $14.4 million in Q3 of 2020. We also point out that the prior year quarter benefited from inventory gains of $11.4 million compared to none in this quarter and also $4 million of FFO from assets that have since been sold, a combined impact of $0.05 per unit. As Jonathan mentioned, the strength and stability of our tenants has resulted in overall cash collection of 98% for the quarter. Based on what we see today, we expect cash collections to progressively trend towards historical norms and the impact of provisions to remain at low levels in future quarters. In fact, we decreased our number of tenants that we classify as potentially vulnerable due to the pandemic from 21% in Q2 to 15% at the end as of Q3 and the number of our tenants have bounced back very quickly with reopenings. Excluding the impact of the provision, same-property NOI was down slightly by 0.8% compared to the prior year quarter. This was primarily due to average in-place occupancy for the quarter being lower than it was in the prior year quarter. This lower average was the result of certain tenants leaving spaces in late 2020, the majority of which has since been built with new leases at higher rates. We note that this lower average occupancy is in contrast to the period-end occupancy, which was higher at the end of Q3 2021 than Q3 2020 on both an in-place and committed basis as spaces were filled and leases signed towards the end of the quarter, which will benefit our results going forward. Now moving to some other areas of the business. During the quarter, we continued to advance our strategy in a number of fronts. Notably, we have been actively recycling capital, streamlining our portfolio and raising funds to invest in growth opportunities that generate higher returns. As we recently announced, our dispositions for 2021 are valued at $881 million, all but $16 million of which are closed or firm deals. These sales were priced at a blended cap rate of 3.74%, including $667 million of income-producing assets at a weighted average cap rate of 4.93% based on in-place NOI as well as $213 million of development properties. Needless to say, this is a significant amount of equity capital raised at attractive pricing. As Jonathan mentioned, the cap rates that we achieved are supportive of asset value within our portfolio and demonstrate that buyers are willing to pay for development potential. We have also continued to advance our 40 million square foot development pipeline that is embedded within our existing portfolio. We believe that this is a very high-quality pipeline given that 100% of it is located in Canada's 6 major markets, over 80% is dedicated to residential buildings as part of mixed-use properties, addressing the demand for housing. The vast majority are located in close proximity to key transit lines and over half of the total pipeline has received zoning approval or are currently advancing through the zoning process. The scale and quality of our embedded development provides RioCan with substantial value creation lever. We have a distinct competitive advantage due to our in-house development expertise and our residential focus program branded as RioCan Living. In terms of unlocking that value, our development team has continued to advance our projects under construction. At The Well, our largest development project and one of the largest in North America, construction continues to advance on schedule. The base building construction of the commercial component comprising office and retail is approximately 80% complete. The office component is nearly fully leased and is expected to reach 99.5% following the completion of certain in-progress leases. The leasing of the retail component is advancing as expected with leases signed with a number of key tenants. We expect rents commencement for the office component to commit to occur in phases over the course of 2022 and the retail component to follow in late 2022 into 2023. Our residential rental project at The Well is also well advanced and is expected to be delivered in 2023 as well. In addition to The Well, we have advanced a number of our other projects having delivered 2 mixed-use developments this year in Toronto, which include both residential rental and retail components. We have 3 additional projects in Ottawa, that will further expand our residential rental portfolio over the course of 2022. In total, we expect our residential projects that are currently in operation or under construction to contribute approximately $35 million of run rate NOI once stabilized and expect to grow this further as we continue to advance this strategy. In addition to developing rental projects, as Jonathan mentioned, we have been advancing our condo projects. These projects are another mechanism through which we can unlock the value that's embedded in our portfolio. We currently have 6 condo or townhouse projects underway, either in construction or presales. And in total, these projects will generate approximately $190 million of inventory gains as they are completed over the coming years. We see the execution of these projects as proof points for our ability -- for the ability of our platform to deliver on the value creation opportunity that is in front of us. A further proof point for our development capabilities is the fact that third parties are willing to pay us for this expertise in the form of fees in projects where we have non-managing partners. While this is currently a modest income stream for us, generating $10.9 million of fees in the first 9 months of 2021, we expect to expand this source of sustainable income as there is a strong appetite from private investors to participate in our development program. Of course, underpinning all of this is our strong balance sheet. We ended Q3 with $1.1 billion of liquidity on hand and credit metrics that remain supportive of our growth strategy. Given where we are in the development cycle on a number of projects, we expect our net debt to EBITDA to naturally improve as these projects are delivered over the course of 2022 and 2023. In addition, we have advanced our financing strategy to shift our debt to a higher proportion of unsecured and to extend the weighted average tenant. We believe that this approach will increase our financial flexibility and decrease risk. To this end, we issued $450 million of 7-year green debentures with an all-in coupon of 2.83%. This issuance was 5x oversubscribed, demonstrating the attractiveness of RioCan's debt investors who are seeking the quality and reliable cash flow that our portfolio offers. In addition, we announced the early redemption of our $250 million Series V debentures and have repaid or plan to repay $154 million of secured financings. Finally, following the distribution cut earlier this year, we are operating at a payout ratio that allows us to retain a significant amount of cash flows for reinvestment. We note that our headline FFO payout ratio of 72.4% is calculated on a 12-month trailing basis, so still includes periods prior to the distribution cut. If we look strictly at Q3 2021 distributions in FFO, the payout ratio was much lower at 60.1%. This level of payout ratio allows us to retain approximately $150 million of cash flow for reinvestments in growth initiatives already accounting for the funding of maintenance CapEx. When you layer on project level leverage, this translates to approximately $400 million of capital, essentially funding our annual development spend based on current levels. While there is still much to do in order to move forward our financial objectives, these are a couple of examples of how we continuously improve our balance sheet. And with that, I will pass the call back to Jonathan.

[Jonathan Gitlin, President, CEO & Additional Trustee]

All right. Good inaugural effort. So what I'll say is that over the last 20 months, the importance of well-located, professionally, managed physical spaces has really been rediscovered. I mean there were early conclusions about retail struggles, and I think they've given way to the recognition that people want engagement and control in their shopping experience. Now bricks-and-mortar retail isn't an alternative to e-commerce. It's not that binary. It's an essential part of the omnichannel experience, bringing that last mile gap between distribution centers and consumers' homes -- sorry, bridging that last mile gap. And RioCan's focus as it's always been is on our customers, our tenants, we're committed to evolving our spaces to benefit from emerging trends and help really solidify RioCan's and RioCan's tenants place in that last mile delivery chain. We continue to demonstrate the ability to create exceptional and thriving communities and really in any context. We proactively manage our assets through ongoing investment to ensure our properties responsibly maintain their competitive position in Canada's major markets. Now I've said this previously, and I'll say it again, RioCan is precisely where Canadians want and need to be. We've got the enduring strength, stability and growth strategy to create lasting value. It's a privilege to lead this incredible team and have this well-positioned portfolio to continue our story of reliable income and trusted growth to create value for you, our unitholders. Thank you again for being here with us today. And now we are all happy to respond to your questions.

[Operator]

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

[Sam Damiani, Director, Institutional Equity Research]

Congratulations on the quarter. Great to see the pandemic getting more and more in the rearview mirror. Jonathan, your comment about the impact of the subsidy program turning over and having no impact on rent collections. Others have said that as well, but I'm just wondering if there's something specific that you're sort of referencing when you say that it gives you that confidence?

[Jonathan Gitlin, President, CEO & Additional Trustee]

The information that we get is from tenants specifically. I mean, one of the very, very faint silver linings of the pandemic is that we have intensified our day-by-day discussions with our tenants, large and small, and we did that for a number of reasons. But a large part of that was to really help them through the process of applying for the various government subsidies that were available to them. And in doing that, we've established, I think, pretty strong connections with them. And what we do with those connections is really seek information from them constantly. And what we're getting from a wide variety of the tenants' feedback that things have normalized and that the timing of the removal of the stimulus will actually bridge nicely with the return to regular commerce. Now we're not suggesting that there'll be no fallout. My sense is that every January, we typically get some fallout, Sam, from retailers who sort of hang on for the holiday season and then just the -- they close things down come January, February. We didn't see any of that last year. We suspect we'll see some of that this January or February, but we don't think it will be more than normal course. But I think that really gives you a sense of where we're getting our information from. There's nothing more scientific than that.

[Sam Damiani, Director, Institutional Equity Research]

That's very helpful. And it's great to see the occupancy and the leasing traction in the quarter. Can you maybe parse that out just by some of the segments of the portfolio between grocery, power center and closed malls? What segments are outperforming? And what segments are lagging on the recovery right now?

[Jonathan Gitlin, President, CEO & Additional Trustee]

Sure. I'm going to hand it over to Jeff Ross, our Head of Leasing, who's still on the ground and has a good finger on the pulse of all of the trends and the tenants that are showing strength and growth and those that are still reluctant to grow. So Jeff, over to you.

[Jeff Ross]

Yes. Thanks. So listen, we're seeing really the pickup across the board, both in our supermarket-anchored strips, the unenclosed and what you refer to as the power centers, we're seeing absolute growth from grocery, both natural and ethnic, a lot of QSRs and full-service restaurants. Any time we have a blip, there's somebody waiting behind to pick it up. And the interesting trend that we're seeing a lot of right now, Sam, is proprietary retailers like Under Armour, Levi's, Nike, Adidas, Sketchers, stepping up to take some of these on their own account, which adds a lot of credibility to the centers and it certainly gives us the strength of the covenant in behind. So we're seeing that as a continued growth model. Yes, the enclosed malls are dragging a little bit. They're just slower to come back. Tenants are just stepping back a little bit. They want to see footfall continue to come back to it. And but funny enough, what we are seeing is a lot of RFP and governmental requests for space. And those enclosed malls create an ideal environment for it. The boxes already exist. They can be converted relatively effectively and inexpensively, and there seems to be a lot of interest in those. So we're continuing to work very closely with all the governments at all levels that are looking for those type of situations. Health and wellness continues to drive it as well an awful lot, but I will tell you, across the board, no matter who it is, we're spending a lot more time scrutinizing who the new tenancy is coming to ensure that, a, they've got some skin in the game and they've got the strength to carry on. But right now, the velocity and the interest from the leasing side has been pretty strong.

[Sam Damiani, Director, Institutional Equity Research]

That's great color.

[Operator]

Our next question comes from the line of Mark Rothschild with Canaccord.

[Mark Rothschild, MD & Real Estate Analyst]

Maybe continuing a little bit of what you're asking in regards to Sam. For the leasing spreads, can you talk just a little bit more about do you feel that this is more of a stabilized number back to no impact from COVID? Or is there still more improvement that you can get? And also, if you could break it out by just maybe some of the different retail types, if you're seeing trends.

[Jonathan Gitlin, President, CEO & Additional Trustee]

Yes. I think what we've seen over the last couple of quarters, Mark, is the trend that we believe we will see. The one thing I've learned not to do is [ put to study ] a prediction on COVID because it's certainly a pretty resilient little pandemic and it keeps on coming back when we think it's gone. But for right now, all signs point to stabilization and normalization in both retail and residential. And so we do believe that what we've seen over the last 2 quarters with leasing spreads, same property NOI and occupancy improvements is something that is, in fact -- or is, I would say, it's going to be consistent, and I think it's sustainable. And I do think we will get back to pre-pandemic levels in the vast majority of those categories. And in terms of the categories that are growing, I think Jeff put it best when, of course, we rely on necessity-based retailers to really fill a lot of the spaces and they've come in and taken. They've contributed to that 7.5% leasing spread in taking spaces that were leased to lower rates. The good news is they're also very resilient uses, and I think that they will continue to improve our overall tenant mix. And Jeff alluded to it, but it's absolutely true. We, as an organization, have been very judicious in the types of tenants that we've been putting into our available space. And I think that will serve us very well. But in terms of the categories, I don't think I can add much more color than what Jeff had provided. And I think there's definitely new categories that have come into play, like these governmental and quasi-governmental uses, which have really filled a lot of space. They bring a lot of foot traffic to our centers and they're well received by their co-tenants.

[Operator]

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

[Tal Woolley, Research Analyst]

Let's start with inclusionary zoning. Obviously, the policy got . Can you just give some thoughts about how you kind of see this unfolding with respect to your development plans?

[Jonathan Gitlin, President, CEO & Additional Trustee]

Sure. I'm going to hand it over to Andrew Duncan, who's middle name is now inclusionary zoning because he know so much about it. Andrew, over to you and you might want to come close to the mic.

[Andrew Duncan, Chief Investment Officer]

Thanks, Jonathan. In terms of impact on our development pipeline from an inclusionary zoning standpoint, listen, I think we spent a lot of time understanding the policy and specifically understanding the transition rules. We're very confident that a lot of the near-term and medium-term projects we've got in our books, we've done what we need to do and advance the policy coming into effect to ensure to the best of our ability, those projects are protected financially. I would say, philosophically, as an organization, we don't object to inclusionary zoning, but we do have some issues in terms of how the city of Toronto specifically is intending to roll out the policy. And not diving in too many of the details, those really consist of the fact that the City of Toronto was asking that inclusionary zoning be born on the back of developers and owners exclusively without providing any incentives whatsoever. Beyond that, like I said, to reiterate, we have done the work in advance of the policy coming to effect and work very strictly with the city to understand them to ensure the majority of our pipeline is excluded from it in the near and medium term.

[Tal Woolley, Research Analyst]

And just to be clear, it's 5% on purpose-built rental to start growing to 8%. Is that be...

[Andrew Duncan, Chief Investment Officer]

No. Purpose-built rentals right now is 0 for the near future and will grow to 5% over the next number of years. Condominium starts at anywhere from 7 to 10, depending on where you are in the city and the jurisdiction and will grow year-over-year. The other thing, I'd say, is the inclusion of zoning policy, the cities put in place is a policy right now. It has to be endorsed by the province through a number of mechanisms, and they've also committed to a 1-year review. So I think there's a lot more to happen on inclusionary zoning before it is finalized from a policy standpoint.

[Tal Woolley, Research Analyst]

So I've got this question in my back pocket for the next 2 years is what you're saying.

[Andrew Duncan, Chief Investment Officer]

Happy to answer it every time.

[Jonathan Gitlin, President, CEO & Additional Trustee]

So we've got so much -- Tal, we've got so much in the pipeline right now that is already zone, which means that it falls outside of this regime. So the near-term impacts for RioCan are quite limited. But as Andrew suggested, I mean, we have always been very much on side with providing affordable housing. We think that the key is actually more supply, but that's obviously an uphill fight for us as well because it's difficult to get entitlement. But once we have them, we are certainly always looking for ways to ensure that we are helping the city and helping the continued demand that is there for housing and from all different demographic profiles. So we're doing what we can to aid in that, whether it's policy or not.

[Tal Woolley, Research Analyst]

Okay. And then just pivoting to the balance sheet, you guys always carried a little bit less term on your balance sheet maybe than your peers. Given that rates have started to move here a little bit, how are you thinking about -- are you thinking about extending the term on the balance sheet? How are you looking at your financing strategy?

[Jonathan Gitlin, President, CEO & Additional Trustee]

Yes. I think it serves as anything the 7-year raise that we just did. I give you an indication that it is an objective of ours to extend out that term. It's hard to do overnight. And of course, we have to weigh that against the cost of debt, which is, as you can imagine, higher when you are doing longer-term debt. But we really do think it is a responsible initiative to expand out that term. Dennis, I don't know if you have any further color on that?

[Dennis Blasutti, Chief Financial Officer]

No, I think that's exactly right. We'll weigh off cost and tenure as we go through time and look at rates. But with that said, I think aligning our term over time to be a bit closer to the weighted average life of our leases as an example, is something that we will definitely be chipping away at.

[Tal Woolley, Research Analyst]

Okay. And then my last question is just as we're getting closer to year-end here, with the volume of dispositions that you guys have done, sometimes the other companies have followed when they pursued that the tax position gets a little funky towards the end of the year, and they have to do specials, what is -- what's sort of your perspective on how your tax position will be with respect to dispositions by the end of the year?

[Jonathan Gitlin, President, CEO & Additional Trustee]

Yes. We've always had an eye on tax implications, and we plan our processes, including our disposition strategies well in advance of any given year. And we did so with a view to ensuring that there wouldn't be any negative impact or any real material negative impact to our unitholders or to us as an organization. So we plan things very carefully. And I mean, unless Dennis kicks me under the table, I would say, Tal, that there are no real implications from a tax perspective, from the disposition successes we've had this year. We might have a qualifier.

[Dennis Blasutti, Chief Financial Officer]

No, no, I think it's exactly right. I think just to be directed, we don't see a need for any kind of special distribution for sure. We may see the percentage a little higher than it's been over the last few years, but not a material impact. And certainly, when we look forward over the next number of years, we don't see this as being an issue. We have our tax situation is manageable to avoid any such very high levels or several distributions.

[Operator]

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

[Pammi Bir, Analyst]

Just -- in-place occupancy, again, it ticked up nicely, I guess, sequentially. I'm just curious, given all the commentary that you made around the leasing velocity, how do you see that trending as we work through the next 12 months from an occupancy standpoint and maybe perhaps any sense of timing of getting back to pre-pandemic levels, which were, I guess, in the mid-96% range?

[Jonathan Gitlin, President, CEO & Additional Trustee]

Well, right now, our committed occupancy is in that mid-96% range. And so we -- and we still think there's room for improvement because we are seeing -- remember one thing, and I alluded to this in my notes for the call. We worked very hard before the pandemic to curtail our portfolio and get rid of a lot of secondary market assets that had low growth, a little higher vacancy rates. And I think we're really going to see the benefits of that now as we emerge from this pandemic crisis that we've been in. So we do feel confident that, one, the existing occupancy rate of that mid-96% is definitely sustainable. And two, we're quite confident that we'll improve on it and get closer -- much closer and hopefully eclipse that 97% mark in the coming year. That's what things are pointing to right now, Pammi. And again, we're just based on the on the lineup that we have for certain spaces in major markets, we feel pretty confident about that. The one question mark, of course, is always office. Our office portfolio did take a hit during the pandemic. Jeff and his team have done a great job of filling a lot of the space that was left open or vacant over the course of the pandemic. And I will echo the words of our partner at Allied Properties REIT, Michael Emory, we really do believe that office in a place like Toronto will stabilize and the work-from-home trend will maybe not end, but certainly reverse course a little bit, and that will stand to benefit that occupancy over time. But there's a little less certainty in terms of timing of that. From a retail perspective, though, we've got strong confidence in our ability to get that number improved from where it is currently.

[Pammi Bir, Analyst]

Got it. And sorry, I was just referring to the in-place, not the committed, but might be the answer, of course, is all valid. In terms of your discussions maybe with tenants, can you comment on any perhaps implications supply chain issue might be having on their recovery and how that might impact leasing velocity, if at all?

[Jonathan Gitlin, President, CEO & Additional Trustee]

I mean, Jeff, you're again speaking to the sense all the time. Have they given you any color as to what the implications are?

[Jeff Ross]

Not yet. No. It's kind of tight to the chest. So no, I don't have a whole lot to offer there.

[Jonathan Gitlin, President, CEO & Additional Trustee]

It's probably dependent on the use. Grocery probably not so much, and hard goods probably a little more. But we have not -- I mean all we heard is that margins are up. Sales velocity is up generally across the board. And on the experiential side, again, thankfully, activity is up, but we haven't received any scientific feedback regarding the supply chain issues on their businesses.

[Pammi Bir, Analyst]

So it sounds like really not much in terms of that could possibly impact the pace of new store openings or anything of that nature.

[Jonathan Gitlin, President, CEO & Additional Trustee]

No. I mean, look, the only implications it might have is on our end, like we've got to construct these spaces for these tenants. And sometimes it's existing spaces where we're bringing in -- where we're doing the landlord's work and some of the tenant fit out. That is always susceptible to delays because of labor shortages and supply constraints. But it hasn't really created any material delays. But around the edges, it probably will.

[Pammi Bir, Analyst]

Got it. As you mentioned, the private market appetite for us is still very strong. That being said, you're just looking at your fair value gains in your IFRS cap rates, they're holding relatively steady sequentially. I'm just curious if you're seeing any perhaps downward pressure in the private markets for the assets, particularly retail that might drive some portfolio value gains over the next several quarters.

[Jonathan Gitlin, President, CEO & Additional Trustee]

Yes, for sure. I think what we've seen is more of a recent trend. A lot of the transactions that service proof points for us went firm or closed after the quarter end, some of it near the end of the quarter. And look, we take our approach to IFRS valuations very judiciously and seriously. So we often will get third-party appraisals to help solidify those proof points. And we're in the process of doing all that right now. But the trends definitely do point to higher valuation for the types of assets we own. And I think that will be reflected over time in our NAV and our IFRS valuation. So it's just a matter of timing.

[Pammi Bir, Analyst]

Got it. Just maybe one last one for me. Any further updates on retail leasing at The Well?

[Jonathan Gitlin, President, CEO & Additional Trustee]

Yes. So I mean we haven't publicized any specific numbers, but I can tell you from the reports that I get from Jeff and his team quite often is that it's really heating up quite substantially. And that makes sense given that the physical space is now available to be viewed by the tenants. And it's also now we're about a year away from the opening, which is, I think, the comfort zone for a lot of retail tenants to commit. So we are -- I think the next report we provide or disclose will show a market increase that is going to be, I think, quite welcome for the investor public. But it's not a surprise to us given how we view that asset and just how strong it is and how well it will fit within that community.

[Operator]

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

[Howard Leung, Investment Analyst]

Congratulations, Dennis, on your first earnings call. I had a question about the vacancies. They're roughly about 3-ish percent. Would you say a lot of the vacancies are concentrated in either enclosed malls or secondary markets? Or are they kind of spread out?

[Jonathan Gitlin, President, CEO & Additional Trustee]

So I'm going to hand that over to John Ballantyne. And my first instance is, again, a lot of the vacancies right now are coming from office. But in terms of the retail portfolio, do you think they're spread out or more from a closed mall?

[John Ballantyne, Senior Vice President of Asset Management]

Yes, I'd say they are a little concentrated enclosed malls. And on the office side, I would say, as Jeff said earlier, we are getting more traction on the office side. It's easier when we can take a very detailed look at our portfolio on a property basis. There are always certain larger vacancies that come up, not necessarily pandemic-related, but just based on expiries. We had a larger one in one of our office towers in Toronto in late 2020. We are actively backfilling those. There is a bit of a time delay, but you will see our occupancy continue to decline, as John said earlier.

[Howard Leung, Investment Analyst]

Okay. Okay. So yes, there's some puts and takes there. And just kind of looking at the valuation, cap rates for the major markets versus the secondary markets. It looks like the overall cap rates down has compressed as the mix shifts towards the major markets, but secondary markets ticked up a bit. Do you anticipate that as you continue to dispose more of the secondary markets properties, it gets harder and harder to dispose of some of these as maybe it gets relatively less attractive because the ones [indiscernible] earlier were in higher demand?

[Jonathan Gitlin, President, CEO & Additional Trustee]

Yes. I think that there's always going to be more demand for major market assets, less demand for secondary market assets. Hence, our strategy in the first place to exit those markets. But I would also just say that we kind of -- we sold as much as we're looking to sell in the secondary markets, right? We might have the odd sale going forward, but we're now at well over 90%, in fact, over 91% in major markets. So I don't think it's going to really impact. I don't think you're going to see a lot more sales that come in from those secondary markets. But I think demand is still there for those assets from what we've seen over the last year. We still are getting a shallower pool, but there's still a willingness to own those assets by either local buyers or syndicators who've just been priced out of the major markets. So I don't -- because of that demand, albeit limited, I don't see the cap rates really increasing too much on those secondary market assets. What I do think will happen is continued demand for major market assets where -- and I do think, and again, this is crystal balling, Howard, so don't hold me to it. But I really do believe that there will be a significant improvement in pricing over the next year in strong retail assets in the major markets.

[Howard Leung, Investment Analyst]

No, yes, that's -- I think that's a reasonable conclusion given it looks fingers crossed, we're turning the page on the pandemic. And then just kind of one last one on a follow-up on The Well, the question about the retail leasing. In the leasing conversations you're having, is there any concern some of the tenants that are -- prospective tenants are also -- you're also competing with not too far from The Well is the path, which has a lot of vacancies, I think for retail. So is there any pressure from the nearby vacancies in the path?

[Jonathan Gitlin, President, CEO & Additional Trustee]

So my perspective, and I'll be happy to get anyone else in the room to weigh in on this. But I think it's actually a totally different market. We're -- I mean we look further west for our comparables or competitors rather than east. So we actually think that King Street is where a lot of our competition is. And we've created an environment that's entirely different than the path, which is largely just walk through convenience stops, whereas The Well is really destinational and it serves all of the constituents that are already in that community being the ones that we've created in the residential or office or the ones surrounding that area where there's so much residential density that they need a place like The Well to come and experience and shop and enjoy. So we actually don't think there will be any impact from the struggles that those unfortunate struggles that those path tenants are having. So -- and again, Jeff, I don't know if you have any color on that?

[Jeff Ross]

Yes. No, listen, the physicality of the path and the limitation from people in seats in the office is really what's limiting it there. And it seems to have turned people on an ongoing basis because they don't want to see this happen again. We are on the street. We are not underground. And I'll also tell you, as you move west, University is about 4 kilometers wide. It seems to be a very dramatic and different market to the east and west side of University. And as Jonathan alluded to, they don't have left for years has been searching for some soul, some heart of a community. And we're providing that both in the commercial and in the residential that's going up there, and it's drawing not just east and west, but north and south because ], which is a massive development to the south has never had any real heart to it. By drawing over the north side, this is going to create that center of community for that downtown West Market. But there is, if anything, there seems to be tenancies that are looking to look for their new lease on life and get out of the path and come into our type of a center, which is very open, very porous, open on all sides, easy for customers to enter. And I think we're a wonderful alternative for the next phase of Downtown West.

[Howard Leung, Investment Analyst]

That's great color and the street side as you mentioned, makes a big difference.

[Operator]

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

[Jenny Ma, Analyst]

I'm going to take advantage of having an inclusionary zoning expert and ask a couple of detailed questions. With the enactment of the policies, assuming that it goes ahead. I just wanted to be clear that all the projects that are currently underway would be grandfathered from that, right? So it would be on incremental new approvals?

[Andrew Duncan, Chief Investment Officer]

Jenny, it's Andrew again. Yes, I guess, as it relates to our pipeline, any project that is already zoned is legacy out of inclusionary zoning. Any project that is under currently within the zoning process can be legacy out of inclusionary zoning if a site plan application is made between now and September of next year. So to the degree we're in that process, we're going to take those steps to be legacy out of it because one of the premises of inclusionary zoning is the incentive is paid for by an adjustment in residual land value. And we already own these properties. So as such, we're going to take -- we're going to do our best to get a legacy treatment and not be subject to that future requirement. The other thing I note and add is our development portfolio is across the entire country. Inclusionary zoning as it currently stands is the city of Toronto policy.

[Jenny Ma, Analyst]

Correct. Correct. Okay. No, that's clear. So when we're thinking about the condo component, I noticed that the pricing ceilings that they had mentioned are obviously well below market. Is that something that they expect the developers to absorb? Like are you -- are they going to ask you to be selling those units with the price cap that they mentioned, is that how it works?

[Andrew Duncan, Chief Investment Officer]

Jenny, there's 2 options for the developers to comply with inclusionary zoning if they are subject to it. One is offering affordable rental units and the other is offering affordable units for purchase. I would say this, it's less financially punitive to offer affordable units for rental than purchase and the set aside rates in terms of the requirements for the number of units is greater in the purchase scenario. So I would anticipate, as we proceed through the -- through people looking at the policy and having to be subject to it, you will see a greater proportion, if not the majority of all developers skew towards providing affordable rental as opposed to purchase. But yes, all of this in the current policy has to come from the developer in terms of funding it.

[Jenny Ma, Analyst]

Okay. Okay. And you mentioned that there were no incentives being offered to the developer, so is there's absolutely nothing? Is there a path for opening that discussion, like offering additional density in exchange for these concessions, like where is that sort of a discussion that's not going to continue further?

[Andrew Duncan, Chief Investment Officer]

Jenny, it's a good point. All of those things were discussed with the industry throughout the process. And the end result is the policy that was approved yesterday, whereby there's no incremental density offered. The one incentive the city is considering is not requiring or has considered is not requiring parking for any of these affordable units for rental or purchase. But at the end of the day, there's no other incentives. All affordable housing that currently is provided in the city of Toronto, most of it goes through something called opendoor, where fees are waived. And there's a number of incentives provided for a developer providing affordable units. Under the new policy, none of that is applicable.

[Jonathan Gitlin, President, CEO & Additional Trustee]

And I will say that in addition, there is -- CMHC came out with the program a few years ago where they use their balance sheet, it's called the RCFI program where they use their balance sheet to provide cheaper financing to developers who will adhere to not just affordable housing requirements but also accessibility requirements. And I think I applaud that program. It's something that still exists. And I think that, that's something that, again, I think that CMHC would be -- certainly would benefit the communities in which CMHC serves if that is continuously rolled out and continuously taking advantage of by developers, particularly for rental housing. But that's sort of over and above or different than the inclusionary zoning policy that was just launched yesterday.

[Jenny Ma, Analyst]

Great. That's very helpful color. Moving to the balance sheet. It looks like your floating rate debt is sort of sitting at about 8% or so, and it had a fairly wide range over the last few years. Given the uptick in interest rates, I'm wondering if there's any appetite to maintain it at the current levels? Or is there an effort to sort of bring that number down?

[Jonathan Gitlin, President, CEO & Additional Trustee]

Floating debt? No, I think we've been pretty -- throughout all interest rate cycles, we've been pretty consistent with the amount of floating rate debt that we've taken on our balance sheet. And I don't think that, that's going to move in any dramatic way.

[Jenny Ma, Analyst]

Okay. Great. And then with regards to the transaction-related costs, so all the dispositions that you disclosed, are those costs all flushed through Q3? Or should we expect some of it to fall into Q4?

[Dennis Blasutti, Chief Financial Officer]

On transaction costs. So there were some of the deals that were in our previous press release, Jenny, that were actually closed in Q4.

[Jonathan Gitlin, President, CEO & Additional Trustee]

And some of them haven't closed yet, they just went firm. So they will definitely service in Q4.

[Operator]

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

[Sam Damiani, Director, Institutional Equity Research]

One last question, not nearly as interesting as the last few. Just on the fourth quarter, lots of cash coming in between the debenture and the dispositions. I know there's 1 redemption being planned, but is there likely to be substantial cash on the balance sheet at quarter end?

[Dennis Blasutti, Chief Financial Officer]

I don't think we'll have cash on the balance sheet at the end of Q4. Our lines will be substantially available at that point in time. We were drawn a bit at the end of the quarter. We'll repay our $250 million debenture Series V, which would have been due next May. We're going to repay half and are going to finish repaying some secured mortgages and then we'll have -- the balance will go on to our lines.

[Operator]

There are no further questions at this time. I will now turn the call back to Mr. Gitlin for closing remarks.

[Jonathan Gitlin, President, CEO & Additional Trustee]

Well, just very briefly, thank you, everyone, for dialing in, and thank you for enduring the last 20 months with us, and we are, again, excited for certainly the next 20 months and beyond. Have a great day, everyone.

[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.