RioCan Real Estate Investment Trust

TSX:REI.UN

Earnings Call Transcript 2024-Q3

[Operator]

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

[Jennifer Suess, executive]

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

Before we begin, I am required to read the following cautionary statements. In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts.

These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. In discussing our financial and operating performance and in responding to your questions, we will also be referencing certain financial measures that are not generally accepted accounting principle measures, GAAP under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers.

Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance, liquidity, cash flows and profitability. RioCan's management uses these measures to aid in assessing the trust's underlying core performance and provides these additional measures so that investors may do the same. Additional information on the material risks that could impact our actual results and the estimates and assumptions 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, 2024, and management's discussion and analysis related there to, as applicable, together with RioCan's most recent annual information form that are all available on our website and at www.sedarplus.com.

I will now turn the call over to RioCan's President and CEO, Jonathan Gitlin.

[Jonathan Gitlin, executive]

Thanks, Jennifer, and thank you all for joining RioCan's senior management team today. I'm pleased to report that our team has delivered another strong quarter with standout results. We're encouraged by the consistently strong results generated by RioCan's high-quality major market necessity-focused portfolio. We've maintained positive momentum with recent activity that enhances stability and fuels future growth. We set new records in leasing results again this quarter. Additionally, our advancement and commitment to responsible growth, sustainability and ethical governance was reaffirmed by our outstanding performance and the recent GRESB assessment where we were ranked #1 amongst our peers. At the same time, our financing activities underscore our access to diverse funding and commitment to maintaining ample liquidity and an ever-improving balance sheet.

Market fundamentals favor retail real estate, particularly assets of RioCan's caliber. Premium real estate remains limited, and this will likely persist due to tough zoning laws and high construction costs. Our prime market locations and appealing demographic characteristics draw the best-in-class tenants from Canada and worldwide. RioCan has the unique combination of a top-tier team and ideal locations in Canada's 6 largest and most densely populated cities.

Let's focus for a second on our demographics. Within a 5-kilometer radius of RioCan's centers, the average population is 273,000 and the average household income is $148,000. Over the past year, these figures have grown by 5%. This setting, along with our strong tenant mix and our ongoing focus on portfolio quality lead to sustained demand. Simply put, it's where relevant retailers need to be. In Q3, we finalized approximately 1.3 million square feet of leases, including 251,000 square feet of new leases. The average net rent of the new leases was $24.51. This is 11% higher than RioCan's average net rent. We're confident that market dynamics will sustain this upward trend each quarter.

With heightened leasing demand comes heightened occupancy levels. Committed and retail occupancy reached record highs of 97.8% and 98.6%, respectively, in the quarter. Our blended leasing spread for the quarter was 14.2%, with renewals at 12.6% and new leases at 24.2%. This is RioCan's third consecutive quarter of double-digit leasing spreads. Alongside these outstanding leasing results, we're very pleased, though not surprised, with the re-leasing of the 10 vacant units resulting from the failures of Bad Boy and Rooms and Spaces, which occupied 261,000 square feet of space in our centers.

With the completion of 2 deals in the third quarter, all units have now been leased to relevant and resilient retailers, including Longo's, Winners, HomeSense and No Frills. The leases featured 23.9% higher base rents and contractual annual increases. We did what we said we would do. We seized an awesome opportunity to move from lower growth, lower quality leases to the high-quality tenancies you would typically associate with the RioCan shopping center. This outcome further enhances RioCan's portfolio quality and cash flow growth. We've made the smart decision to focus on high-quality tenancies to drive sustainable growth in FFO and NAV.

The long-term benefits of the strategic leasing significantly surpassed the short-term downtime needed to prepare these premium spaces. Now in addition to backfilling these units, we finalized a land lease for 158,000 square foot Costco at RioCan Center Burloak. Costco will be transformative to that center, replacing less resilient fashion-focused tenants with an additional strong service-based anchor that will draw significant traffic, attract impactful co-tenants and enhance the property's net asset value. Additionally, since the beginning of the year, we've signed 6 new grocery leases, representing 117,000 square feet, 3 of which transformed previously open air or urban sites into highly valued grocery-anchored centers.

While RioCan continues to actively manage its portfolio to drive income quality and asset value, we also remain focused on fortifying our balance sheet. By year-end, we're on track to reach the high end of our long-term adjusted net debt-to-EBITDA target range of 8 to 9x. This goal will be achieved in part through increased EBITDA, supported by a steady stream of diversified NOI from strong operations and development deliveries like The Well in Toronto's Downtown West.

Since Wellington market opened in May, traffic at The Well continues to exceed our expectations. Many new businesses continue to open, driving even more traffic to this vibrant mixed-use center. On the other side of our deleveraging equation, our strategy includes significantly reducing construction spend. We've halted the start of new construction, and we don't intend to commence physical construction of mixed-use properties anytime soon. We continue to drive value through rezoning and enhancing existing entitlements, but we will not initiate new capital-intensive projects for the foreseeable future. Our road map also involves repatriating proceeds from inventory property sales. I'll spend a moment on the condo units that RioCan has in its inventory.

There's been a significant amount of focus on our presold condo units and the associated risks if they don't close. Let me explain to you why we do not view this as a material risk. First, I'll acknowledge that the condo market across Canada is under strain. There are no new product launches, and it's very difficult to dispose of unsold inventory in this environment. However, it's important to note that RioCan is not relying on the disposition of unsold inventory to achieve our balance sheet objectives. We presold approximately 90% of the 2,500 units we will complete through 2026. So we're talking about presold units that are subject to legal binding purchase agreements with buyers who passed credit checks and made average deposits of close to 19% or on average, $150,000 each.

Many buyers also invested additional funds in unit upgrades. The vast majority of these condo sales were concluded before the market peak and the closing prices are below market value. In addition, interest rates have decreased and will likely continue to do so. This makes carrying costs for our purchasers more viable and will help facilitate transaction closings. I must also remind you that we are through 24% of the inventory sales that we highlighted at the beginning of 2024.

To break it all down, out of the approximately $800 million expected from 6 active condo projects, we've already realized and accelerated $193 million through unit sales and forward selling. These dispositions accelerate revenue, reduce our condo exposure and preserve capital as purchasers assume the cost to complete and the associated debt. Another $607 million is expected as units close. As they say, the proof will be in the pudding. We are commencing occupancy and closings on a number of projects in Q4 and into the first half of 2025. We will keep you apprised of our progress.

When it comes to RioCan's presold condo inventory, I do not perceive a material risk. Our portfolio features many low cap rate properties that appeal to both institutional and private investors. These assets allow RioCan to use strategies such as asset dispositions to further improve financial flexibility when attractive opportunities arise. The growing demand for these assets is evidenced by our recent firm agreement to sell Strada, a residential property in Downtown Toronto at a sale price reflecting a 6% premium over its IFRS carrying value. Selling Strada for a price above IFRS value is just one case that highlights and substantiates the immense value of our residential rental properties, which have an average age of approximately 4 years, are not subject to rent control and have below-market debt with average remaining term of 8 years.

You'll recall that one of our objectives for the RioCan Living portfolio was to create enough scale to provide us with flexibility and options. And we've reached that point with these valuable assets and can now focus on unlocking the inherent value of that portfolio. As we consider our next steps, the market continues to move in a favorable direction. I'll take a minute now to quantify the capital that we are capable of repatriating in the short term. RioCan Living assets are valued at approximately $1 billion. As I mentioned a moment ago, we expect to repatriate over $600 million from inventory sales between now and 2026.

Furthermore, we're preserving over $150 million in free cash flow annually due to our conservative payout ratio. Combining these factors, RioCan has the potential to compile approximately $2 billion between now and 2026 without materially diminishing FFO. This $2 billion represents fuel that we can deploy strategically. For instance, we can rapidly accelerate balance sheet improvement and enhance FFO growth by strategically redeploying the capital through paydown of existing debt and accretive activities such as unit buyback and portfolio acquisition. This flexibility provides RioCan with a very attractive range of options.

Our strategy to build a valuable residential portfolio is clearly paying off. We now have the appropriate scale and quality to explore effective pathways to monetize this portfolio. Before turning the call over to Dennis, I'll address our recent restructuring. On October 22, we restructured our workforce to optimize the organization and support future growth. As part of this process, we made the difficult decision to reduce our workforce by approximately 9.5%. The corporate restructuring was driven by RioCan's commitment to responsibly enhancing performance and improve workflow efficiency and optimize resource allocation to align with our business needs. This is part of our responsible cost management efforts, which also include a national procurement program, advanced technology capabilities such as an upgraded ERP solution and as I previously mentioned, reduced construction spending. These steps further position RioCan for sustained success and resilience.

I'll wrap up now. RioCan has a premier retail portfolio in Canada's most desirable markets. The favorable retail real estate dynamics create long-term demand for our properties. Our strategy is anchored in building a resilient portfolio that ensures steady growth. Our strategic and patient approach, combined with high-quality assets promotes growth and minimizes risk. We have levers to accelerate the repatriation of a tremendous amount of capital. We have several mechanisms to drive growth, and we are committed to prudent financial management backed by an excellent team. The deliberate repositioning of our portfolio, tenants and platform has improved efficiency, effectiveness and resilience. Our consistency, vision and commitment to responsible growth will continue to benefit our unitholders while ensuring the trust stability.

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

[Dennis Blasutti, executive]

Thank you, Jonathan, and good morning to everyone on the call. Our performance reflects the strength of our high-quality portfolio as constructive supply and demand dynamics continue to drive positive results. These dynamics are reflected in our leasing spreads and high occupancy levels. These metrics, along with the continued improvement of our tenant composition compound over time to enhance long-term value, portfolio quality and growth prospects.

FFO for the third quarter was $0.46 per unit, up from $0.45 per unit in the prior year quarter. Operational growth and ramp of developments continue to add to our earnings for a combined positive impact of $0.02. Fee income earned from joint ventures, along with various other income items added $0.02. Higher interest expense, net of higher interest income had a negative impact of $0.03, of which $0.01 is related to lower capitalized interest. In addition, we sold another 12.5% interest in the 11 YV project, resulting in a gain of approximately $11 million. Along with the previous sale this year, the 11 YV disposals have accelerated approximately $180 million of the $800 million of future condo sales revenue we projected at the start of the year. The process of selling this inventory reduces our condo exposure and preserves capital as buyers take on the completion cost and debt obligations associated with the project.

Our full year FFO per unit projections will be impacted by approximately $0.03 per unit in the fourth quarter due to a nonrecurring restructuring charge. This was not considered in determining our previously disclosed FFO per unit guidance range. Excluding this charge, we expect to achieve our FFO per unit guidance for the year. All other guidance items included in the outlook section of our release from last quarter remain unchanged.

Turning now to our balance sheet. Net debt to EBITDA has improved to 9.1x, down from 9.3x at the end of 2023 and 9.5x as at Q3 2023. As previously discussed, we anticipate this matter to continue its downward trend to our target range of 8 to 9x. This improvement is expected as EBITDA from completed developments ramp up and as condo revenues are realized.

In August and September, RioCan took advantage of a window of stable interest rates and raised $1.05 billion of financing with a 6.4 year weighted average term at a 4.5% weighted average interest rate. The proceeds were used to pay off higher interest rate loans and address near-term mortgage maturities, selectively with a 5.9% average interest rate. Financing activities were across a variety of debt types, demonstrating RioCan's access to multiple sources of capital, including $148 million CMHC financing with a 10-year term at a fixed rate of 3.97% used to repay a floating rate construction loan, extending a $200 million nonrevolving unsecured credit facility to January 31, 2030, at a 4.47% fixed interest rate, issuing $700 million in unsecured debentures in 2 series with a weighted average interest rate and term of 4.6% and 6 years, respectively.

To date, the proceeds that have been used to repay are $300 million, 6.5% 3NC1 debentures that were issued about a year ago, taking advantage of the par call feature, the aforementioned floating rate construction loan and $252 million on the revolving unsecured operating line of credit, resulting in the $1.25 billion line being undrawn, bringing our total liquidity to $1.7 billion. Residual proceeds from this financing, supplemented by our line of credit will be used to repay mortgages over the next few quarters, which will continue to improve our ratio of unsecured to secured debt. Based on current liquidity levels, we will not be required to issue any further debt for the remainder of this year and well into next year, which is important in times of volatility. We have also decreased our weighted average interest rate on total debt from 4.17% to 4.01% and have extended our weighted average term to maturity from 3.5 years to 4 years.

As reflected in our disclosure and highlighted in our comments today, RioCan has a top quality portfolio and strong balance sheet that provides us with numerous options to maximize long-term value. Whether it be selecting the best tenants for our centers, monetizing value through asset sales or accessing various forms of capital, RioCan will use these options to provide strong returns for our unitholders.

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

[Operator]

[Operator Instructions] We have our first question from Sam Damiani with TD Cowen.

[Sam Damiani, analyst]

Maybe first off, just with the same-property NOI growth, you did guide it down a little bit earlier this year with those 10 vacancies temporarily. But it is running around 2 percentage points below your 3% target. So would the shortfall this year or at least in Q3 be all related to those temporary vacancies and what would that imply for same-property NOI growth to rebound in 2025?

[Jonathan Gitlin, executive]

Sam, thanks for the question. The 10 vacancies that we have will have a significant impact on same-property NOI. Of course, it's not all of it. There's going to be a lot of components that go into that statistic. But the fact that all of those tenancies will be paying cash rent into next year does mean that there will be significant support for that metric going into 2025. So we will offer some more refined guidance as we head into 2025 around same-property NOI. But as we've said for a while now, the -- today's leasing spreads are tomorrow's same-property NOI. So we are establishing the building blocks for a pretty strong future in that regard.

[Sam Damiani, analyst]

And I guess just in that vein, are you seeing anything on the horizon specific lease expiries or tenancy issues that might present meaningful offsetting negative against what would otherwise potentially be a rebound?

[Jonathan Gitlin, executive]

At this point, nothing material. Canadian retailers and also a lot of the other international retailers are performing well. I mean we picked a list of tenants that is strong in any economic backdrop. And so we're seeing a lot of those types of tenants expand even in what we see as a bit of a slowing economy here. And we're opening up a lot of new stores for some of those tenants. But more importantly, they're loath to give up any of the space they have, as you can see from our 92% retention ratio. So we're still seeing quite a bit of strength. Now of course, there will be some weakness. I mean we've seen The Beer Store, for instance, go through a rapid change in their business model, and we have some of those in our portfolio.

But as I've said before, Sam, at 98% occupancy or thereabouts, we need these opportunities. You're going to see from those bed bath, those old bed bath spaces and Bad Boy spaces, that they will transfer into significant growth drivers in our future and a much better qualitative tenancy. And so when we do get spaces back, which I'm not suggesting is a significant trend, but when we do, we're taking full advantage of it, and it really does improve our outlook.

[Sam Damiani, analyst]

That's great. And last question for me. The shopping center industry obviously has gone through a ton of change over the last 10-plus years. And now that your occupancy is at all-time high or a new high. How would you compare RioCan's current leasing strategy to the point in time pre-pandemic when occupancy was at a similar level?

[Jonathan Gitlin, executive]

So I would say that our leasing strategy has evolved in that we have such confidence in our portfolio. Our portfolio has improved dramatically. We disclosed a lot in our investor deck, but also in our regular disclosure about improved demographic profile of the properties that we have, the improved physical resilience of the properties we have as well as the major market presence that we now have. And because of that, it really puts us on our front foot. Add to that, that you've got a very strong supply shortage and a very high level of demand for that space. And that makes the sort of pendulum shift in our favor. And so we feel very confident when we have negotiations with tenants, whether it's about a renewal or about new space.

And that really allows us to pick and choose best-in-class tenants and it allows us to get terms that favor growth going forward. So we're now able to embed annual growth bumps in our leases. And again, we're getting the best-in-class tenants, which really transform our portfolio. And we don't need to scramble to fill space anymore. That space is rarely available and when it is, we can really take our time and really pick and choose the best-in-class tenants. But happy to turn it over to John or Oliver to see if there's anything to add to that.

[John Ballantyne, executive]

Yes. I would just add to that, Sam, we went to great lengths in the last 3 or 4 years to restructure internally as well. With a real focus on customer centrism, and that was setting up a tenant experience team, which we feel like gives a real white glove experience to our tenants. Be it in how they pay rents, how they see their invoicing and who they actually deal with to lease or renew space. So we've always had great relationships with our tenants. We've always been one of the biggest landlords in Canada. But I think the focus on the tenant experience within our portfolio is really helping us leverage growth in renewal and new leasing discussions now.

[Operator]

The next question is from Lorne Kalmar with Desjardins.

[Lorne Kalmar, analyst]

I just wanted to focus on the Strada sale you guys announced. I believe that's in partnership with Allied. I know they're undergoing a disposition program. And obviously, your comments about starting to realize value. I wanted to get a better idea, is this sort of a one-off? Or is this the beginning of the unwinding of the multi-res portfolio?

[Jonathan Gitlin, executive]

What we've said is for a long time now, we were looking to get enough scale that would give us optionality with respect to our residential portfolio. And we feel that we're coming into that scale now as while the market is certainly favorable for these types of assets. We've got a lot of options based on that scale. And we're looking to explore those options now in earnest, and we're certainly -- we're in the midst of doing so. So there's lots of -- but like I said, there's lots of different avenues that could unfold with respect to the residential portfolio.

[Dennis Blasutti, executive]

The thing I would add there, and Jonathan mentioned in his comments, but I think it's important to reiterate, this is a $1 billion business. Asset values have been approximately $1 billion. And seeing this sale at the level it's at premium to our IFRS value is supportive of the value of that business. So when we think about the NAV of those assets within our current balance sheet and how that may or may not be recognized in public markets, it does kind of open up that discussion around what to do with the assets.

[Lorne Kalmar, analyst]

No, absolutely. And I mean, I guess, given that most of the assets are 50% owned, does sort of these one-off transactions make the most sense? Or is there an opportunity to do something with the portfolio in aggregate?

[Jonathan Gitlin, executive]

Well, like I said, Sam, there's -- [indiscernible] there's plenty of options. There's so many different structures that we have at our disposal. So we're going to explore all of them, but there's not sort of one distinct methodology that we need to focus on.

[Lorne Kalmar, analyst]

Okay. Fair enough. I'll move on from that now. Just wanted to touch on the condo closing, Jonathan, I really appreciate your comments around that. A lot of good color. Have -- in the early innings of the stuff that's supposed to close this quarter, how has it been going?

[Jonathan Gitlin, executive]

So it's going well. I mean, I think as I've been saying for a while, Lorne, the narrative around condos has gone -- I mean, as I said before, I recognize that new releases or launches are highly problematic. And if you have any unsold inventory, it's very difficult to move in this kind of market. But the stuff that's been sold, given all of our mitigating factors, we feel quite strongly or quite confident that there won't be any significant issues. And that's really been -- we've seen strong indications that, that will unfold with respect to the interim closings that we've got or interim occupancies that we've got coming up in December. There's very little friction on a relative basis to the units that we are intending on occupying over the next 30 to 60 days.

There's the odd sort of person not showing up to their PDI. There's the odd person saying that they won't be able to close, but this is a very small percentage like low single digits, which in the scheme of things is actually a normal course. We've spoken to our condo developer partners. And for them, this is the same type of friction that they would get even before this recent downturn in the market. And so that leads us to be pretty confident around the closings that we've got coming up.

[Lorne Kalmar, analyst]

Okay. We like to hear that. And then just last quick one. Are you guys expecting any other gains on sales in the fourth quarter that would be included in FFO?

[Dennis Blasutti, executive]

In terms of like 11 YV type sale that we had this quarter, I'd say no to that.

[Operator]

The next question is from Mark Rothschild with Canaccord.

[Mark Rothschild, analyst]

In regard to new development starts, you've been pretty clear that you're not really looking to do much in the near term. Should we interpret this as more of a view on the market for the next several years? Or is this more a change in shifting strategy from where you've been several years ago?

[Jonathan Gitlin, executive]

Well, I think the market has definitely changed, and we've got to be dynamic in our thought processes to ensure that we're building only when it's accretive for our unitholders and makes sense for us strategically, Mark, but I think pricing where it is and returns relative to some other allocation that we can make with respect to our capital makes it nonsensical in this environment. Things can change. And what I will say though is the strategy that we would favor going forward is similar to what we started deploying before we started, I would say, developing less which is utilizing our strong platform and our great landholdings but getting outside investors to bear the brunt of the balance sheet burden that development takes. So I would say that development is still a part of RioCan. It would just be done differently, and it wouldn't be done in the short term because of the market dynamics.

[Mark Rothschild, analyst]

Okay. Great. And maybe just following up to something you discussed earlier in regard to -- from a different question. When you talk about same-property NOI growth and give a number of 3%, that's achievable, should we assume that, that's the size for re-leasing the 10 vacant stores, which should provide an extra boost next year and you get 3% annual separately from that, and that will give an additional boost to next year? Or would that be a big part of that?

[Jonathan Gitlin, executive]

I think the release of those 10 stores, along with some other leasing that we've been doing this year will be a big part of evening out the statistic. I mean, this year, we said what we want is an average over the course of time of 3%. And this year, we certainly dipped below that because of some anomalous store closures. But we feel that given the strength of the leasing we've done this year, you'll see results that will start to show in next year's same-property NOI. And between the various years and the CAGR that will arise out of taking a few years in a row, we are still very much steadfast behind that objective and the guidance to stay at 3%.

[Mark Rothschild, analyst]

So just so I understand, evening out means that if this year is below 3%, then as that comes on, it will be well above 3% to average out to even out the 3%.

[Jonathan Gitlin, executive]

We think over a long period of time. But as I said to one of your colleagues previously, we're going to provide more refined guidance as we get into the new year around same-property NOI growth as well as some other key metrics.

[Operator]

The next question is from Mike Markidis with BMO.

[Michael Markidis, analyst]

I guess, first off, congrats on the continued strength in retail leasing and the operational momentum that you guys have. It's great to see. I just want to follow up, pardon me, I guess, on Lorne's question, and I know Jonathan -- sorry, Dennis, you said no 11 YV sales. But for Q4, just in terms of getting to your guidance, what is the actual development profit that you -- gross profit you expect to realize in Q4 to achieve that $1.79 to $1.82 range.

[Dennis Blasutti, executive]

Yes. I don't think we've disclosed that quarter-by-quarter. We have a significant amount of UC 2 sales coming in. So if you kind of look at our disclosure around the revenue that would come in from UC 2 and average that over kind of 3 or 4 quarters, that should give you approximately the number. But it is an outsized condo sale closing in -- condo sale revenue in Q4 relative to other quarters.

[Michael Markidis, analyst]

Okay. That's helpful. And then just kind of a technical question, but can you remind me, I mean, thanks for your commentary, Jonathan, just in terms of the odd person not showing up for a PDI or saying that they won't close. But from a cash flow perspective, I guess, interim occupancy first, but that's when -- is that -- when interim occupancy takes place, is that when you recognize the sales revenue? Or is it when the actual condo title is given and the funds are transferred in terms of the purchase price coming in.

[Jonathan Gitlin, executive]

Yes, it is interim occupancy when that's recognized. And I think from all of the information we have and experience that we've gone through, Mike, there's very, very, very limited risk of someone taking occupancy and then not closing. The time period in between interim occupancy and closing will vary project to project, but it's really only a matter of 2 months. And so yes, that's definitely the accounting treatment, and we feel pretty confident.

[Michael Markidis, analyst]

Yes. No, no. Okay. Got it. So just from a deleveraging perspective, I guess, the debt doesn't get paid down until after you just have a receivable in the interim.

[Dennis Blasutti, executive]

Yes, that's correct. So there is a working capital timing point there. Now we do get to cap the [ condo ] gains in our EBITDA. So from a debt-to-EBITDA perspective, that sort of helps pull it forward a little bit.

[Michael Markidis, analyst]

Yes. Okay. No, great. That's helpful. Okay. And just on the 11 YV sale, I totally understand what it does for RioCan and what you guys get there. I guess 2 questions on that one. What does the -- I guess, just trying to understand what the purchaser gets in terms of that transaction and what type of return profile, number one. And then number two, is there anything specific to 11 YV just given the benefits to RioCan, why you wouldn't pursue that strategy with the other projects that you have?

[Jonathan Gitlin, executive]

So Mike, I just want to answer one other point of your last question. We do -- once you have interim occupancy, you do get sort of the phantom mortgage payments, you do get interim revenue while the occupants are in place. So I just want to clarify that. With respect to 11 YV, we haven't disclosed a lot around what the purchaser gets. But again, I think they just -- they get a decent return for their investment, their earlier investment. And with respect to deploying that same strategy elsewhere, it's something that we really haven't considered. I think we're happy to do it on 11 YV. Our partners there were very happy or the purchasers of those interests were very happy to do it there as well, but it's not something that we've determined we need to do on a more widespread basis.

[Michael Markidis, analyst]

Okay. And last one for me. Just on -- I mean, I appreciate your comments on the scale of the resi business and the optionality that you have. I think earlier this year, in February, you had talked about getting to sort of $50 million to $60 million of residential NOI by the end of 2026. Is that sort of still the goal as we progress forward here? Or is there a shift in that in terms of maybe selling a little earlier now than maybe previously anticipated?

[Jonathan Gitlin, executive]

I mean we're going to get around that. I don't know that we'll quite get to that level, Mike, but we'll certainly get a significant amount of scale. So in terms of that, we'll have more refined guidance around exactly what that NOI target and where we'll get to in 2025. But at this point, I would say that the $50 million to $60 million number...

[Michael Markidis, analyst]

'26.

[Jonathan Gitlin, executive]

It was '26 based on a certain process unfolding. And if that process were to unfold as we had anticipated when I gave that information out in February, we would get there. But we'll see what happens to that portfolio between now and then. Because with sales of things like Strada, that obviously takes away from that NOI number. So there'll be some puts and takes in there.

[Dennis Blasutti, executive]

But I think if we did nothing and we just would have carried on, we would hit that number. I think what Jonathan referred to is potentially options to accelerate that by pulling in some of this might early.

[Michael Markidis, analyst]

Again, congrats on the strong retail leasing.

[Operator]

The next question is from Pammi Bir with RBC.

[Pammi Bir, analyst]

Maybe just coming back to the commentary around residential monetization. Does this imply that maybe as you sell sort of maybe one-off assets, I recognize you said that all options are on the table. Does that maybe imply that maybe a spinout is at the lower end of probabilities or IPO, one of the options that you had discussed before? And then just secondly, when would you think that you'll have an update or maybe a bit more of a fulsome update on this?

[Jonathan Gitlin, executive]

Like I said, we do have a lot of options. Spinout is one of those options in terms of ranking them. I'm not going to do that at this point. But given the scale and given the quality of that portfolio, that is one of those options. Again, just dispositions individually as an option, private REITs are an option, there's a whole myriad of options that we do have with respect to that or just keeping it within the portfolio where we to be sort of get recognition for it. But it's something that all of these things are -- we have the luxury of considering. And what was the second part of your question?

Update. Yes, I think as we get into 2025, there will be definitely some more clarity around exactly what we intend to do.

[Pammi Bir, analyst]

Okay. I wanted to maybe just touch on property controls because there's obviously been a lot of attention around that from the Competition Bureau. So as you think about maybe some potential changes that might be coming, what -- are there opportunities in the portfolio that maybe could be unlocked if some of this moves forward? I'm just curious how you expect to manage that with existing tenant relationships.

[Jonathan Gitlin, executive]

Yes. Look, our relationships with our tenants are a paramount importance to us, and we're obviously not going to alienate a metro by putting the Loblaws right next door. But I do think there are certain subtleties around that where we can allow certain types of retailers that were, I would say, almost like ancillary retailers that were cut off from operating or selling certain things to now sell those certain things that would make them stronger and don't really provide a practical impediment against those whose the restriction was in favor of. So John or Oliver, do you have any further color to that?

[John Ballantyne, executive]

No. I think it will open up opportunities, Pammi, more on a smaller nature, I would say. To the extent it's a grocery restriction or food restriction, it does give you the ability to do more ancillary uses -- ancillary food uses in those shopping centers who like a ballpark, like an M&M needs adding food to a pharmacy. Those are all additive to us. They're additive to the sites, and they'll help impact traffic, which will help all of the tenants. So yes, again, as Jonathan said, relationships are important to us. We're not going to do anything to solely those. But around the edges, it will definitely be additive.

[Pammi Bir, analyst]

Got it. That's helpful. Just with respect to the [ mezz ] loans, you put some more capital to work there. Can you maybe just talk about how you're approaching that going forward? And how much exposure you're comfortable with?

[Jonathan Gitlin, executive]

Yes. I think it was very active part of the business right now that's been quite productive for us. I mean, again, just reminding you that we only do it with properties that we are comfortable owning at the end of the day and with relatively conservative underwriting techniques so that we're really giving -- we're on the lower end of loan to value and a decent part of the capital stack. And in terms of the growth of that business, I would say right now, we're at a pretty steady state and it wouldn't get much bigger than what it is right now.

[Operator]

The next question is from Mario Saric with Scotiabank.

[Mario Saric, analyst]

Just coming back to RioCan Living, Jonathan, would you characterize your comments on the call today in terms of timing and degree of monetization as an internal shift in view in terms of timing and kind of pace of executing on it relative to 3 months ago or 6 months ago? And if so, what would you characterize the primary driver of the shift in thinking be?

[Jonathan Gitlin, executive]

I mean, I think this is really just the next chapter in the story that we've been telling for a while now, which even at our Investor Day in 2022, what we said was, at the time we were going to scale up the portfolio to give us options and we'll assess what the best options are once we get to or close to that scale. And that's where we are now, Mario. So I don't think it's a significant shift. I think it's just a further chapter in that same story. And in terms of the timing, we were going to get to that scale in 2026. We're starting to consider those options right now. And I think Strada just indicates the value involved in that portfolio, but also the desire for others to be involved in that type of asset, which is, again, a major market new low CapEx and no rent control. So there's a lot of attributes to that portfolio that make it highly desirable. And now we've just got to assess what the best path forward is based on all those attributes.

[Dennis Blasutti, executive]

Ultimately, the Strada process is, while it's indicative of value, it started with unsolicited offers. And so this is something that came to us and our partner was very attractive valuation, again, indicative of the value we have. But when we think about what we've been saying for a while and exit or looking at options for 2026, mean we're almost at 2025. So we have to start planning that now and think about it now. The Strada situation is just supportive of value and show that we've got something that we can really do something with here.

[Mario Saric, analyst]

Got it. Okay. And like the multifamily REITs are pretty much taking it on the chin these days because of the announced proposed changes in immigration policy at the federal level. What are your thoughts on the implications for RioCan Living's portfolio as a result of that announcement if it does indeed get enacted as suggested?

[Jonathan Gitlin, executive]

Yes. I think the -- I mean, the type of tenants that we are attracting, we're typically not going to be affected by those change in policies. I think it does cast a bit of a pall over the entire residential space or the multires space. But I think, again, the types of units that we were curating and the type of experience we were curating wasn't significantly geared towards the same people who would be impacted by that legislation.

[Mario Saric, analyst]

Okay. I did notice that the residential occupancy did come down a little bit post quarter to November 11, it was down 140 or 170 basis points, how broad-based was that? Or was it specific to a couple of assets?

[Jonathan Gitlin, executive]

It was fairly broad-based. I don't think there was any one municipality or property that weighed into that more than any other. And I think it was just a moment in time, a bit of a soft season for lease-up. But again, we're confident given the quality of those assets that these things ebb and flow, and this last quarter was a bit of an ebb, but we do, given the quality of those assets, believe that they will begin to flow upwards again. It really does differ. I mean it varies quite dramatically kind of month-to-month based on trends in various neighborhoods and based on if there's a competitive product that's opening up in that neighborhood. But we again feel that this will trend higher given the consistent lack of quality residential and mixed-use products in the neighborhoods where we own properties.

[Mario Saric, analyst]

Okay. One more quick one on RioCan Living and then one just on the other 95% of your portfolio. Dennis, you mentioned $1 billion kind of asset value for the residential portfolio. Can you share with us what the debt to gross book value for the residential portfolio is today?

[Dennis Blasutti, executive]

You broke up at the end there, Mario, can you say that -- the end part of that question?

[Mario Saric, analyst]

I'm just asking whether you can share with us what the debt to gross book value for RioCan Living is today?

[Dennis Blasutti, executive]

Okay. Yes, it's probably in the neighborhood of 50-50, I don't know if we've disclosed that specifically. But if you kind of walk through our typical kind of CMHC lending process over the last few years, take off some amortization, it's in that neighborhood. So we would typically do in the neighborhood of 60% loan-to-value at the outset of a loan and then we've got a few years of [indiscernible] in there. So in the neighborhood of 50-50.

[Mario Saric, analyst]

Got it. Okay. My last one, just on the 10 vacancies that you talked about as opposed to thinking about 2025, can you share with us what the impact has been on reported same-store NOI growth in year-to-date of 0.4% from those 10 vacancies?

[Jonathan Gitlin, executive]

I don't think I have a specific number around the exact impact of those 10 stores on our same-property NOI this year.

[Dennis Blasutti, executive]

I don't think we specifically disclosed that number, but it's a significant impact of the delta between, call it, the initial 3% guidance and our current guidance, if that's a way to kind of give you a sense.

[Operator]

The next question is from Matt Kornack with National Bank Financial.

[Matt Kornack, analyst]

Dennis, just quickly, you mentioned that Strada proved out value. Could you give us the cap rate that, that would have transacted at?

[Dennis Blasutti, executive]

No, we've not disclosed that cap rate.

[Matt Kornack, analyst]

Okay. Fair enough. And then maybe just going to the leasing spreads that you've achieved. In the past, you've also been layering on annual rent escalators on top of those, would you say that, that was consistent in this quarter as well? And kind of what type of escalators are you achieving?

[Jonathan Gitlin, executive]

Yes, that is consistent, and we've been striving to get between 2% and 3% annual rent escalators in each of our leases.

[Matt Kornack, analyst]

Okay. On the restructuring, I think you mentioned in the disclosed MD&A information that it's about $8 million of annual savings going forward. $4 million of which impacts G&A, will the remainder impact earnings? Or is it being capitalized and recovered by the tenants currently?

[Dennis Blasutti, executive]

Yes, so we have ongoing cash savings of about $8 million, $4 million of which so about half is what will hit the G&A line. So the rest of it was capitalized costs.

[Matt Kornack, analyst]

Okay. And then on straight-line rent, it's been elevated. I assume there's a component of that, that relates to the leasing that's been done on the 10 vacancies. Can you give us a sense as to how that kind of will translate over the next couple of quarters, but also maybe what additional delta there is above and beyond that straight-line rent number for what will come on from those previously vacant stores?

[Jonathan Gitlin, executive]

I don't know if we have that information on our fingertips. We'd have to...

[Dennis Blasutti, executive]

Yes, Matt, let us circle back to you on that question.

[Matt Kornack, analyst]

Okay. And then just a last one for me. On nonrecoverable operating costs, it was a little high this quarter. I know it kind of bobs around, but like should we expect that to come back down to kind of somewhere in the $7 million to $8 million range where it's been historically?

[Dennis Blasutti, executive]

Yes, that should normalize. And it kind of depends on in-place occupancy at a point in time and the timing of when those tenants come online. So even sometimes when we have in-place occupancy up at the end of the quarter, you kind of -- if some of those tenants kind of moved into the latter part of the quarter, that could have an impact. So that's the kind of aspect that would swing that around. But you should expect that to normalize out. It's not -- there's nothing abnormal.

[Operator]

The next question is from Gaurav Mathur with Green Street Advisors.

[Gaurav Mathur, analyst]

Just one quick question on dispositions ahead and then you provided quite a bit of color on the call. I was just wondering where development land feature factors into the decision-making process, and what's the appetite for development land currently as you're talking to potential buyers?

[Jonathan Gitlin, executive]

We've got over 14 million square feet of zoned land in our portfolio. And right now, I'd say the appetite is, I'd say, mediocre at best. And so for us, we are no urgency to deal with this land. And in fact, oftentimes, we're going back to various municipalities to get the zoning improved. And that will allow us when the market does turn in our favor to realize more or better value on that land. But right now, I would say, the market is not extremely robust for that. And that's, I mean, I think, a by-product of the fact that there's just not a lot of new builds starting.

[Operator]

The next question is from Dean Wilkinson with CIBC.

[Dean Wilkinson, analyst]

Just a few quick ones on the condos, which have been sort of beaten over the head a bit here. On the remaining $607 million of sales that you expect through 2026, how much spend do you have left on that?

[Jonathan Gitlin, executive]

Sorry, those sales have already taken place, just to be clear, the $607 million are already presold. And we're going to close on those. Yes. In terms of the...

[Dean Wilkinson, analyst]

So there's no more construction?

[Jonathan Gitlin, executive]

Well, there is still cost to complete because, again, like that $607 million, we've got, it's a combination of 11 YV, UC 2 and a couple of other projects like Verge, we're still in the midst of finalizing construction on some of those. In terms of our own interest in them because a lot of them are owned with partners or investors. I don't have that specific number, Dean, but I think we can give you some color off-line.

[Dennis Blasutti, executive]

It's in the neighborhood of $200 million. So we just said we're just going to get that breakout on Page 43 of our MD&A, so we can go through that with you off-line, but it's in the neighborhood of $200 million left to spend.

[Dean Wilkinson, analyst]

Okay. That's good. And can you remind what the development profit on that was expected to be over the course of the next 18 months?

[Jonathan Gitlin, executive]

I don't think we've disclosed that specifically to you.

[Dean Wilkinson, analyst]

Yes. No, I keep asking. So no. All right. And then just switching over to the reorg. Was that largely related to you taking a more conservative view around development? Or was this just sort of a larger headcount reduction in terms of the buildup and rightsizing it?

[Jonathan Gitlin, executive]

Unfortunately, you faded out for the middle part of that question, Dean. So I'm going to have to get you to ask it again.

[Dean Wilkinson, analyst]

Was the headcount reduction largely related to scaling back developments? Or was it across the board?

[Jonathan Gitlin, executive]

No, it was across the board, Dean, I mean it was -- and it wasn't just a headcount reduction. We really did restructure and reorganize a number of the groups within RioCan based on just attaining more efficiency and relying on technology. So it really was an across-the-board thing. But the development -- the trend in development certainly led to a restructuring of that group specifically. But I wouldn't say that, that was the only reason for this. There were many different efficiencies that were gained as a result of it.

[Operator]

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

[Jonathan Gitlin, executive]

All right. Well, thank you, everyone, for joining, and we will look forward to speaking to you all again soon. Bye-bye.

[Operator]

Thank you. This concludes today's call. Thank you all for joining. You may now disconnect.