RioCan Real Estate Investment Trust

TSX:REI.UN

Earnings Call Transcript 2017-Q4

[Operator]

Good morning. My name is Julie and I will be your conference operator today. At this time, I'd like to welcome everyone to the RioCan Real Estate Investment Trust Fourth Quarter 2017 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions] I would now like to turn the call over to Mr. Edward Sonshine. Mr. Sonshine, you may begin.

[Edward Sonshine, Chief Executive Officer]

Thank you very much, and welcome everybody to our year-end and fourth quarter conference call. Before launching into our presentations, I'd like to turn it over to Christian Green to warn you about what we're about to say.

[Christian Green]

Thank you Ed, and good morning everyone. Before we begin, I just like to draw your attention to the presentation materials that we'll refer to in today's call that were posted together with the MD&A and financials on RioCan's website yesterday and on the webcast as well. Before turning the call over to Qi, 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 conclusions in these forward-looking statements.Also in discussing our financial and operating performance and in responding to your questions, we will be referencing certain financial measures that are not generally accepted accounting principle measures, or 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 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 apply to making these forward-looking statements, together with details on the use of our non-GAAP financial measures, can be found in the financial statements for the period ended December 31, 2017 and management's discussion and analysis related thereto, as applicable with RioCan's current annual information form that are all available on our website and at www.sedar.com. Qi?

[Qi Tang, Senior VP & CFO]

Thanks, Christian, and good morning everyone. We are pleased to review RioCan's 2017 results that were released after market hours yesterday. The fourth quarter was another strong quarter for RioCan, ending a strong 2017 for the trust. In comparison to 2016, we achieved same property NOI growth of 2.1% for 2017, our highest annual same property NOI growth since 2010. Relative to Q4 2016, we achieved same property NOI growth of 2.9% in Q4 2017, our highest quarterly same property NOI growth since Q4 2010. In Q4 2017, FFO per unit grew from CAD 0.40 in Q4 2016 to CAD 0.44, a 9.3% increase. The trust's full year FFO per unit grew from CAD 1.68 in 2016 to CAD 1.79 in 2017, a 6.3% increase. This was our highest FFO per unit in the trust's history, excluding 2015 when we received the CAD 88.3 million Target settlement. Despite Sears closures in Q4 2017, which accounted for 0.8% of the trust's net leasable area as of September 30, 2017, our committed occupancy remained high at 96.6%, a 100 basis point increase from 2016. Our in-place occupancy grew 200 basis points to 95.6% over the year. As of December 31, 2017, 76.1% of our annualized rental revenue is generated from the 6 Canadian major markets, including 40.9% from the greater Toronto area. Our key operational performance metrics in 2017, which Rags will speak to shortly, were the strongest in the recent history.Looking at the financial results for the year, excluding fair value gains in the comparable period, net income from continuing operations is CAD 571.3 million for 2017 compared to CAD 500.2 million in 2016, representing an increase of CAD 71.2 million, or 14.2%. The increase of CAD 71.2 million is largely the net effect CAD 36.4 million higher income from property acquisitions, strong same property NOI growth, completed developments, and higher lease cancellation fees; CAD 31.9 million higher gains from the sale of available for sale marketable securities; CAD 8.1 million in interest savings; CAD 5.7 million in higher income from our equity accounted investments; partly offset by CAD 6.1 million lower transaction gains and CAD 4.6 million less dividend income from available for sale marketable securities, given such sales since Q3 2016.FFO, which reflects the combined results of both continuing and discontinued operations, increased by CAD 36.7 million, or 6.7%, to CAD 584.6 million in 2017. On a per unit basis, FFO increased by 6.3% to CAD 1.79 in 2017 over CAD 1.68 in 2016, as noted earlier. Our FFO growth benefitted from strong same property NOI growth, acquisitions net of dispositions, development completions, gains from the sale of available for sale marketable securities, lower interest costs, and preferred unit distributions and higher income from our equity accounted investments. As a result of the strong FFO growth, our FFO payout ratio improved from 83.6% in 2016 to 78.8% in 2017. For Q4 2017, our FFO per unit increased 9.3% from CAD 0.40 in Q4 2016 to CAD 0.44 this quarter, as noted earlier.Relative to Q3 2017, however, FFO per unit is lower by approximately CAD 0.02 in Q4 2017. This was primarily due to a one-time CAD 4.7 million accelerated depreciation of certain information management systems, CAD 2.6 million increase in other costs due to one-time fair value adjustment of a loan receivable, and CAD 3.1 million lower gains on the sale of available for sale marketable securities due to a lower number of units sold. As noted earlier, our same property NOI growth in 2017 was the highest since 2010, up 2.1% or CAD 13.6 million. Approximately CAD 8.8 million or 65% of the increase was related to higher occupancy, renewal rate growth, and contractual rent increases, and the remaining CAD 4.8 million was due to the timing of Target backfills and other expansion and redevelopment projects completed.General and administrative expenses for 2017 were essentially flat versus 2016, and we anticipate that G&A costs will remain flat in 2018 relative to 2017. Next we would like to provide an update on our progress in the disposition program. As you know, the goal of the program is to accelerate our focus in Canada's 6 major markets. As of today and in four months since the strategy's announcement in October 2017, the trust has either completed or entered into firm agreements to sell CAD 511.9 million of properties in secondary markets at a weighted average cap rate of 6.07%, representing approximately 25% of the announced CAD 2 billion disposition target. The trust currently also has conditional transactions under contract totaling CAD 58 million. If all these firm or conditional transactions close by the end of Q2 2018 as currently contemplated, the trust will have completed the sales of 19 properties for aggregated sales proceeds of CAD 569.9 million at a weighted average cap rate of 6.13%, representing approximately 28% of our disposition target. The aggregate proceeds from the sale of these properties are in line with our IFRS valuation. The net proceeds from the disposition have been and will be used to pay down debt, fund the unit repurchases through our normal course or NCIB program, and fund the trust's development program.As of December 31, 2017, we have repurchased and cancelled 3.9 million trust units at an average purchase price of CAD 25.3 per unit for a total cost of CAD 99.6 million. In addition, as announced, the trust suspended its DRIP program effective November 1, 2017 in order to maximize the effect of its NCIB program. Effective January 1, 2018, the trust has increased its annual distribution by CAD 0.03 to CAD 1.44 per unit, a 2.1% increase. As we discussed in the previous conference call, we characterize key value drivers of our business into two groups. One is from our income producing properties which deliver same property NOI growth. Our strategic capital recycling program and use of NCIB program are also key components of this group, for which I provided a brief update earlier. The other group of value drivers are those related to our development program. Our development program is aimed to unlock the intrinsic value of our existing properties through redevelopment and intensification and deliver strong NAV growth to our unit holders. In 2017, we obtained zoning approvals for 4.5 million square feet at our share, including the zoning approvals for The Well in Toronto, Westgate and Elmvale in Ottawa, Millwoods in Edmonton, and Southland in Calgary. As of December 31, 2017, the trust has identified approximately 26.3 million square feet of development pipeline at our share, of which 46.7% is already zoned and another 20% with zoning applications submitted. The current development pipeline is not a finite list, and we anticipate this pipeline will continue to grow. During 2017, RioCan continued to make good progress in advancing our development program and completed approximately 800,000 square feet of projects, with CAD 223.3 million cost. A notable example is the substantial completion of the Sage Hill project, a 380,000 square feet new format center co-owned with KingSett Capital located in a growing neighborhood of northwest Calgary, anchored by Walmart and Calgary's first Loblaw City Market banner. Our Alberta properties continue to do well, with the highest occupancy of 98.1% in the portfolio as of December 31, 2017. We are also making good progress on major project scheduled to be completed by the end of 2018 or early 2019, such as Yonge Eglinton Northeast Corner, both the condo and residential rental towers, and the mixed use King & Portland Center project that we co-own with Allied Properties REIT in Toronto's trendy King West neighborhood. All 134 condominium units of the project have been presold at prices well above initial expectation. A significant advantage of RioCan's development program is its ability to attract well established partners with successful track records and residential development expertise. Such strategic alliances reduce the trust's development risks and also crystallize the value of zone density and generate NAV growth for our unit holders. During 2017, RioCan entered into strategic alliances with a number of new partners through the sale of partial interest in several development projects. We partnered with Killam Apartment REIT at Gloucester in Ottawa, which is under construction for phase 1 of the 840 unit four apartment tower project. We have partnered with Concert Real Estate Corporation at our Sunnybrook Plaza in Toronto along the Eglinton Crosstown LRT to redevelop the property into a 16 story and 11 story mixed use project, and with Capital Developments and Metropia at our Yorkville development in the prestigious areas of Toronto, and with Boardwalk REIT to develop a discrete portion of our Brentwood Village property in Calgary into a 164 unit mixed use residential project with retail. We also strengthened and realigned a number of our existing strategic relationships with partner such as Woodbourne Canada Partners at 740 Dupont in Toronto. Woodbourne is also our 50% partner in our largest residential rental development, the 584 unit building 6 at The Well in downtown Toronto. RioCan and Allied Properties REIT acquired Whitecastle New Urban Fund 2's undivided 20% interest in the commercial component of The Well, and each now owns 50% of the commercial component of the project. We also expanded our relationship with Metropia through our investment in E2, a condominium project adjacent to our Yonge and Eglinton Northeast Corner development and closed the deal with Tribute Communities to develop 551 townhouses at our Windfield property in Oshawa, Ontario. We will continue to maintain a disciplined approach to capital allocation and fund our development pipeline from our capital recycling program, the continued sale of marketable securities, and various strategic development partnerships. Looking briefly now at our capital structure and key leverage metrics, our leverage ratio on a proportionate share basis at year-end was 41.4%, down slightly from last quarter. And we expect this ratio in 2018 will remain at the higher end of our 38% to 42% target range. The 1.4% increase over 2016 was primarily due to the payment of accrued U.S. taxes in Q1 2017 relating to the same of our U.S. portfolio in 2016 and redemption of Series C preferred units at the end of Q2 2017.In 2017, our debt to adjusted EBITDA improved from 8.1 times in 2016 to 7.57 times, below our target of 8 times. Furthermore, we continued to improve our debt metrics and have exceeded all our targeted debt metrics. We continue to access multiple sources of capital and maintain a strong liquidity position. We recently successfully completed a CAD 300 million 5.7 year senior unsecured debenture issue at a coupon and effective rate of 3.209%. We have also secured a total of CAD 350 million non-revolving unsecured credit facilities in Q4 2017 and post the year-end at attractive rates.Our pool of unencumbered assets has further grown to CAD 7.7 billion as of the end of 2017 and generates 56.7% of our annualized NOI, well above our target of 50%, representing a 7.2% increase from 2016. Our unencumbered assets over unencumbered debt was at 226% as of year-end, well above our 200% target. Overall we are very pleased with our results in 2017, with strong FFO growth, multiple quarters of solid and increasing same property NOI growth, committed occupancy and in-place occupancy approaching 97% and 96% respectively, significant progress with our strategic disposition program, and well phased progress with our development program and project completions. With that, I would like to turn the call over to Rags for an update on RioCan's operations.

[Raghunath Davloor, President & COO]

Thanks, Qi, and good morning everyone. We are pleased with our Q4 and year-to-date results. We achieved our operational and financial targets and at the same time made significant progress with regard to our strategy to focus on Canada's 6 major markets. As Qi highlighted, in Q4 2017 same property growth was 2.9%, and for the full year 2017 same property growth was 2.1%. These results reflect the fact that the overall health of our portfolio continues to improve. Our outlook for 2018 is positive, with expectations for same property growth for the full year 2018 in the range of 2% to 3%. With respect to the leasing environment, the recent Whistler ICSC Conference was very active. Both value priced and high-end retailers continue to seek new opportunities. Grocery and certain large format retailers are continuing with their expansion and repositioned strategies, and overall there is high demand for well-located space, particularly in the 6 major markets where RioCan has a strong and focused presence.RioCan's committed occupancy rate decreased from 96.8% in Q3 '17 to 96.6% in Q4 '17, and in-place occupancy decreased from 96% in Q3 '17 to 95.6% in Q4 '17. The decrease in occupancy was primarily the result of the vacancy of our remaining Sears locations totaling 348,000 square feet at RioCan's interest this quarter, which represented 0.8% of the portfolio by GLA. The net impact, however, to our occupancy metrics was lower due to strong leasing activity that included 6 deals totaling 111,000 square feet that were completed for space in the former Sears premises. To date, RioCan has either completed deals, conditional deals, or is in advanced lease negotiations for 84% of the GLA. These deals represent 133% of the net revenue loss of 100% of the former Sears locations at RioCan's proportionate ownership percentage. The leasing of former Sears units for the most part is much less complex than the leasing of former Target units. The individual boxes are easier and less expensive to demise and municipal approvals are easier to achieve, as we can largely avoid the time consuming process of obtaining site plan approval for most of the sites. As such, we anticipate that most of the replacement tenants will be in possession within the next 9 to 12 months, and will be operating and paying rent in late 2018 and the first half of 2019. Similar to the releasing of Target's units, we are confident the replacement units will be high quality, drive greater customer appeal, and increase our cash flow over what Sears was previously paying. Our quarterly leasing and renewal results were also good in Q4 '17. RioCan completed 527,000 square feet of new leasing in the fourth quarter at an average rent of CAD 19.16 per square foot. 165 renewals totaling 720,000 square feet of space was completed during the fourth quarter of '17 at an average rental rate increase of CAD 0.89 per square foot, or 4.5%. Our retention ratio for the quarter also remained strong at 87.5%. For the full year '17, RioCan completed 741 renewals, representing 4.5 million square feet of GLA at an average rental rate increase of CAD 1.04 per square foot, or 5.8%. 91.1% of the total expiring GLA was renewed.With regards to our major market expansion and redevelopment, urban intensification, and greenfield development programs, an additional 117,000 square feet of space of RioCan's interest was completed and become income producing in Q4. The majority of this space pertains to the last of the tenants taking occupancy in the former Target premises. That event is now behind us, with 94% of the former Target space and 132% of Target revenues now accounted for. We continue to unlock the value of our portfolio, and RioCan's urban intensification and residential programs continue to be very active. Recent highlights include 491 College in Toronto, where LCBO took possession of their premises in January 2018 and are scheduled to commence operations in June '18. Completion of the development of 491 College is important, as the relocation of LCBO from our 555 College Street site will allow us to commence a 56,000 square foot rental residential development at 555 College. At 740 Dupont Street in Toronto, RioCan entered another 50/50 joint venture with its partner Woodbourne to develop the property into a 10 story mixed use project with 210 rental units and 31,000 square feet of retail space. A deal was completed with Farm Boy in Q4 '17 to anchor the retail portion of the site. Demolition began in December '17.At Brentwood Village in Calgary, RioCan formed a 50/50 JV with Boardwalk to develop a 12 story 165 rental unit mixed use project with 10,000 square feet of retail space. Excavation began in January '18 and the site is projected to be substantially complete by Q4 '19. At Lincoln Fields in Ottawa, a lease buyout was completed with a dark Walmart in January 2018 that will allow RioCan to redevelop the site. A small grocery anchored retail site comprising approximately 70,000 square feet will be developed on a portion of the property in 2018 and '19, which will replace the existing 285,000 square foot enclosed shopping center. A rezoning submission is currently being prepared that would request permission to develop approximately 1 million square feet of residential space adjacent to the new LRT station that is scheduled to be completed in 2023. Construction is progressing well at a number of our projects, including Yonge Sheppard Centre, Bathurst College Centre, ePlace at Yonge and Eglinton, King Portland Center and The Well, all in Toronto; Frontier in Ottawa; and East Hills and 5th and Third East Village in Calgary.2018 will see the completion of 2 of our residential rental projects, being ePlace again in Eglinton and Toronto, and phase 1 of Frontier in Ottawa. We are forecasting that completions from our expansion and redevelopment, greenfield, and urban intensification development programs will deliver an additional 1.1 million square feet with 693,000 square feet at RioCan's interest in 2018.Over the next three years, we are expecting to complete approximately 5.4 million square feet at 100%, or 2.8 million square feet at RioCan's interest. These new development completions will make significant contributions to our growth going forward, as it represents approximately CAD 54 million of annualized NOI at RioCan's interest. Qi provided an update on our strategic disposition program, which is progressing very well. The rationale for our decision to focus exclusively on our major market assets is clear. In the 4 months since the strategy's announcement, the trust has either completed or entered into firm agreements to sell a total of CAD 512 million worth of properties in secondary markets that represents approximately 25% of the disposition target. We are pleased with the strong continued progress against the strategy, and the reasons for the decision to focus exclusively on the major market assets are clear. Our Q4 same property growth is 3% in primary markets versus 2.6% in the secondary markets. On a year-to-date basis, same property growth was 2.2% in primary markets versus 1.7% in the secondary markets. Occupancy in Q4 is 97.6% in the primary markets versus 94.3% in the secondary markets. And the average year-to-date renewal on rental rate increases was 6.5% in the primary markets versus 3.6% in secondary markets. We currently generate approximately 76% of our revenue from the 6 major markets and 40% of revenue coming from the GTA. These percentages will continue to grow as we complete our planned dispositions of secondary market assets. The retail is constantly changing. While tenants who fail to adapt will disappear, many others are thriving and eager to expand in the major markets to meet demands of population growth. Our ownership of 192 properties that sit on nearly 3,400 acres of land in Canada's six major markets is the foundation that will allow us to produce consistent long term growth. Our ability to create value through redevelopment and intensification of our many properties located on current and future transit lines that will serve the growing populations in the 6 major markets will further improve results in the many decades. In conclusion, we are very pleased with our Q4 and full year results. They are our best in many years. Same property NOI is very strong, and we are confident that it'll continue to be strong throughout 2018 and future years. These are the operational highlights. I will now turn the call over to Ed.

[Edward Sonshine, Chief Executive Officer]

Thank you, Rags, and thank you, Qi for those great presentations of what is clearly a great quarter and a great year. It's appropriate to have this call on Valentine's Day, and happy Valentine's to everybody. It's appropriate because I'm deeply in love not only with my wife, children, and grandchildren, but with the balance sheet, the solidity and growth potential in our portfolio, and our team's proven success in surfacing that potential. In turbulent times, and the transformation in the retail landscape that has been underway for years together with the more recent financial market volatility certainly has put us into those times, what becomes important is financial strength, experience and the ability to execute. So I'll focus today on each of those critical maters. First, the financial strength of RioCan continues to be the best it's ever been in our almost 25 year history. This is being proven constantly in both the secured and unsecured debt markets. Back when REITs first came into existence, leverage limits and calculations were simply total debt over the historical cost of the entities expressed -- entity's portfolio expressed as a percentage. Comparison among REITs was easy as a result. With the arrival of IFRS at the beginning of this decade, matters became a little more complex as each entity valued its own portfolio in arriving at its leverage percentage. This, of course, brought some elements of discretion and differences into the equation.While leverage percentages are still important for certain requirements such as debt covenants, I submit that far more attention should be paid to metrics such as debt to EBITDA and the various coverage ratios to ascertain -- in order to ascertain the true financial strength of a balance sheet. When put together with our size, I am proud to compare our financial strength and depth, quite frankly, to any of our peers. The experience and management depth at RioCan is without parallel. Of course, that's easy to say. But every few entities in our business have handled the ups and downs that the world comes up with periodically better than RioCan has over the last 24 years. Without going back into history, I'll just point at the timing of our entry into the United States market in 2009/'10 and the exit in 2015/'16 and the bringing home of about CAD 1 billion, which actually put us into the great financial strength position we're now in. That wealth of experience leads directly to our ability to execute. While many entities talk about potential and strategies, what separates the winners from the others is execution of that strategy. Let me give you a few examples of RioCan's execution of strategies.When we announced our decision late last fall to dramatically accelerate our major market strategy by disposing of most of our secondary market assets, the reaction was not surprising. And I'll quote and probably paraphrase the general reaction. Great strategy, guys, but it will be difficult to achieve in the size and time period to which you aspire. And yet only several months after announcement of that strategy, we have closed or have under firm contract, as both Qi and Rags have mentioned, in excess of CAD 500 million of sales. And we have further dispositions of about CAD 200 million under conditional agreements. All of these transactions have been off-market, and we have sourced the purchasers directly. In addition, we're either in the market or have selected brokers with underwriting having commenced on assets with a value in excess of CAD 1 billion. While certainly not every transaction will be completed or even entered into in some cases, there is no doubt in my mind that we will easily meet our target of CAD 2 billion in dispositions before the end of 2019, and that we will be doing so generally in line with our IFRS values. Only through much experience and incredible hard work is this being achieved.And some further examples of actually executing, Qi talked a little bit about Sage Hill. But I think it's worth noting that, after we acquired this property in 2013 with our partner KingSett, we immediately ran into probably one of the most difficult few years economically in Calgary that they've experienced in over a generation, and this against the backdrop of a quickly changing retail landscape. And yet, even allowing for the extra time it took due to these factors, let's look at what we achieved. This 384,000 square foot shopping center is 97% leased and is anchored by 3 great retailers called Walmart, the first Loblaw City Market in Calgary, and of course that western staple, London Drugs. They have long term leases. And with the completion of the last 8,500 square foot building later this year, the return on the overall investment will be in excess of 7.5%. And we recently took down a 7 year mortgage on this project at 3.43%, which sets us up for solid and increasing growth from this asset over the future many years. Again, King & Portland was mentioned, and the numbers are indeed impressive, but I think the backdrop and the story are equally impressive. With our partner Allied, we acquired together a portion of this site. And then we have purchased a half interest in the current historical Scholastic building right at the corner of King & Portland from Allied so that our interests would be completely aligned. The historical building is just in excess of 50,000 square feet of space and is 100% leased. The new 261,000 square foot office building is also 100% leased to only 2 tenants, both of which are really marvelous companies, Shopify, which takes the bulk of it, and Indigo for their new head office. Total project cost -- and lastly, sorry, the last component is the 134 unit residential -- I hesitate to call it a tower because it's not really high rise that is sort of at the back of the project fronting more on Adelaide but is connected internally right through to King Street -- we decided to make that project a condominium after some of the legislative changes relating to rental and just because so many people, quite frankly, were approaching us to buy units in it that we said okay, let's satisfy that demand. The units at 100% sold and will yield a gross proceeds in excess of CAD 95 million. If one does the usual businessman's equation of taking that yield off the cost of the overall project -- and the cost of this project will be close to CAD 225 million, and 90% of the construction contracts have been awarded or completed so we're pretty comfortable with that number. But the yield will be about 7.5%. However, if one does it what I'll call more correctly from an accounting perspective and just treats the profit and the return on the residential separately, the yield strictly on the commercial component is in excess of 6.35%. I'll just leave it to you to think about the creation of value that's happened at one of the best corners in Downtown West through this one project alone. I expect to be able to share many more results like this with you in the upcoming years. RioCan, in addition to the strengths noted earlier, has the ability to attract and retain relationships with partners who are amongst the best in their field in Canada, many of which Qi mentioned in her presentation. With their help, with our solid balance sheet and the incredible skills, experience, and hard work of our amazing management team, I look forward with full confidence and optimism in, in fact, just over a year from now telling you about our first receipt of residential rental income, which, again, lots of people are talking about the possibilities. We started doing it 3 or 4 years ago with the result that, by next year, we'll actually be collecting rents from completed brand new transit oriented rental residential properties. In the meantime, we will continue to execute all of our announced strategies, including our significant NCIB program, which quite frankly right now may be the best use of our capital, considering the price at which our units are trading. So thank you very much for dialing in. Thank you for listening to all of us. And at this point I'll turn it back to Julie for any questions that there might be.

[Operator]

[Operator instructions] Your first question comes from Sam Damiani with TD Securities.

[Sam Damiani, Analyst]

Thank you and good morning everyone.

[Edward Sonshine, Chief Executive Officer]

Morning.

[Sam Damiani, Analyst]

First question I just wanted to cover off was the outlook for 2018 operationally. You've mentioned a 2% to 3% same property NOI growth. Wonder if you could break out the portion of that that's being contributed from the Target lease up and other expansions and redevelopment. And also --.

[Raghunath Davloor, President & COO]

Well, the Target --.

[Sam Damiani, Analyst]

Go ahead.

[Raghunath Davloor, President & COO]

Sure. Go ahead. Sorry.

[Sam Damiani, Analyst]

And also just on the lease roll, I see it's about 8% of leases rolling this year are growing to about 13% in 2019. I wonder if you could just speak to any anomalies in either of those years.

[Raghunath Davloor, President & COO]

No, I can't speak to the '19 anomaly, to be honest. We are focused more on '18. As far as the same property growth, the Target is diminishing as far as the impact and just the growth in the portfolio.The 2% to 3%, I would tell you that the major markets would be at the high end of that range and the secondary markets would sort of be at the low end of the range. And that's where we see the growth coming from. Target is going to contribute close to CAD 2 million in annualized NOI, and the balance will come from rental step ups and increases in rental rates on renewals.

[Sam Damiani, Analyst]

So you're saying basically a very small amount of that growth is coming from Target.

[Raghunath Davloor, President & COO]

That's correct, yes.

[Sam Damiani, Analyst]

Expansion and development, okay. And just switching over to the disposition program, Ed, you did touch on this a bit. But just given the spike in interest rates we've seen and the landscape for retail properties on the market, investment properties, are you anticipating any potential backing up in cap rates for shopping centers today versus maybe a couple months ago?

[Edward Sonshine, Chief Executive Officer]

You know what? Over the last couple of months we haven't really seen any significant back up. I think -- happily, I think what people don't realize is that we actually started our secondary market disposition program a decade ago, in fact a little over a decade ago. So when you look at our secondary market program, yes, there's still some very tiny little towns like Levis, Quebec, but they're a tiny component of what we're actually selling.You have to look more at cities like London, like Quebec City, Altona in Winnipeg, and some of the medium sized towns in British Columbia and Ontario, Sudbury, for example. And those markets are very attractive markets to people who are focused on reliability rather than growth. We're focused on growth and eventual redevelopment. So might there be some change in cap rates as we look through 2018? I guess it depends how far interest rates go up. So far we haven't seen much, in fact haven't seen any of consequence. But obviously if interest rates move up another 100 to 200 basis points for here, I think it would be silly to think that there wouldn't be any impact on rates. But again, when you can buy stuff in our secondary markets for 6-plus cap rates and finance them at sub-4, that yields to private buyers. And except for CT REIT, virtually all of our transactions so far have really been with nonpublic buyers, and I expect that to continue. So, they're looking at leveraged returns. And those leveraged returns, even at today's interest rates, are awfully good.

[Sam Damiani, Analyst]

Okay, thank you. And just finally, I wanted to touch on The Well, if you could provide any updated sort of target milestones you expect either in the first half or the latter half of this year.

[Edward Sonshine, Chief Executive Officer]

Sure.

[Sam Damiani, Analyst]

Any new information there you can provide?

[Edward Sonshine, Chief Executive Officer]

Yes. Well, obviously we've physically started excavation. By this time -- actually, by later this year this will be by far the largest hole in Toronto. We're going down I think about 6 or 7 levels. It's almost 8 acres, so that's a lot of excavation. And then Enwave will go in and put these 2 giant tanks into the ground, and then we start -- simultaneously we start building up.But the second -- so from a milestone perspective, physically we've started. We will actually start coming out of the ground at the beginning of '19, if I'm not mistaken, so about a year from now, which is pretty good considering the amount of forming and concrete that's got to go in there. We've completed the zoning process. We did have an OMB appeal that we had to deal with last year, but we successfully dealt with it. And I think equally exciting, we received permissions to effectively have The Well area as a sign district, giving us third party digital signage rights. I think there's 3 signs approved on the exterior of the building and multiple signs internal. And internal means a lot of people walking through there, because we expect the pedestrian traffic through this project to be extremely significant.And what I expect -- so that's the sort of regulatory and physical update. From a leasing perspective, we really -- now that we've got those things behind us and we know what we're building and when we're building it, this year will be a pretty important year. We didn't want to lease too soon, quite frankly, until we had our costs nailed down. We are pretty close to having our costs nailed down because, as I'm sure everybody listening has known, there has been a significant increase in construction costs over the last 2 years simply because of the amount of demand for labor and materials. And I think you're seeing one outfall of that from some of the cancellations that I think some of the media have been reporting on, of condominium projects where things that were sold 3 years ago can now no longer be built economically at the sales prices. But now that we're getting pretty close to having a lot of this pricing nailed down, we're starting to be comfortable in going forward with the leasing. The demand is starting to build. And I would certainly hope and expect that a year from now we will be able to give you a pretty fulsome report on where we are in our retail program and, of course, in the office program that's being carried forward by our friends and partners at Allied REIT.That's a much longer answer than you expected probably.

[Sam Damiani, Analyst]

That's good and very informative. Thanks very much.

[Edward Sonshine, Chief Executive Officer]

Thank you.

[Operator]

Your next question comes from Pammi Bir with Scotia Capital.

[Pammi Bir, Analyst]

Thanks. Good morning. Just with respect to what you're seeing on the ground with tenants, the tone seems positive and certainly reflected in your same property NOI guidance for the year. So do you feel that we've passed maybe the worst in fundamentals, or is there still potentially more shakeout to come among your tenants as retailers continue to optimize their footprints?

[Raghunath Davloor, President & COO]

Well, there is still a lot of optimization going on. I mean, we're seeing certain segments sort of outperform, primarily discount, restaurants, fitness. So there's certain areas that are expanding.The department store dynamic is mostly behind us, I think, and fashion is where you're still continuing to see some pressure. But overall, we are seeing stability in the portfolio. And the Calgary dynamic and Alberta, there certainly seemed to be a more positive tone when we were at ICSC in Whistler. So overall, the tone does seem better. I think people aren't as freaked out about e-commerce as they were a couple of years ago, and they recognize that it's a balanced strategy. It's really a combination of e-commerce and bricks and sticks is what's going to win the day. And people are starting to get their head around that.

[Edward Sonshine, Chief Executive Officer]

If I can just add to that, Pammi, what we've seen over the last two years is a shakeup but also a transformation. I think the starkest evidence of that is how quickly Rags and his team have been able to address the Sears fallout.I mean, there you had an old line retailer that, after limping along for many years, finally gave up the ghost last quarter. And within a very short time period, we have entered into agreements or about to finalize agreements for the vast majority of that space at far better rents than we were receiving. So there's takers. Is everybody repositioning themselves and considering what their optimum sizes are? Absolutely. And is there a major transformation going on as to the types of tenants that we are getting our revenue from? For sure. It's been going on for 10 years and it's continuing. But generally, the other out fall of that is I talked about Sage Hill and Rags mentioned East Hills. There are no new real shopping centers except for the odd fill in being built. So as the population grows, the supply of retail space is actually diminishing. And it's diminishing not just because of lack of significant new construction but as we go through and do intensification programs. I mean, a small little example is Sunnybrook that we hope to be under construction within a year or so. You had 50,000 feet, and when we -- it's going to be all out of commission starting early next year. And when it's all completed a couple years after that, there'll be 25,000 feet. And you're seeing that repeated all over the place in the major markets. So that -- quite frankly, retail space in the major markets, we're quite comfortable over the next 5 to 10 years, notwithstanding whatever is going on in the makeup of the tenants in that space, will become more and more valuable.

[Pammi Bir, Analyst]

That's great color. Thank you. Just maybe one last one. On the NCIB, it seems to have paused. Was that more of a function as to the timing of dispositions or is there something more behind that?

[Edward Sonshine, Chief Executive Officer]

It's very simple. We were in a blackout and we had not gotten to the point of setting up automatic purchases. So that blackout lifts in a couple of days as per securities law. So we have been constrained in going forward with that. So there's the explanation for that.

[Pammi Bir, Analyst]

Great. Thank you.

[Edward Sonshine, Chief Executive Officer]

Thank you.

[Operator]

[Operator instructions] Your next question comes from Michael Smith with RBC Capital Markets.

[Michael Smith, Analyst]

Thank you and good morning. Ed, I thought I heard you say, and I don't know if I misheard this, that you have CAD 200 million under conditional contract of properties that you plan on selling. Is that --?

[Edward Sonshine, Chief Executive Officer]

No, no, you didn't misheard. We have about CAD 500 million either closed or firm. We have another CAD 200 million under conditional agreements. Some of that may be actual properties -- agreements of purchase. The sale's signed but still in conditional period.Some of them are LOIs that are in the process of being converted to firm -- or conditional agreements. And those will all either go firm or not, because you never know about anything in this world, probably over the next I would guess 60 to 75 days. So yes, that would be another couple of hundred million on top of the CAD 511 million that Rags and Qi were mentioning.

[Michael Smith, Analyst]

Okay. Thank you. And are you still thinking two years, or are you thinking maybe to accelerate it?

[Edward Sonshine, Chief Executive Officer]

You know what? A lot of that will depend on the markets. We have a measured plan because we know that a lot of you, your analyst group, like to see growth in FFO notwithstanding that we're in the middle of repositioning a CAD 13 billion or CAD 14 billion portfolio. And we will deliver it.So that is one aspect of how we measure it. There are other implications to our tax situation of our unit holders that we have to keep in mind. We have a target, quite frankly, internally that by the end of this year we don't want to have sold much more than CAD 1.3 billion or so worth of assets. We're quite comfortable we'll achieve that and then over the course of '19, quite frankly, sell the remainder. And we don't want to go faster than that.

[Michael Smith, Analyst]

Okay. All right, thank you. And just switching gears to King & Portland, so a 6.35% development yield on the rental portion, all the condos are sold. They sold out extremely fast, I guess over a weekend or just a few hours, I guess.

[Edward Sonshine, Chief Executive Officer]

Yes, there was a few sort of -- the larger units always take an extra few days in a location like this. But within a couple of weeks after putting them up for sale, they were 100% sold.

[Michael Smith, Analyst]

So you have most of your costs or your contracts I guess let out. So what type of profit margin would you -- on the condos if you just looked at that? If it costs you X to build versus what you're selling them for, what percentage would that be?

[Edward Sonshine, Chief Executive Officer]

It gets a little complicated because of sort of shared services between the commercial and the residential, and the land, of course. So allocation is a bit of an art, but I would say that our profits will be well over 20% of cost.

[Michael Smith, Analyst]

Great. And lastly, can you tell us what you're thinking about Oakville Place now that you've got a little bit more leeway to rethink that property?

[Edward Sonshine, Chief Executive Officer]

Well, it's interesting because we actually were in the -- and I'm not going to give you tenants' names, but we're in the fortunate position of having several different alternatives. We have one tenant interested in the whole thing. We don't think that's -- that may not necessarily be the best for the overall Oakville Place story and the prosperity of the other tenants.And then the second alternative is to sort of break it up, not dramatically but into probably 4 different tenancies. And then the third one is to break it up into more than 4. I suspect we're going to land at about 4, possibly 5 tenants. And I think that will all come to fruition over the course of the next couple of months.

[Michael Smith, Analyst]

And what about development? The development restrictions have removed any thoughts on that, or is that too early?

[Edward Sonshine, Chief Executive Officer]

Yes. No, that's actually very exciting because the key, besides the fact we're going to make the shopping center a lot better from a tenancy point of view, is Sears had control rights, as we've disclosed previously, on the parking lot. We're, of course, very -- we're located right literally on the highway, the Gardiner /Queen E, and there is a GO Station in very close proximity.So we are working with the region and the city of Oakville. We have opened those negotiations -- discussions as of the end of last year. It's a process. All these things are. I wouldn't expect to see any announcements out of that in 2018. But there's no doubt that sometime in the next few years you will see sprouting there a number of towers to alleviate some of the housing stresses. Oakville is a very attractive place to live, and it has very little multiunit high rise development. And this is an ideal location for it. We just have to convince the city and the region of that. But I suspect we'll be able to, and I think it's going to be great. It's going to be a very, very lucrative property.

[Michael Smith, Analyst]

Great. Thank you.

[Operator]

Your next question comes from Matt Kornack with National Bank.

[Matt Kornack, Analyst]

Good morning.

[Edward Sonshine, Chief Executive Officer]

Good morning, sir.

[Matt Kornack, Analyst]

Just quickly on Sears, you guys have been quite successful with your portfolio. I'm wondering if you could provide some more general commentary, I think you has some smaller boxes with regards to Sears, but how the larger boxes are filling up and whether there's sort of an urban secondary market split in terms of the success in leasing that space.

[Raghunath Davloor, President & COO]

Yes. So, we only had 2 full line Sears, one being Oakville and the other one being Timmins. So, as Ed mentioned, Oakville will be split probably into 4. Timmins is a work in progress. We think that's going to be 3. That's been a tougher challenge given that it is a secondary market.And there is quite a difference between the secondary market and the primary market. The primary market Sears boxes are basically dealt with. In most of them, you're dealing with 1 tenant and in some cases 2 tenants where you just split the box in two. You're dealing with fairly traditional big box tenants, buybuy BABY, Ashley, Structube, Crunch Fitness, Winners, HomeSense, all those guys, the typical people that you would see.

[Matt Kornack, Analyst]

Fair enough. So it sounds like in terms of potential pressures on the general retail space, it will be more of a secondary market issue. Primary markets continue to be fairly tight. And occupancy, in your view, probably won't be hit materially at most of your properties.

[Edward Sonshine, Chief Executive Officer]

Without a doubt.

[Raghunath Davloor, President & COO]

Yes.

[Matt Kornack, Analyst]

Okay, fair enough. And on the CAD 200 million of divestitures that you have under contract post quarter, is the pricing on those consistent with the pricing on the CAD 500 million that you've disclosed?

[Edward Sonshine, Chief Executive Officer]

I'm sorry?

[Matt Kornack, Analyst]

Just from a cap rate standpoint, would the cap rate be similar on that CAD 200 million versus the CAD 500 million?

[Edward Sonshine, Chief Executive Officer]

You know what? I wouldn't want to make that generalization, other than to say they're generally in line with our IFRS cap rates, because obviously cap rates differ materially depending on the quality and the location of the property. So I don't think I could generalize that way. But we're satisfied with where we are.

[Matt Kornack, Analyst]

Fair enough. With regards to your debt strategy, I agree with you. You probably have one of the best balance sheets when you look at leverage metrics across the retail space. You do, however, have a little bit shorter term to maturity on your debt. And in the context of rising interest rates, wondering if you'll continue to move on that front on the shorter end of the curve or if you'd still be looking for push out your debt maturity profile.

[Edward Sonshine, Chief Executive Officer]

Our numbers on that are probably a little bit disjointed, because we do sit with a CAD 1 billion operating line which is due in a few years. But I have no doubt that's easily expanded or extended.But when it comes to our fixed rate financing and the percentage of non-fixed rate, we intend to keep moving forward on expanding our fixed rate at this point and diminishing our float rate, i.e., short term. That started like in Sage Hill, where we paid off a short term loan which, at 100%, was about CAD 78 million with a due date like this year, with a new mortgage that takes it out 7 years. And you'll see us continue to do that kind of program, whether it's that kind of mortgage or the unsecured that we did for just about 5.6 years I think the other week. So we're actually focused on that metric, and we'd like to expand our average maturity.

[Matt Kornack, Analyst]

Okay. No, makes sense. Final question for me, condos demand seem somewhat insatiable in Toronto, which I think --.

[Edward Sonshine, Chief Executive Officer]

It does.

[Matt Kornack, Analyst]

Is a little bit counterintuitive to what I think the fair housing plan I thought was going to result in. What is your view sort of on the condo market going forward? Understanding that you don't have an entire crystal ball, but is that demand sort of there for new projects? You saw it at King Portland, but is it something you're seeing in most submarkets or is it submarket specific?

[Edward Sonshine, Chief Executive Officer]

I mean, it's largely -- we see largely Toronto and Vancouver, and even submarkets within that. Anything in the city property -- the demand seen within the city proper seems to be insatiable. But quite frankly, we're really focused on building our rental portfolio. We're trying hard to resist the attractions of the kind of prices that are being thrown around.To the extent that we participate in the condo market in the future, it'll be very sort of unique, and we may by selling some air rights now and again rather than building it ourselves. But we have great ambitions for the rental market, and we're going to continue to focus on it.I think everybody, including most of the developers, is amazed by the resilience of the condo market, notwithstanding everything that government tries to do. But when government tries to do something there are always unintended consequences, and I think we're seeing that play out.

[Matt Kornack, Analyst]

Yes. No, it makes sense. Appreciate the color, and congrats on a solid quarter.

[Edward Sonshine, Chief Executive Officer]

Thank you.

[Operator]

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

[Edward Sonshine, Chief Executive Officer]

Again, thank you. I know there are other conference calls going on today, so for those of you who are still listening to my voice, thank you for staying with us. And we look forward to talking to you again in a few months. Bye-bye.

[Operator]

This concludes today's conference call and you may now disconnect.