RioCan Real Estate Investment Trust

TSX:REI.UN

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is Lindsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the RioCan Real Estate Investment Trust Fourth Quarter 2018 Conference Call. [Operator Instructions] Thank you. Ms. Jennifer Suess, you may begin your conference.

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

Thank you, Lindsey, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel and Corporate Secretary for RioCan. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website earlier this morning. Before turning the call over to Qi, 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 December 31, 2018, and management's discussion and analysis related thereto as applicable, together with RioCan's most recent annual information form that are all available on our website and at www.sedar.com. Thank you. I am going to turn it over now to Qi Tang, our Chief Financial Officer.

[Qi Tang, Senior VP & CFO]

Thank you, Jen, and good morning, everyone. 2018 was another great year for RioCan. FFO per unit grew by $0.06 or 3.3% from 2017 to 2018 despite completing nearly $1 billion of secondary market asset dispositions and incurring $7.5 million of severance costs during the year. Severance costs were incurred as we further streamlined our operational structure to maximize operational efficiency and to focus on major markets, which will further drive same property NOI and FFO growth. Since September 30, 2017, there has been a net reduction of 69 employees. Including the severance costs, FFO per unit growth would have been 4.7% for 2018.It is important to highlight that the trust's FFO per unit has increased by nearly 10% since 2016, despite the sale of our $2 billion of U.S. assets in May 2016, the substantial secondary market asset dispositions completed since October 2017, and the severance costs incurred in 2018. As a result of this strong FFO per unit growth, our FFO payout ratio has improved from 83.6% in 2016 to 78.8% in 2017 and further improved to 77.9% in 2018. A significant factor driving our FFO per unit growth was our increasingly strong same property NOI growth. Our major markets' assets same property NOI grew by 2.2% in 2017, and then further grew by 2.6% in 2018. Our overall portfolio same property NOI grew by 2.1% in 2017 and further grew by 2.2% in 2018. Jonathan will speak of how we drive operational growth. Our committed occupancy increased by 50 basis points from 2017 to 97.1%, with retail committed occupancy increasing 60 basis points to 97.2% over the same period. Our major markets committed occupancy increased by 10 basis points to 97.7% in 2018.As of yesterday, February 11, 2019, we have completed or entered into firm, conditional or letter of intent deals to sell approximately $1.5 billion of our secondary market assets. This represents approximately 73% of our disposition target by sales proceeds. The weighted average capitalization REIT for these $1.5 billion of disposition is 6.68% based on in-place NOI, materially in line with our IFRS value of which $1.3 billion of disposition has closed as of yesterday. We have used a portion of the disposition proceeds to purchase and cancel almost 23 million RioCan units, representing about 7% of the then-outstanding units at the start of the disposition program, at a weighted average unit price of $24.51 for a total cost of $561.2 million. The balance of the proceeds was used to repeat that and fund our development program. As a result of the substantial secondary market asset dispositions achieved and our development completions, we have increased our major market's presence by 9.3% to 85.4% as of the 2018 year-end, and we increased our greater Toronto area presence by 5.9% to almost 47% as at the year-end, both on annualized revenue basis. In RioCan's 25-year history, the quality of our portfolio has never been better. One indicator is our portfolio's $19.07 average net rent per occupied square foot as of the year-end, which increased by 7.4% from the 2017 year-end. Our compound annual growth rate, or CAGR, on average net rent per occupied square foot since 2010 is an impressive 3.2%. The average net rent for our active urban intensification project is $32.26 per square foot, based on approximately 811,000 square feet of committed or in-place leases as of yesterday. Reflecting the quality of the trust's major market focused transit-oriented developments, which will further drive the portfolio's average net rent per occupied square foot over time.Our actual maintenance capital expenditures in 2018 were $45.6 million, which were closely in line with our $45 million normalized capital expenditure guidance for the year. Our normalized maintenance capital expenditures are expected to decrease to $40 million in 2019. Jonathan will speak of the reasons for this decrease. Next, I will provide an update on our development program, which represent a great source of net asset value, cash flow and FFO growth and provides diversification to our major markets' focused retail portfolio.We continue to make significant progress in our development program in 2018, including the launch of our residential program, RioCan Living, additional loaning application, continued progress on de-leasing for development and most importantly, 799,000 square feet of development completions.As of the year-end, our total development cost balance was $1.2 billion, representing approximately 8.5% of our total consolidated gross book value of assets as of the year-end, a rather limited developments exposure. We are pleased with the development yield and value creation we're generating from 5 of our large development projects that are complete or near completion. These are ePlace at Yonge Eglinton Northeast Corner, King Portland Centre and Bathurst College Centre in Toronto; Frontier in Ottawa; and Sage Hill in Calgary.These projects are highlighted as they're complete or near completion and in our review are representative of the transit-oriented mixed-use developments we focus on, and reflect our ability to complete projects successfully regardless of market cycle, such as our Sage Hill project, which was completed as Alberta continues to face challenges in its economy with historically low oil prices.For these 5 projects, we expect to achieve estimated blended development yield of about 5.7%, based on estimated stabilized NOI, and approximately $231 million of estimated incremental value creation, including $26.5 million of gains on the sale of condo units and 2 of the projects. As of the year-end approximately $165.4 million incremental valuation has been recognized through property fair value, applicable interim and fee income, and applicable gains on sale of condo units. These yield and value-creation estimates take into account the trust's purchase of our partner's non-managing 50% interest in Sage Hill subsequent to the year-end and the expected purchase of the remaining 50% interest in the residential rental and retail portion of ePlace in 2019 based on agreements in place.Jonathan will provide updates on our residential rental leasing to date, which is progressing well. One financial impact, I want to note here, is a potential lease-up loss, as a newly completed project is leased up over a period of time regardless of how successful a project may be upon stabilization. Another financial impact, I want to note here, is a loss of capitalized interest as a project is complete, which has a potential negative effect on FFO and equals a project cost multiplied by the trust's average annual cost of debt, adjusted for timing of the project's completion in a year. Of course, this loss of capitalized interest upon project completion could be offset to an extent by the capitalized interest on continued development costs incurred on other or new development projects, but there may be still some timing or magnitude difference, which could lead to a negative impact on FFO.Over the next 2 years, our annual development costs are estimated to be in the $400 million to $500 million range, as we progress on our large projects, such as The Well. Despite a 15% limit permitted under our revolver and credit facility agreements, we expect to keep the total of our property under development and residential inventory as a percentage of total consolidated gross book value of assets at no more than 10%.We remain committed to a strong balance sheet and to self-funding our development programs through continuous assets recycling, condo or townhouse sales, air right sales, the sale of remaining marketable securities, strategic development partnerships and excess operating cash flows after unitholder distributions and maintenance capital expenditures.Next, I will provide a quick overview of our credit fundamentals. RioCan continue to focus on the debt-to-adjusted-EBITDA metrics, which was at 7.88x on a proportionate share basis as of this year-end, remaining below our target of 8x, and remaining one of the lowest among our peers in Canada. This was accomplished despite the substantial asset sales, large severance costs and a development cost balance of $1.2 billion. Including the $1.2 billion development cost balance, our debt-to-adjusted-EBITDA would have been closer to 6x.Our leverage as of the year-end was largely unchanged from the last quarter at 42.1%, in line with our target range. As of the year-end, RioCan's debt composition was roughly 58% unsecured and 42% secured, which benefits our overall cost of capital and provides ample flexibility should general liquidity conditions change. Our pool of unencumbered assets has increased to just under $8 billion and generates 59.1% of our annualized NOI, well above our target of 50%. It is my pleasure to report that we have met or exceeded all of our internal debt metrics targets. Subsequent to the year-end, we entered into a couple of interest rate swaps to lock in interest rates for $275 million of drawn credit facilities and further decrease our floating interest rate exposure to under 12% of total debt on a proportionate share basis, holding all else confident as of year-end. We have also completed a new 5-year $350 million non-revolving, unsecured credit facility with 3 financial institutions, which through our interest rate swap bears an annual fixed interest rate of 3.39%.Given the recent volatility in the debt markets, we believe this is prudent capital management and demonstrates our ability to access multiple credit sources at one of the lowest costs in the industry. Overall, we are pleased with our operational and financial results for 2018, and we look forward to another great year in 2019. With that, I'd like to turn the call over to Jonathan for an update on our operation.

[Jonathan Gitlin, Chief Operating Officer]

Thanks so much, Qi, and I hope everyone is having a good morning in spite of this nasty weather here in Toronto. Our results are strong and well-documented in our various disclosures. Consequently, I will highlight only a few notable metrics from this past quarter and year and then extrapolate on some key operational themes that really drive RioCan's growth. I'll focus on the portfolio that makes us one of Canada's largest retail landlords and the competitive advantages that accompany this positioning. And as Qi mentioned, with the continued success of our secondary market dispositions, over 85% of our revenue is now derived from properties in Canada's 6 major markets. Our same-property NOI growth for 2018 in the major markets was 2.6%, and our major market committed occupancy is close to 98%.These are healthy results and demonstrate the desirability of RioCan's well located increasingly mixed-use commercial portfolio. So how are we achieving these results? There has been increasing retail demand for space in the 6 major markets. RioCan has great locations and compelling tenant mixes curated to suit the needs of the growing communities within these markets, and that drives traffic. In other words, we are where the retailers want to be. I'll draw your attention to 3 additional factors that lend to strong same property NOI and occupancy results.First, due to their impressive and growing demographic profiles, our central and very visible shopping centers attract new entrants into the Canadian market, including foreign retailers, such as the Decathlon and U.S.-based L.L. Bean, who recently signed a lease with RioCan for their first Canadian location. Evolving concepts are also attracted to our sites. We've seen this demonstrated across many retail segments, particularly the food and beverage and service commercial sectors with growth from the likes of Recipe Unlimited, Popeyes Chicken and A&W. Our strong relationships with these national tenants also serve us well as they look to expand. Second, we have benefited from a creative and industry-leading ancillary revenue program that drives NOI. Sources of ancillary revenue include digital signage, common area licensing, cell tower and specialty leasing within our portfolio. Additional sources continue to become available due to the desirability of the sites within our major market portfolio. And when you add these factors, continuous -- when you add to these factors continuous redevelopment completions at locations such as Burlington center, the strength and solidity of our growing revenue stream is not surprising. To our leasing team's industry-leading depth, expertise and relationships, we've been active in repositioning well-located shopping centers, such as Burlington Centre, Yonge Sheppard Centre, and Lawrence Square here in Toronto, where revamped interior spaces have attracted a new and enhanced mix of strong regional and national tenants. The significant improvement of these shopping environments not only delivers enhanced revenues for our unitholders but also improves their draw as gathering places for the communities in which they are located.Revenue-enhancing activities are only half the battle. Same property NOI has also benefited from ongoing management efficiency that allows us to reduce the operating costs. We have commenced a rigorous review of processes to leverage our scale to drive efficiencies.We're implementing a national procurement program that will deliver cost reduction and provide a consistent level of service that will drive benefits for RioCan and, even more importantly, our tenants. In its pursuit of a sustainability goal to be amongst Canada's real estate leaders, RioCan is making improvements to deliver operational cost efficiencies and also adhere to its sustainability commitments. One example I am proud to share is the transition of our portfolio to LED lighting, which allows RioCan and our tenants to save cost and utilize less energy, thus contributing to a cleaner environment. In addition to these operational efficiencies at the property level, organizationally, we paid a great deal of attention to ensuring we have the appropriate personnel and a rightsized team equipped with the necessary skills to continue advancing RioCan's business through the evolving retail and residential landscape. Finally, as we continue to shed secondary market assets, we are generally -- which are generally older and, therefore, require a disproportionate amount of maintenance and as we continue to complete new developments, CapEx requirements for maintenance are reduced, and spending can shift to investments that add value. For these reasons as Qi noted earlier, we have lowered our normalized CapEx guidance for 2019 to $40 million. And what I have noted about that speaks to our existing results and some of the key growth drivers for RioCan. But I'd be remiss to omit some of the factors that will enable RioCan to sustain and continue to drive these strong metrics. Now concurrent with that strategy to drive operational excellence, we continue to unlock the value within our existing portfolio through intensification. The recent amendment to rent control legislation as it applies to new purpose-built rental development in Ontario has encouraged RioCan to move forward even more expeditiously to expand our rental residential portfolio.We have the team, the capability and the balance sheet to bring our major market assets to their highest and best use by capitalizing on opportunities to intensify transit-oriented properties with mixed-use and residential developments to generate new sources of cash flow and NAV growth. We continue to demonstrate our ability to successfully deliver development projects and have made significant headway on key projects, including the completion of Bathurst College Centre, which is a new grocery-anchored retail and office project in Toronto that's now fully leased with high-profile tenants. There's also King Portland Centre, which is in Toronto, and it's substantially complete, and both Shopify and Indigo have taken possession of their office units. We also achieved substantial completion of eCentral rental residential, part of our mixed-use project at the corner of Yonge and Eglinton in Toronto. Substantial completion of Frontier, the first phase of a residential rental development adjacent to RioCan's Silver City Gloucester Shopping Center in Ottawa, is expected in the second quarter of this year. We started the leasing process for units at eCentral and Frontier late last year and earlier, this year, respectively, and are very pleased with the velocity in rents we're achieving at both properties. Construction continues to progress as scheduled at The Well in Toronto and has reached grade. Retail leasing will commence this year. These are just a handful of examples in a portfolio with more than 26.2 million square feet of development pipeline, 16.6 million square feet of which are active developments, including some of the close to completed developments that we alluded to in our disclosures, and it's notable to point out that the 5.8% yield that we're achieving on those developments does include 2 assets that consist primarily of a residential rental component.Developments such as these will contribute to our future success, while we continue to enhance our revenue by evolving our tenant mix to stay ahead of changing consumer trends, while at the same time, driving strong results from operating efficiency and ancillary revenue. We continue to strengthen our major market portfolio by focusing on properties within fast-growing, high population and high income areas. Put simply, RioCan continues to demonstrate that we have the balance sheet, the portfolio, the pipeline of transit-oriented sites, and, most importantly, the team to successfully execute and deliver results today and long into the future.Ed, over to you.

[Edward Sonshine, CEO & Trustee]

Thank you, Jonathan. Thank you, Qi, and thank you, Jennifer. Jennifer is now extra incented to reduce the warning at the beginning since she is now the one giving it. So we'll see how that goes in future conference calls. In my remarks, during the third quarter conference call, just a few months ago, I spoke to the transformation under way of RioCan and our progress in getting to the milestones we set for ourselves. We are quickly approaching those targets, and I think I can say with confidence that by the end of Q2 of this year, we will be either at or very close to what I consider our 2 most strategic metrics, namely having 90% of our revenue coming from the 6 major markets of Canada, now more often referred to as the VECTOM markets. I didn't make that up; somebody did. And 50% of our revenue derived from the GTA, the largest, most prosperous and fastest-growing area in this country. The actual pace of sales of secondary markets is really meant to get us to those 2 key strategic metrics, rather than being an end in itself. As we're going to hit those numbers this year, and make no mistake, those percentages will continue to grow in the future, I feel it's worth a few minutes looking at what RioCan is becoming and will be. First and foremost, we are still and will be for quite a while, primarily a retail-focused REIT. We own about 35 million square feet of retail space, and I expect that number not to change much over the next few years, but the nature and use of that space has changed and fairly dramatically over the last few years, and it will continue to transform in the upcoming years. Rather than simply being traditional shopping center retail, more and more of that retail space will simply be components of mixed-use projects, primarily in urban and/or transit-oriented locations, and will house users that are largely immune to disintermediation by e-commerce. So what does that mean to our unitholders? Simply put, higher quality revenue and faster growth. Higher quality revenue has several components; diversity of revenue, quality of the tenants' covenants, occupancy rates, and the ability to re-lease the inevitable vacancies, all of which are essentially driven by the location of the space. And the best space in Canada is located in the VECTOM markets and amongst the best space in the VECTOM markets is the GTA. In urban areas, we are able to build in growth even into what are considered anchored leases, and even some of the legacy anchored leases we inherited or entered into over our 25 years eventually come to an end. For example, the phenomenal growth in revenue at the Yonge Eglinton Centre has been achieved despite several long-term flat leases with large tenants. But over the next decade, even these will come to an end. Wrapped around this best-in-Canada retail portfolio is the best balance sheet amongst our peers. Our analysts often quote leverage as a percentage of IRS value -- IFRS values, a far more accurate metric in our opinion is net debt-to-EBITDA. Even with $1.2 billion in ongoing development, ours is amongst the lowest in the sector. Financial institutions and sophisticated investors get this and the result is our achieving the lowest spreads amongst our peers, as shown by our recent financings. Our cost of debt will go even lower as we replace some commercial debt with lower-cost CMHC financing, as our residential portfolio grows.Before I get to the non-retail components of worth of RioCan, it is worth a moment to touch on the part of our business that bridges our traditional retail properties to our mixed-use future. This is, of course, our development group, which we started building almost 15 years ago. It has grown and evolved over that time from building pads at existing centers to building new shopping centers and now to planning, zoning and developing complex master-planned mixed-use properties.These can range from the 3 million square foot project now under construction in Front and Spadina in Toronto, The Well, to the renovation and expansion of Yonge Sheppard Centre now nearing completion to the master planning and redevelopment of large-scale shopping centers having an area of 50 acres or more, such as Shoppers World Brampton and Colossus, both of which are located at or near new transit hubs. These 39 professionals we have in that group enable us to move forward confidently in the transformation of RioCan. And while the vast majority of these new income sources will be in the GTA, RioCan is simultaneously creating similar assets in Ottawa, Calgary and the Vancouver area, and with developments in the planning stages in Montréal and Edmonton as well.So what are we so busy creating to drive the revenue and value growth we are talking about? While attention is often focused on high-profile projects, such as The Well, or what we are doing at Yonge and Eglinton or at Yonge and Sheppard, I think some preliminary numbers of where we are and soon will be are perhaps even more telling. Our office portfolio often gets lost in the shuffle between retail and residential. But by the end of next year, it will total over 2.5 million square feet at RioCan's ownership, and will continue to grow as our mixed-use development program continues, and what an office space it is! It is located either at The Well, King and Portland as well as our properties around Bathurst College or at major transit hubs, such as Yonge Eglinton Centre and Yonge Sheppard Centre. While office will soon comprise close to 10% of RioCan's commercial space, it has historically represented a much lower percentage of revenue. This is changing. For example, our last office leases at our Bathurst College Centre are at much higher rents -- much higher effective net rents per square foot than the retail below it. The in-place net office rent at YEC where we own about 750,000 square feet have increased almost 60% over the last 10 years, with most of that growth actually coming in the last 3 years. YEC office is now essentially full with new demand, ever-increasing as the Eglinton transit-line nears completion. We expect similar results and trajectories of rent growth at Yonge Sheppard Centre as it is completed and existing leases expire.Now to our growing residential portfolio, which I can finally refer to as a portfolio. With the substantial completion and commencement of leasing at eCentral here at Yonge and Eglinton and our Frontier building in Ottawa. This portfolio will grow materially over the next few years as well as the number of condominium units included in the mix of residential unit completions.We currently have 2,100 rental units under construction or substantially completed together with 920 condominium units at the same stages. Within 2 years, by 2021, those numbers will have grown to 4,300 rental units and 1,500 condo units. In fact, the opportunity in our existing portfolios -- portfolio of properties are to have about 14,000 units in total, either completed or under construction within 5 years. Again, a mix of rentals and condos, although predominantly rental.This mix and our program of bringing in partners to individual projects are appropriate for a number of reasons. Condominiums create capital recycling and short-term profits, while partnering brings in capital. While at the same time shining a light on the density values we have created through the long and expensive planning process. Sadly, much of the analyst community really doesn't get a lot of what we have been doing here at RioCan. Part of the blame undoubtedly lies with us, as we perhaps have not explained it with sufficient clarity. But while we will get better and spend more time presenting the new reality at RioCan, the way we are going to finally overcome the built-in cynicism about new development is that we now are starting to have completed buildings and actual results, as referred to by Jonathan and Qi. Finally, I will, again, emphasize that all these new developments, both office and residential are urban, new and transit-oriented ensuring their lease-ability and rental growth over many, many years. Thank you, and I now like to open it up for questions.

[Operator]

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

[Sam Damiani, Analyst]

Thank you very much for the extra disclosure on the development yields, that's helpful for everyone to understand the value creation. We look forward to more disclosure -- similar disclosure in the future. As we look at eCentral and Frontier, can you give us a little bit more granularity on the leasing progress to date?

[Edward Sonshine, CEO & Trustee]

No. You know what? I'm going to turn that over to Jonathan, but we're going to be a little bit cagey on that for the simple reason that we're really just getting going. And, of course, you start at the bottom floors because the top floors aren't even finished. And in Gloucester, actually, nobody is even moving in until May at the Frontier. But I'll leave that to Jonathan.

[Jonathan Gitlin, Chief Operating Officer]

I think, generally, Sam, both the velocity of lease up and the rates that we're achieving are ahead of our expectations. I think we'll save the granularity for a further stage, once we're a little bit more embedded into the process.

[Edward Sonshine, CEO & Trustee]

Probably by the next quarter, conference call, we'll actually start getting some numbers. But I think it's just too early, but to suffice it to say, Sam, as Jonathan mentioned, we're extremely pleased.

[Sam Damiani, Analyst]

Okay. Great to hear. I look forward to more there. And just with respect to the change in the portfolio, the dispositions, the major market focus and things going well in many respects, but is there any guidance you're willing to share for 2019 in terms of NOI growth and/or FFO?

[Edward Sonshine, CEO & Trustee]

I think we've basically given that guidance. We expect to maintain that 2% to 3% NOI growth, and that will translate into FFO growth of something more than that.

[Qi Tang, Senior VP & CFO]

That's only same-property NOI growth.

[Edward Sonshine, CEO & Trustee]

Right, yes.

[Sam Damiani, Analyst]

Okay. One more question maybe, then I'll turn it back. Just an update on the cannabis store opportunity, and also what are you seeing in terms of any recent trends in terms of bank branch closures?

[Edward Sonshine, CEO & Trustee]

Bank branch closures, I'll take the easy one first, is something that we've been dealing with for probably a decade. It's nothing new. It actually seems to have stabilized. We -- TD bank on the other hand has just taken possession across the street here of an 18,000-square-foot facility that's going to be replaced some others, obviously. But that will be the largest facility outside of head office in the metro area. So I would say 20 years ago, Sam, we probably had 2 or 3 of the banks in our top 10. Today, I think we have 1 bank left in the top 30. So it really is of no impact. In fact, it often creates opportunities for us, as they vacate, particularly on the high streets. Number two, on cannabis, at the risk of making a political statement, only governments could screw up the selling of dope and have a supply. I mean, I applaud the Ontario government for privatizing, but the fact is there's no stores open. We have done 20 odd leases here in Ontario. Most of the tenants paid 6 months upfront, which takes them, I think, to end of April. What's going to happen then, I don't know. Because most of them, in fact, all of them, I don't think it's open to actually apply for licenses until much closer to year-end. So we don't really know what the impact is going to be. It's certainly going to be delayed. I think you're not going to see that big gold rush, land rush. We've seen it and we've taken in, quite frankly, a few million dollars in rent paid upfront. What's going to happen in the remainder of this year, I don't know. But I think it's more delayed than eliminated. So it will probably be a bigger factor in 2020 than it will be in 2019.

[Operator]

Our next question comes from the line of Dean Wilkinson with CIBC.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

I guess, Ed, a year ago, you said you were in love with the balance sheet. Is the honeymoon still on?

[Edward Sonshine, CEO & Trustee]

Oh, yes. I mean, we get constant updates from banks as to indicative spreads, and basically get them almost every day. And I won't mention which bank, other than say that they're amongst the big banks. We happen to get 2 yesterday, and we are the lowest spread indicated amongst all the retail players. And quite frankly, again, I won't mentioned their names, but the ones that are dominated by 1 specific retailer used to have better spreads than us, lower spreads than us, because they got the sort of nice glow from the mothership. While our spreads are not lower than theirs as well, never mind the other retail peers. So yes, I'm in love with our balance sheet. It will continue to get better, quite frankly, as we continue our partnering program and the odd secondary market disposition. And as, quite frankly, it's been an interesting juggling act, I think I called it a couple of years ago to go through the secondary markets' disposition, while at the same time undertaking that significant development program. Well, they've all gone more or less according to plan. Nothing ever goes perfectly according to plan. I wish we could build things in 20 minutes and sell them in 10 minutes, but it doesn't work that way. But the fact is, we book in the back of the secondary market disposition program. We've essentially done about almost 3 quarters of it. The $2 billion in itself was a number. As I tried to emphasize in my remarks, the real strategic metrics are getting to 90% and 50% GTA. We're getting there. We will definitely get there within the next few months. Whether it's by the end of June or it's sometime in July or August, I'm not sure. We'll get there through selective continued sales and, quite frankly, more importantly, development completions and -- because all of our developments are in the big cities and primarily here in the GTA. So yes, I think our balance sheet, quite frankly, is just going to keep getting better. Go ahead.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Perfect. So it kind of leads me into a follow-up question on that and...

[Edward Sonshine, CEO & Trustee]

Sure.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

And it's the issue of that higher quality revenue, faster growth, better quality assets. The cap rate that we're seeing on the dispositions is kind of creeping up, creeping up, and as we get to the tag ends of the last $500 million, and it looks like those cap rates are in some cases low double digit, but let's call them around an 8. So we look at the portfolio ...

[Edward Sonshine, CEO & Trustee]

I'd call them more around a 7.5.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

7.5. 7.5. Okay. Let's say, 7.5. Mid-7s. So you roll off of that, now you've got the portfolio in the markets that you want to be in. Would that be more of a 5 cap portfolio versus the 5.5 that sort of been your current IFRS valuation? And could that actually even go lower as you see more of the multifamily come into that where people are -- there are crazy numbers out there. There's 3.5s. There's 4s. There's whatever -- would that...

[Edward Sonshine, CEO & Trustee]

Dean, you put your finger on exactly where we're going. And again, don't take that $2 billion as magic, I'm trying to emphasize that. I wouldn't be surprised if our new sales from here on in 2019 are only a couple hundred million bucks. But the fact is, we expect our -- the secondary market sales, by the way, on ongoing basis were -- they're sitting at 7.27, and the major markets are sitting at 5.21. I would not be surprised as the shift of our portfolio changes to see our overall portfolio capitalization rate drop. Dramatically is a word I don't like to use, but when you get a 5% drop, which might be 30 basis points, I wouldn't be surprised to see that happen over the course of the next couple of years, maybe even sooner. Because the assets we're starting to get the same way our CapEx is falling as the age of our assets gets younger and younger as opposed to the age of the CEO. And so I think you put your finger on exactly where we're going.

[Operator]

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

[Jenny Ma, Analyst]

So I want to expand a little bit on the disposition program. First of all, maybe, Jonathan, you can give us an idea of the estimated closing time for some of the conditional sales you have in hand assuming all the boxes get ticked off?

[Jonathan Gitlin, Chief Operating Officer]

Sure. The majority of them are conventional deals with somewhere between the 30- and 60-day due diligence period and then a 30-day closing period. And now we've entered into a number of these over the last months or so. So I think they range between the end of Q1 and the beginning of Q2 for the most part. Some of the ones that are firm, those are much more imminent. Those are the ones that'll close in the next couple of weeks. So of the various deals that are in play right now, I think anywhere between the next -- the majority of them should close, should they all wave them and go forward within the next 2 to 3 months.

[Edward Sonshine, CEO & Trustee]

And we have new ones going on the market as well as we speak.

[Jonathan Gitlin, Chief Operating Officer]

Yes.

[Jenny Ma, Analyst]

Of course. Well actually, Ed, that leads into my next question because on last quarter's conference call, you had discussed sort of the environment. The volatility leading to a little bit of a slowdown in discussions and whatnot. Now that we've seen some stability, have you seen a little bit of an increase in interest again? Or how do we reconcile that with the comments you made a few months ago in terms of the sales...

[Edward Sonshine, CEO & Trustee]

No, no, no, my comments were exactly right at that time, quite frankly. And there were 2 factors that caused those comments to be made. One was the velocity of interest rate increases and the resulting sort of pullback in financial institutions' willingness to finance our buyers of these assets. Because we're selling it to buyers who generally want leverage. Obviously, interest rates have -- if anything, they've gone the other way, they'd certainly start going up and they've gone down a bit, which has helped. But I -- and -- but I am not sure of the banks willingness to lend has actually opened up. But at the same time, the other factor was just the actual mass of assets that was coming to the market, both from us and others. We're not the only guys, although we may be the largest that want to sell the secondary market assets. So that hasn't changed either, but what we found interesting is, together with the interest rates coming down and our saying, "Hold it guys, we've broken the back of it. We're going to take more time on and be quite a bit more selective on what we sell." We've actually found that to increase interest, and we're getting a lot of inbound increase more -- more like when we started the process year and a bit ago. So yes, we're actually starting to see some healthier numbers on some of these new offers we're getting.

[Jenny Ma, Analyst]

Okay. So would it be fair to say that maybe with that context and all else equal going forward, which we know is not necessarily the case...

[Edward Sonshine, CEO & Trustee]

Never.

[Jenny Ma, Analyst]

But would it be fair to say that the sale process completing the $2 billion takes a little bit longer than through the end of 2009 (sic) [ 2019 ] that you're guiding too, with the view that you might get better values from having a little bit more patience?

[Edward Sonshine, CEO & Trustee]

Oh, yes. No -- first of all, I want to emphasize that the $2 billion is a number. The real target is that 90% of our revenue coming from the major markets, with 50% coming from GTA and that target we're going to hit anyway. So at that point, once we get there, even if we only at $1.7 billion or $1.8 billion, we're not dedicated to get into $2 billion. And I want to disabuse the community that that's a magic number. It's not. It was an estimate that we made a 1.5 year ago of what we thought we would need to get to, to get to that 90% number. There will be certain secondary assets that we don't -- secondary market assets we don't sell. We have the dominant power center in Kingston, Ontario, secondary market, but a nice, stable slowly growing market and nobody is going to build another one. We had a similar situation in Sudbury, where we have the dominant power center of the whole North, quite frankly. Great -- the best tenants in Canada and nobody is going to build another one and the tenants have nowhere else to go. And again, a stable market growing slightly and quite prosperous. So I guess I'm going to say if a year from now, I say to you, you know what, we've sold $1.8 billion of assets, and as far as that ongoing definitive sales program, we're really not paying any attention to it. Having said that, we will be selectively selling on an ongoing basis for the next several years, into the 2020s, assets that we feel either have no possibility of interesting redevelopment or are just slow growth, low growth, no growth assets that we think we can better use the cash we can get for them somewhere else. A long answer to your question.

[Jenny Ma, Analyst]

That's good color. And then, just going back to the leasing of some of the rental apartments, maybe this is trying to go at Sam's original question in another way, but as far as eCentral goes, when you think about the kind of demand for rental apartments that's out there, can you give us some comments as far as what you're seeing? How does it square with seasonality? Are you just seeing so much demand and it doesn't really matter that it's winter, today notwithstanding? And that there has been a lot more activity just given the market fundamentals? Or are we still subject to sort of the same factors that drive all rental apartments?

[Jonathan Gitlin, Chief Operating Officer]

Well, if seasonality -- sorry, it's Jonathan, Jenny. If seasonality does come into play, we certainly haven't seen any negative impacts from it.

[Edward Sonshine, CEO & Trustee]

We don't expect a lot of visitors today.

[Jonathan Gitlin, Chief Operating Officer]

Yes, today might be a poor day.

[Edward Sonshine, CEO & Trustee]

For example.

[Jonathan Gitlin, Chief Operating Officer]

Yes, but we started both programs, both processes in the depth of winter in both Ottawa and Toronto, which have both seen pretty nasty weather so far. And like I said, we are well ahead -- we are ahead our estimated lease-up to date. So the answer to your question is, it certainly hasn't played a major factor. And if it has for whatever reason then we're going to have one hell of a spring.

[Edward Sonshine, CEO & Trustee]

Yes. And finally, just to add to that. When the rent control legislation of the previous government, the Liberal government here in Ontario, came in, we actually changed our pro formas in one major respect, we extended the stabilization period, if I'm not mistaken, Jonathan from 1 to 1.5 years.

[Jonathan Gitlin, Chief Operating Officer]

In most cases, yes.

[Edward Sonshine, CEO & Trustee]

In most cases. Because quite simply put, once you're going to have a limit on what you could increase rents for, well, you better get the biggest first rent you can get. While we haven't yet changed our pro formas, the fact is the legislation has changed. And we're not as pressed as we are to get the absolute last penny. Because a year from now the market's still market, and without any limitation, I think it's worth adding that, call it luck of timing because the regulations when they changed the rent control are a bit complex relating to signed leases and occupied buildings. None of the units that we are bringing on stream are going to be subject to any sort of rent control other than the odd replacement unit. So -- but having said all that we are hitting better numbers than we had in our pro formas, and we are doing it faster than we expected, notwithstanding the seasonality.

[Jonathan Gitlin, Chief Operating Officer]

It's all good.

[Jenny Ma, Analyst]

That's great. And just a last question. What kind of profile are some of these tenants who are signing up leases like? Or, is it people who are just moving out for the first time? Is it people moving up? Or couples and families that need bigger units and that can't afford to buy? Have you kind of surveyed the people who are coming into your sales units?

[Jonathan Gitlin, Chief Operating Officer]

We do. We survey them all the time, and it is really a mix bag at this point and it's also very different between the Frontier in Ottawa and eCentral in Midtown, Toronto. So it really is actually a bit of a varying demographic in each case, and for each unit type. For instance, we've released someone bedrooms, some bachelors, which as you can imagine have gone to young professionals and people moving out of home for the first time. And then the 2 bedrooms that we've released have gone to families who are downsizing, some older families who really don't need the single-family home anymore or cohabitation scenarios, where people are simply rooming together. So it really is a mixed bag.

[Edward Sonshine, CEO & Trustee]

It's really going to be, I think, very site-specific to those demographics. For example, when we get under construction on Sunnybrook at Bayview in Eglinton, hopefully, later this year, if Metro links lets us, we expect a lot of retirees from the leased side area coming into there because you got transit. You got beautiful walking, going self on bay view, places to go, restaurants all that. Whereas Yonge and Eglinton, I think will tend to be a younger demographic by and large. Frontier in Ottawa, which happens to be right across the street from the headquarters of CSIS, so it's a very safe building. We're getting a lot of people, young professionals, that work at CSIS and can just walk across the street to go to work. So it's -- and yet there is a transit -- if they want to go into downtown Ottawa -- a transit stop by next door. It's going to vary. We have a building we're involved in that we haven't talked about much on the Scrivener, which is probably the most attractive location in Toronto, it's Rosedale. It's just going to be around the what it is commonly known as the Five Thieves shopping center. And we're not starting construction, probably for 9 to 12 months on that one. Our partners in that -- will be running that one. But I'm getting all kinds of calls from people who are looking to sell their homes in Forest Hill and Rosedale and move there. So it's really all over the place.

[Operator]

[Operator Instructions] Our next question comes from the line of Pammi Bir with Scotia Capital.

[Pammi Bir, Analyst]

It seems it's been a pretty benign Q1 despite what is typically a weaker period for foreclosures. But how would you characterize the overall tenant demand, say, versus a year ago? And of the 2% to 3% same property NOI growth guidance for the year, how does that break out between rent growth versus occupancy gains?

[Jonathan Gitlin, Chief Operating Officer]

Demand has been similar to last year. There have been, as I mentioned in my remarks, Pammi, there have been some new entrants into the market that have created a bit more attention for some spaces. There are certain factors that are a lot more popular than others, and we're taking advantage of those. And so I think by and large it's at or slightly ahead of where it was last year at this time with respect to tenant demand. The -- what was the second question? The breakout between -- no, same property NOI.

[Qi Tang, Senior VP & CFO]

Yes, I think as occupancy, and you know, we are already very high, right? Especially, in major markets, nearly 98%. We expect some occupancy growth on the office side, as I think Ed and John touched on earlier, but predominantly will be driven by the core same property rent growth.

[Edward Sonshine, CEO & Trustee]

Yes, I think one of the -- a couple of the anecdotes, which is where I get most of my information, Pammi, is, I had a conversation with the head of one of our larger Canadian fashion brands. And fashion has been, I think I'm being nice by saying, it's been a relatively underperforming sector, for us, and for them. And his comment to me as they were heading into the ICSC convention out in Whistler few weeks ago was that, "Well, you know what? We're starting to really slow down our rate of closings." And in fact, we're even looking at the odd new store. So life hasn't gotten wonderful yet, but I think in that sector, it's probably bottomed out. We're still going to get the odd bankruptcy here and there. I think in the fourth quarter, we had Bowring Bombay who've been looking to go bankrupt for about 5 years, and they finally got there. And the -- but I think the big wave of real ugly stuff happening that we usually see in the first quarter, as you categorically say, is not happening. There will be spotty things, but by and large, the things are relatively stable and we hope for better times.

[Pammi Bir, Analyst]

Got it. And, Qi, just 1 question with respect to the lease-up losses that you cited on the residential lease-up period, I guess, were those -- do you have a rough range of what does will look like this year? And I'm presuming those will be hitting NOI?

[Qi Tang, Senior VP & CFO]

Well, we don't provide that specific guidance. It's -- but it's basically certainly will be driven by this retails of the lease-up, right? It's just initially will be some switching earlier quarters, as you can imagine, as we lease up because we have to bear the full operating cost.

[Edward Sonshine, CEO & Trustee]

Yes, it won't hit NOI that much as just us give us increased interest cost because instead of capitalizing it, we'll be expensing it.

[Qi Tang, Senior VP & CFO]

There will be some NOI impact as well, I have to say, because operating costs you had like property tax...

[Edward Sonshine, CEO & Trustee]

Well, that's true. Yes, yes, you still got to pay the property taxes and the other stuff on the building. That's quite true.

[Qi Tang, Senior VP & CFO]

Yes.

[Pammi Bir, Analyst]

Right. Okay. And just on the lease up, what did you underwrite for the lease up of the eCentral in terms of the timing to get to a stabilized level?

[Edward Sonshine, CEO & Trustee]

18 months. 18 months to full stabilization.

[Pammi Bir, Analyst]

If stabilization is 90%-ish or higher, 95% or...

[Edward Sonshine, CEO & Trustee]

It's higher, higher. Yes, 95%. I think we'll make it faster, but there is a -- people forget, there are physical limitations in how fast you can move people in. And one side of the equation is lease-up, and that's going fantastic. And we actually have, I think, at least one that I know of, living there already.

[Jonathan Gitlin, Chief Operating Officer]

Well, we've got 2.

[Edward Sonshine, CEO & Trustee]

We've got 2 living there, thank you. But everybody wants to move on the weekend. There is only so many elevators that you can set aside, once you add actually people living in there. So it will take the best part of a full year to get there, but I think we'll get there faster than what we had proforma-ed.

[Jonathan Gitlin, Chief Operating Officer]

And be mindful of the fact that there are 466 units in that building, so it's sizable.

[Pammi Bir, Analyst]

Right. Just last one. Last summer you talked about potentially exploring some options to unlock value at the entity level. If the unit price doesn't catch up to the embedded value that you talked about in the past, and certainly, relative to The Street's NAVs. So just given where the NAV discount is today, what are your thoughts on that? And is this still under consideration?

[Edward Sonshine, CEO & Trustee]

I would say the only thought is we never stop considering. And we are -- we're certainly not on any specific path, Pammi. But it's something that we always look at and I would really think that over the course of the next 18 months, if unit value doesn't reflect what we certainly believe and, hopefully, everybody is starting to understand what we're creating here, then we will explore other options. And we're constantly thinking about them. We're constantly talking about them. But we're nowhere close to actually doing anything. There is time maybe for one more question, if there is one. Lindsey?

[Operator]

There are no further questions in queue at this time.

[Edward Sonshine, CEO & Trustee]

What perfect timing. Thank you all for calling in. I will talk to you in a few months. Bye-bye.

[Operator]

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