RioCan Real Estate Investment Trust

TSX:REI.UN

Earnings Call Transcript 2020-Q4

[Operator]

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

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

Thank you. Thank you, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel and Corporate Secretary for RioCan. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website earlier this morning. Before turning the call over to Jonathan, I'm required to read the following cautionary statement. In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the 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 principal 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, 2020, and management's discussion and analysis related thereto, as applicable, together with RioCan's most recent annual information form that are all available on our website and at www.sedar.com.

[Jonathan Gitlin, President, CEO & Additional Trustee]

Thank you, Jennifer. And thanks for joining us today. I'm pleased to be here and be surrounded virtually by our great senior management team at RioCan, and I'm happy to provide an update on our fourth quarter operational highlights as well as our 2020 results. I'm going to focus today on what will continue to drive stronger FFO, namely, our underlying operating performance, our increased focus on mixed-use developments and the strength of our tenants who are largely classified as strong or stable. I'll also focus on how we continue to upgrade our portfolio through dispositions and tenant mix evolution so that we will continuously reduce our exposure to nonessential businesses. But before doing that, it's critical to acknowledge the challenges that the real estate industry and our business faced in 2020. I mean, the impacts of COVID-19, they tested our team and our portfolio, and we consistently demonstrated strength, resiliency and the ability to mitigate the impacts. We're pleased to report that RioCan ended the year with record liquidity and that we achieved our FFO per unit guidance of $1.60.We made the responsible decision to reduce our distributions effective in January of this year, which does enhance our financial flexibility and allows us to advance our goals and to absorb the impact this pandemic has on our business. While we continue to face the pandemic and an uneven road to economic recovery, I've got total confidence that RioCan's team is well positioned to unlock the value that's embedded in our incredible portfolio. So now let's focus on the fourth quarter operating results. The second wave of the pandemic in the fourth quarter resulted in restrictive measures, including the closure of nonessential businesses in a number of provinces. In fact, 75% of our tenants remained open and operating as of December 31. But in spite of this, we collected 94.2% of our total fourth quarter rent and just shy of 92%, 91.7% of our January billed gross rents as of February 10, and we're not done yet. Throughout this crisis, we've been responsible, protective and forward-looking by balancing our tenants' needs with the well-being of our unitholders. When CECRA launched in the second quarter of 2020, we actively participated on behalf of around 100 -- sorry, 1,800 qualifying tenant locations and another 950 tenant locations in the third quarter. Over the 6-month CECRA period, RioCan abated approximately $14.4 million in gross rents. We continue to work with tenants whose businesses have been affected by the pandemic. The CERS program replaced CECRA in the fourth quarter and CERS funding, which is provided directly to tenants without the requirement of landlord rent abatement is in effect until June of 2021. Now we view CERS as a positive initiative that will provide a lot of short-term relief for businesses that are in need. To provide further support, RioCan has established an ambassador program to assist our tenants with the online CERS application process. We continue to use our expertise to ensure that tenants are applying for any available government subsidies. The bottom line remains the same as we reported in Q2 and Q3. Every dollar matters to us. We're using our resources, energy and a thoughtful strategic approach to maximize rent collection. To the extent that we need to make some concessions, we negotiate lease amendments that will benefit the trust over the long term, such as redevelopment rights that will support our ability to unlock so much future value. Now as anticipated, same-property NOI growth continued to be impacted. We ended the quarter at minus 7.9%, stronger than the previous quarter, but obviously, very far from our historic norms, which we intend to return to. Now while we can't predict the length and extent of the mandated closures, the strength of our tenant base insulates RioCan's income from temporary disruptions. In fact, 79% of our tenants, we classify as strong or stable. These are primarily grocery, pharmacy, liquor, essential services and value retailers that have strong covenants and have demonstrated resilience in volatile economic cycles. The stability is highlighted by RioCan's collection of over 98% of the total gross rent that was billed to these tenants in the fourth quarter. The remaining 21% of our tenants, we classify them as potentially vulnerable. And most of these tenants are going to survive, and we've collected more than 80% of their rent. Some of these tenants, such as restaurants and gyms, while they're vulnerable in the face of COVID, well, in our minds, they make up a very important part of the retail landscape and we think they will do just fine in the future. These are the kinds of uses that are poised to prosper when commercial exuberance rebounds after months of suffocation. Now I'm not going to downplay the volatility in the industry, but I want to be clear that to date, the relative impact on RioCan's revenue is manageable, and we're positioned to see significant improvement as the impact of COVID starts to dissipate. And in regards to leasing, in spite of the pandemic, our fourth quarter leasing renewal and retention results were strong and very much in line with our historic pre-pandemic results, thanks to the good and very hard work of our team here at RioCan. Our committed occupancy ended the year at 95.7%. Our leasing team completed 359,000 square feet of new leasing and renewed 1.2 million square feet during the quarter. We achieved a blended leasing spread of 3.8% for the quarter and 5% for the year. New leasing spreads for major market properties was 8.3% for the year. Our renewal and new leasing spreads demonstrate that there's still a healthy upside between our average portfolio and the market rents. Our retention was 85.8% for the quarter, and 86.7% for the year. And average net rent per square foot for new leases was just under $44 for the quarter and just over $32 for the year, impressively above the trust portfolio average rent of $19.80 per square foot. Now I'm going to turn to residential. We collected over 98% of residential rent in the fourth quarter, which is really a testament to the desirability and strength of RioCan Living's offerings. Our residential rental portfolio continues to grow and currently has more than 1,200 units in 4 buildings, eCentral and Pivot in Toronto; Frontier in Ottawa and Brio in Calgary. The total NOI from our residential rental operations was $8.2 million for the year, which was up $5.8 million from 2019. We will see this number continue to increase as new projects are completed throughout the course of this year. As of February 10, Frontier and eCentral, were 97.8% and 86.3% leased, respectively. First, occupancy of Pivot's 361 units took place in December of 2020. Now it's understandable that the pandemic has really temporarily affected leasing at eCentral and Pivot. It's challenging to lease space with virtual tours, and we also can't ignore the short-term pressures in the multi-res rental space. However, we are confident that all RioCan Living offerings will thrive in the long-term not only because we have well positioned properties but also because enhanced integration and a resurgence in economic activity should lend to stronger market dynamics going forward. In terms of developments, we have always prudently balanced and adjusted our construction plans in the face of COVID-19. Now that said, we're pleased to report that the pandemic didn't have a material impact on the pace of our most significant construction projects. We continue to look ahead to ensure continuous growth through sustainable development pipelines. As we complete developments, we break ground on new ones, we achieved zoning on others and initiate the zoning approval process on still more. This pipeline translates into lucrative opportunities, real -- it's a virtuous cycle that was well demonstrated throughout 2020. We validated how profitable our rezoned land is by selling interest in several GTA and Ottawa properties at very strong pricing. We have so many of these projects that will take us well into our future. They include Laird and Eglinton here in Toronto, Shoppers World Brampton up in Brampton and RioCan Hall in downtown Toronto, and this is just to name a few of so many that we have in our tremendous pipeline. We saw value creation through the successful closing of the sale of 50% non-managing interest in eCentral at attractive capitalization rates and a value far above our cost, further supporting the long-term strategic importance and NAV growth potential of our development pipeline and residential rental business. We also completed approximately 530,000 square feet of new development GLA. This included developments such as 5th & Third in Calgary and Windfields Farm in Oshawa, which continues to see great growth. In addition to the completed projects I've just referenced, we've got more than 14 -- sorry, 1,400 residential rental units currently under construction. And this is between 6 projects and estimate that we'll have an additional 1,500 or over 1,500 residential rental units in different phases of development by 2022. We've got a 50% interest in 3 condo or townhouse projects at various phases of presale and construction. This includes 11 YV condos in Yorkville, and U.C. Uptowns and a U.C. Tower condominium project at Windfields Farm in Oshawa. I'm proud to say that these projects include 1,242 units and were 98% pre-sold with deposits paid in full. And what should also be noted is that the proceeds from our condo sales provide an alternative source of revenue and an important bridge of FFO that will supplement our productive core commercial portfolio going forward. Moving to The Well, our iconic mixed-use community in Toronto's Downtown West. The office tower, if you haven't seen it, has reached its final 36th story and is expected to be topped off next. The project is on track for the initial office tenants to take possession later on this year, and retail leasing is advancing well. We intend to continuously use our vast pipeline of [ REITs ] and will seek out partners to validate value, reduce our overall development exposure, and equally important, to get paid for our deep and experienced development platform through equitable fee structures. We're going to use this strategy, not only in residential rental projects but in condo projects as well. Subsequent to quarter end, RioCan made its final capital contribution to the HBC joint venture, which brings our ownership interest in this well positioned portfolio of properties to 20%. The properties in which we've increased our interest include Downtown Vancouver, Montreal, Ottawa, Calgary, as well as destination shopping centers such as Yorkdale and Square One. Our position in these properties is consistent with our strategy towards dominant, well-located urban assets, and we're going to work with our partner to explore potential uses for these properties, be they existing retail uses or dynamic mixed-use concepts. We've also reached an arrangement with HBC to clear up all rental arrears that had accrued over the course of 2020. It's important to highlight that while our focus is obviously on managing our business and tapping into growth opportunities, our commitment to sustainable growth has not, in any way, diminished throughout the course of this pandemic. RioCan continues to lead the real estate industry on ESG with the achievement of a 5-star rating from GRES B, or GRESB, I never know how to pronounce it, for our ESG performance and sustainability best practices. RioCan is also ranked first amongst Canadian peers in the GRESB public disclosure assessment. And in terms of our culture, maintaining a connected and engaged team has been critical during these challenging times, and we're proud to be named one of Greater Toronto's top employers, and we achieved the highest employee engagement score in RioCan's history. Our 2020 employee engagement survey results exceeded the industry benchmark for overall engagement by 10 points. We're committed to investing in our corporate culture and the development of our expert talent. We'll continue to support excellence and empower our people to drive our collective success. RioCan's history is a story of successful transition. This won't stop as we seek to drive sustainable profitable growth in 2021. Looking ahead, we will continue to reshape our tenant base to focus more than ever on resilience, sustainable growth and value creation. We've got the team, the locations and the balance sheet. We have the drive, the expertise and relationships to weather this storm, and as always, adapt and thrive, and we are poised to advance our business as COVID and its impact become less relevant, which will, mark my words, happen soon. And before I close out, I want to express my gratitude to Ed, the RioCan Board of Trustees, the team here at RioCan, and of course, you, our unitholders, for your confidence in me as RioCan's next Chief Executive Officer effective April 1, 2021. I'm really excited and really privileged to lead RioCan through this complex period in their history and into our next phase of remarkable growth. And with that, I will turn it over to my colleague, Qi Tang, for her CFO report.

[Qi Tang, Senior VP & CFO]

Thank you, Jonathan, and good morning, everyone. As Jonathan noted, RioCan reported FFO per unit of $0.39 for the fourth quarter and $1.60 for the year, in line with our guidance. Our $1.60 FFO per unit for the year was net of $42.5 million pandemic-related provisions for rent abatements and bad debt, which represented 5.2% of our billed gross rents from Q2 to Q4. Our net contract to receivables was about $44 million as of the year-end, which is expected to be collected in due course. Despite the challenging environment under the pandemic, including a much less active transaction market, we continue to service value of our portfolio and closed $193 million of dispositions during 2020. Of those $66 million were income-producing assets with the weighted average capitalization rate of 6.31% based on in-place NOI and $127 million were development properties with no in-place NOI. In addition, as of February 10, 2021, we have closed or entered into firm or conditional agreements to expose 100% of partial interest in a number of properties for total sales proceeds about $290 million. This included $151 million for the sale of 50% non-managing interest in eCentral and commercial component of ePlace at 3.5% and 4.5% capitalization rate, respectively, based on stabilized NOI, which was closed in mid-January 2021. Overall, since the beginning of 2020, we have closed or entered into firm and conditional deals totaling $483 million. This included about $241 million of income-producing properties with a weighted capitalization rate about 5.5% based on in-place NOI. Our ongoing disposition program not only realizes the value inherent in our development pipeline, but also enables us to fund mixed-use development, mitigate risk, share costs, earn additional fee income and attract new partners or strengthen relationships with existing partners. Our reduced distribution payout will provide about $152 million of additional cash flow annually, which will also serve to fund development projects as well as other value-added initiatives such as debt repayment and unit buybacks through our NCIB program. We remain committed to our development program and unlocking the significant value inherent in our portfolio. Residential development accounts for about 83% or about 35 million square feet of our 42 million square feet of development pipeline. Our residential projects will serve to address the growing demand for housing as Canada's population grows, particularly when the government resumes its immigration plans. As announced in October 2020, the government of Canada plans to welcome an average 411,000 new immigrants per year over the next 3 years. The majority of the new Canadians will make their homes in one of Canada's 6 major cities, where all of our mixed-use residential developments are located. In fact, typically, more than 30% new Canadians or over 100,000 a year called Toronto home, where 74% of our projects are located, offering close proximity to major transit lines. Looking ahead to 2021, we estimate development spending to be in the $500 million range, net of projected cost recoveries and proceeds from air right sales. This spending estimate includes about $400 million for properties under development and approximately $100 million for residential inventory projects, which are condominium or townhouse projects. In addition to meeting market demand for homeownership, condominium or townhouse projects enable us to accelerate capital recycling to further fund our development program. 2021 development expenditures will allow us to develop -- deliver a significant portion of our flagship development, The Well, and complete other mixed-use developments such as Litho on Dupont Street and Strada on College Street, both in Toronto as well as the second phase of our Gloucester Project, Latitude, in Ottawa. With these completions in 2021, the staggered nature of our pipeline and cost-sharing with existing and future partners will allow us to lower our annual development spending in 2022 and beyond. In general, we expect to keep our total IFRS value of properties under development and residential inventory on consolidated balance sheet as of a percentage of consolidated gross book value of assets at about 10% or lower, despite the 15% limit committed under our various credit facilities. As of the year-end, this matrix was 10.3%. Now let me turn your attention to our balance sheet metrics. We closed the year with record liquidity at $1.6 billion in the form of cash and cash equivalents and undrawn committed revolving lines of credit and other credit facilities. This was partly as a result of the $500 million green bond we issued in December 2020. This green bond effectively refinanced our $550 million debenture maturities in 2021. Subsequent to the year-end, we prepaid our $250 million December 2021 debenture maturity in full at a total redemption price of $256 million plus accrued interest. We will repay the $300 million debenture due in April 2021 in due course. Out of our total $380 million mortgage maturities in 2021, about $229 million have already been repaid, refinanced or have refinancing commitments in place as of February 10, 2021. Overall, we expect to continue to maintain our strong liquidity in 2021. Further, we continue to have a large unencumbered asset pool of $8.7 billion on a proportionate share basis, which generated about 59% of our annualized NOI and provided 2.15x coverage for our unsecured debt as of the year-end. This unencumbered asset pool will offer additional flexibility as we manage our liquidity during the year while maintaining compliance with various debt covenants. Our debt-to-adjusted EBITDA metric was 9.47x, and leverage was 45% as of the year-end. The increase in the 2 metrics year-over-year were driven by the impact of the pandemic on property operations and valuations over the 3 quarters in 2020, and the timing of development spending and completions. We wrote down our investment properties by about $527 million or 3.7% during the year. While we expect the 2 debt metrics to increase marginally in the near term, given the impact of the pandemic on a 12-month trading basis, we maintain our long-term goal of keeping our leverage and debt to adjusted EBITDA within the target range of 42% or lower and around 8x, respectively. Our cost of debt continued to decline with the weighted average effective interest of 3.2% on a proportionate share basis, which compared to almost 3.5% as of last year-end. Our floating interest exposure decreased to 1.9% as of the year-end from the 6.4% as of last year-end, which was partly due to timing of the December 2020 green bond issue and no utilization on the floating revolver. We remain committed to a consistent and disciplined approach to managing our balance sheet and capital structure to maintain strong liquidity, financial flexibility and to position us well to navigate through crisis and invest in accretive initiatives to create value for the long term. With that, I'd like to turn the call over to Ed for his closing remarks.

[Edward Sonshine, Non]

Thank you, Qi. Thank you, Jonathan. Thank you, Jennifer, and they certainly are closing remarks for me. Because as most of you know, this will be my last conference call as CEO of RioCan. It's certainly an unusual one. I can't see the rest of the RioCan executive team or see when they roll their eyes during part of my remarks. So that's probably good. On April 1, I'll be passing the CEO baton to Jonathan Gitlin and move to a new role as nonexecutive Chairman. In that seat, as well as working with our Board, of course, I will be available to Jonathan for any advice he wants or just to bounce around some of the dynamic new ideas and strategies that I have no doubt he will bring to the job. Astonishingly enough, this is my 108th quarterly report. Thank you to everyone for putting up with me for 27 years. It's certainly a long time and lots of excitement, new initiatives, crises and setbacks over those many years. I won't reminisce today, or at least not much. You'll have to come to a post-COVID party for that. But it's remarkable when I look back and recall that the first 2 or 3 years of investor meetings and calls, and of course, then they were all in person, were mostly taken up with explaining what a REIT was and why it was a good investment, which it was. And today, it's even better, quite frankly, with the way the market has reacted. As a side benefit to everything I did for -- or we did in creating this -- helping to create this industry. We've actually created a lot of jobs for real estate analysts, so some of you here might keep that in mind when you write your reports. I generally don't have regrets, but simply move on to the next decision. I do regret, however, that we found it appropriate to reduce our distribution as of January 1, 2021. It took a once in a century pandemic arriving right in the middle of an expansive development program to lead us to this difficult decision. But it was the correct one, freeing up over $150 million in cash and equity, which, together with our other initiatives, will enable us to keep our balance sheet extremely strong, while continuing to build value and cash flow through our development efforts. The stability of our cash flow, as indicated by the numbers for 2020, including the metric that became so important early last year, rent collection, are clear. RioCan's portfolio was created over the last 27 years, curated, particularly over the last decade and its strength, resilience and future potential are hopefully becoming apparent to all. It is a portfolio that was partly acquired and partly developed. And in my opinion, could not be duplicated today. Besides the stability it has demonstrated, we are only at the beginning of surfacing the inherent value it contains, maybe in the second inning. We took a conservative approach to valuations in 2020, writing our portfolio down by $527 million or 3.7%, as Qi mentioned. But whatever my personal opinion of our being the most conservative amongst our peers is, it certainly created more runway for surfacing and increasing value over the ensuing time. In addition to the portfolio itself, the quality and experience of RioCan's team also differentiates us and will enable us to achieve the value and cash flow growth that I'm confident are coming. No point in complaining about our unit price. But I will simply point out that not only is it well below our beaten up NAV, a huge discount, probably the biggest it's ever been. But that NAV reflects none of the great things that are being created nor much of the -- most of the development pipeline that we've already zoned, not just thought about or applied for. I mentioned earlier that I rarely have regrets. But while it is the right time for me to transition to Chair, I do regret that I will be in a watching role as opposed to a doing one, while Jonathan and his team create enormous value and new cash flows for our unitholders over the next few years. Mind you as a significant unit holder myself and as Non-Executive Chair, I will certainly be cheering them on and watching with pleasure. That's it for my remarks, I'd like to turn it back to Melissa for any questions that anybody has.

[Operator]

[Operator Instructions] Our first question comes from the line of Mark Rothschild from Canaccord.

[Mark Rothschild, MD & Real Estate Analyst]

Jonathan, I heard your optimistic comments about the more troubled operators such as gyms and restaurants. Maybe you can give some additional color on, for instance, will they be able to pay the prior level of rent as we exit these lockdowns? And do you expect some of the spaces will ultimately need to be re-leased?

[Edward Sonshine, Non]

Go ahead, Jonathan.

[Jonathan Gitlin, President, CEO & Additional Trustee]

Thanks and thanks, Mark. Yes, I think that those categories, movie theaters and restaurants are going to see some disruption. Movie theaters I think that there will be, let's say, a reduction in the amount of space required, but I do think the movie exhibition business will continue to be part of the Canadian retail landscape, I think it will be just smaller. I think both the number of theaters that are out there will be reduced a little bit and perhaps the size of some of those theaters will be reduced a little bit. But I do think that where there are theaters that are high-performing, they will continue to be high-performing in the future. Thankfully, a lot of ours are. And I think that we will be able to maintain the rents, which we've already seen decline a little bit over time. So I think they're not at a high level to start with. But I do think some of those theaters will come back to us. And what I would say is from reviewing every one of them, Mark, which we do constantly to ensure that we have contingency plans, depending on what happens to those theaters, the majority of them can be utilized for other things, be it a redevelopment entirely or simply redefining the space as something else, be it retail or industrial. But by and large, we do think that the majority of our theaters will continue to be in existence, and we don't see significant rental pressure going forward on all of our locations, but some of them, we certainly will. And then with respect to restaurants, I mean, look, I think this pandemic has had a serious short-term impact on restaurants. But I don't believe that restaurants, particularly some of the ones that we're dealing with that have a larger balance sheet, and I would say, a fairly sizable infrastructure like Recipe Foods. I really don't believe that their business model is going to be affected significantly in the long term. I do think the next year is going to be extremely tough for them. And I think there will be some banners that will lighten. But I do think that the trend towards eating out at restaurants, will reinvigorate itself on the other end of this pandemic, and therefore, demand will increase again, and there will be, again, I think the opportunity, particularly in some of our very well-located properties to increase rent over time. But again, the next year, that won't be the case because there's simply -- I mean, they are suffering quite tremendously.

[Mark Rothschild, MD & Real Estate Analyst]

Okay. Maybe just one more question. Over the past number of years, RioCan have been extremely active in divesting assets. And obviously, that took a pause. We saw over the past number of months, some other retail REITs sell properties. With interest rates where they are, there's understandable interest in well-leased assets. Should we expect a pickup in asset sales this year and maybe related, do we need to think to stabilize more before investors can have more confidence in what the real cap rates are and how asset values shake out?

[Edward Sonshine, Non]

I think you will see an uptick in divestments this year and recycling of capital. And we're starting to see the investment market slowly come back to life. It all depends on the type of asset, Mark. And I think on -- basically on your question, I'd answer stay tuned.

[Operator]

Your next question comes from the line of Howard Leung from Veritas.

[Howard Leung, Investment Analyst]

I want -- any idea of the amount of tenants or percentage of tenants currently on the new rent program?

[Edward Sonshine, Non]

That's been relatively opaque, but let me turn the detail -- if we have a detailed answer on that to Jonathan.

[Jonathan Gitlin, President, CEO & Additional Trustee]

Thanks, Ed. Opaque is the right word on this one because the landlord involvement has been somewhat disintermediated. We don't have a clear site other than anecdotal as to who's using it. As I suggested in my notes, there was -- we have set up an ambassador program. So we are being utilized as a resource for a lot of these tenants to help them with the application process. But we have not yet got a clear sense as to exactly who or how many of our tenants are utilizing it. My sense is though that as tenants become a little more comfortable with it and they recognize the benefit in it, there's going to be an uptick. And so -- and because it is retroactive to October of 2020, we do believe that, that is one of the elements that will actually improve still our 2020 and early 2021 rent collection numbers. But I can't answer your question with any definition at this point. But as I said, the number of tenants are increasing as months go on and as the process becomes a little less intimidating and a little easier for them to reconcile.

[Edward Sonshine, Non]

We find that a lot of our tenants are a little more weary of dealing with the CRA than they were with the CMHC -- with CMHC under the original rent program. CRA tends to scare a lot of people. So I think that's been one of the reasons for the slow take up.

[Howard Leung, Investment Analyst]

Right. No, no. I understand that. I want to also turn to the renewals. The amount of square feet renewed this quarter was pretty healthy. Spreads were a little light, I think, even compared to the past few quarters. Are you seeing kind of maybe a trade off there, at least in these past few months as the lockdown persists that maybe you have to lighten the spreads a bit in order to get more renewals?

[Edward Sonshine, Non]

I think there's an element of truth in that. I think we always have 2 goals in mind when we approach a renewal, keep the tenant and increase the rent. And depending on what's going on in the world, those 2 assume relative importance. Right now, I think the importance is keeping the tenant. And the tenant has a bit of a stronger hand, particularly when he's not being allowed to operate, which is the case in some of these things or when you're renewing empty office space that's not being used. So to the extent we've erred, we've erred on the side of keeping the tenant. And I think you'll see those spreads as this pandemic hopefully comes to an end sooner rather than later, I think you'll see those spreads increase back to more normal levels.

[Jonathan Gitlin, President, CEO & Additional Trustee]

And I could add one thing to that. I can add one thing to that well thought out answer, which is that when we are doing lighter than average renewals, we will keep the terms short because in recognition of the fact that this is not a terminal condition, right? I think that the conditions will improve. So we very methodically worked with the tenants to really do shorter-term renewals, and then we'll work with them and have better growth, in our view, once the conditions do improve.

[Howard Leung, Investment Analyst]

Right, great. No, that makes sense. And then just maybe one final question on the credit ratings. So DBRS has put you on negative trend. How are the discussions with them going? And should there be a downgrade, does that really impact your strategy going forward? Or do you think that you can mitigate that?

[Edward Sonshine, Non]

I think if -- I'll let Qi add to my comments if she wishes to. We're in constant contact with the 2 rating agencies, S&P and DPRS. We found S&P is taking a bit of a longer-term view of this pandemic. And so far, obviously, there's been no activity from them. Keep in mind, DBRS had us rated 1 notch higher than S&P. We certainly don't want to be downgraded by anybody, but we're very, very committed to keeping our investment-grade status. And at the end of the day, I think if the worst happens with DBRS, I'm not sure it would make that much difference right now.

[Howard Leung, Investment Analyst]

No, that's fair and...

[Edward Sonshine, Non]

Qi, do you want to answer that -- add to that?

[Qi Tang, Senior VP & CFO]

No, Ed. I think you answered it very well.

[Edward Sonshine, Non]

No? Keep in mind, just one thing. I mean, we've always run the ship, so to speak. And I don't want to make a light of our credit rating because, believe me, we're -- without one eye on that credit rating and wanting to keep our development program going, we would not have even considered reducing the distribution because, certainly, financially, we can afford it. But this is like -- but we didn't want to sell stock to raise equity. And quite frankly, reducing the distribution was the equivalent of doing $150-odd million equity deal, but quite frankly, giving away stock at these prices, in my opinion. So this was the lesser evil. And it was -- that credit rating's top of mind. But we've always run our balance sheet where unsecured debt is probably -- well, I think it's about 40% right now, but it's certainly less than half of our total debt. And the secured debt market is alive and well, and actually, in many cases right now, cheaper than the unsecured. So we always have options, lots of options when you're sitting with $8 billion plus of unencumbered assets.

[Howard Leung, Investment Analyst]

For sure. And the spreads, I think, between BBB high and BBB are not that far.

[Edward Sonshine, Non]

Exactly.

[Howard Leung, Investment Analyst]

So that's good to know. So thanks again, and congrats again to Ed and Jonathan, and I'll pass the line.

[Operator]

Your next question comes from the line of Sam Damiani from TD Securities.

[Sam Damiani, Director, Institutional Equity Research]

Just firstly, on the office tenant departure. I'm pretty sure that was a pre-COVID decision. Could you confirm that and also clarify when the rent on that lease stopped or will stop?

[Edward Sonshine, Non]

Yes. I'm going to turn that over to Jonathan. I'm pretty sure you're right. This particular -- they were talking about consolidation like over a year ago. So it was a pre-COVID decision, I think. And I know your last name is Damiani.

[Jonathan Gitlin, President, CEO & Additional Trustee]

Sam. Yes, Ed is right. This was something that has been in the works for a little while. We had preplanned and started looking for tenants quite some time ago. Obviously, the impact of the pandemic has made that search for new tenants a little more challenging. But given the nature of the space, we feel that over time, we will get it leased up or at least the majority of it. But we did lose it pursuant to plans that were in place a while ago. And I believe the rent has already stopped.

[Sam Damiani, Director, Institutional Equity Research]

Okay. And next question, just on to leasing. The new leasing has come back pretty nicely in the latter part of 2020. What is the pipeline looking like right now for leasing, active leasing discussions both on a new and renewal basis? And how would that compare to pre-pandemic levels?

[Edward Sonshine, Non]

Jonathan?

[Jonathan Gitlin, President, CEO & Additional Trustee]

Yes, sure. So the pipeline is actually looking remarkably good relative to what I think the expectations are out there or the perceptions. I think Jeff and his team have done a remarkable job of pivoting to look at tenants that are a little bit more unconventional than what we're used to. And we -- because of that, we have actually, particularly in our well-located major market centers, decent demand for space, and we're seeing empty boxes that have arisen as a result of apparel tenants leaving, backfilled pretty quickly. And an example of that is we have a welcome center in Calgary in over 20,000 square feet of space that took an old furniture store at a higher rent, which is effectively a government tenant that allows for new residents in Calgary to come and visit this place to get, I guess, just get a sense of what's available in Calgary to them. And it actually creates a great cross-shopping opportunity, and it's a good co-tenant and that's one example of many. There are health care uses that we're now starting to see more of. And then the categories that are growing are the ones that you'd expect in this pandemic, and we continue to see that kind of growth, and we think it'll happen after. Those are a lot of the value-oriented retailers, which include grocery stores, of course, but also the likes of Dollarama and TJX banners and we're seeing growth from all these different places. There's not enough talk about those elements of the commercial landscape here. A lot of people are focusing on those that are shrinking their footprints like apparel, which is understandable because people tend to focus on some of the negative aspects, but we are actually seeing some pretty good movement and pretty good demand out of some other categories.

[Sam Damiani, Director, Institutional Equity Research]

And finally, would you have like a specific outlook for in-place occupancy in Q1 or maybe even as far ahead as Q2 based on what you're seeing today?

[Edward Sonshine, Non]

You know what, today is so unpredictable. I mean, you tell me, Sam, when the lockdown will finish and when we can actually start showing tenants space live. I mean I think our leasing guys have been remarkable in doing the amount of leasing and so on, where property tours are just not done and travel to go take a tenant through a property isn't done. So I think when things go a little bit back to normal, it -- we'll be able to give you a solid answer to that. My feeling, and I'll welcome Jonathan's comments, it's bottomed out. And over the course of 2021, it's going to get better as far as I was concerned.

[Jonathan Gitlin, President, CEO & Additional Trustee]

Yes. I would concur with that entirely Ed. I think that we did reach a trough in late 2020. And now based on the momentum we're seeing, it will start to increase over each quarter this year.

[Edward Sonshine, Non]

Yes people do see an end to this, Sam. I mean it's an end that's sort of moving around with the rollout of the vaccine being, to be complementary, weak. And -- but they know that sometime this year, you will get people out there and whatever passes for normal in the second half of 2021, we'll get there. So QSR restaurants are signing up new deals for openings. And there's lots of deals that are being done and will continue to be done, where tenants look to, well, okay, if I can open at the end of '21 or the beginning of '22, that's good. And there is starting to be that confidence out there.

[Sam Damiani, Director, Institutional Equity Research]

I'll turn it back. But Ed, congrats again and looking forward to hopefully seeing you on BNN from time to time.

[Edward Sonshine, Non]

Well, you'll see me on in about 40 minutes.

[Operator]

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

[Tal Woolley, Research Analyst]

Just on the tenant side, I'm wondering, when you look at sort of the vulnerable slice of your tenant roll, if you guys have made it this far, do those tenants still when you're talking to them, feel committed to continuing? And how are they feeling about operating in a post-CECRA post-CERS world?

[Edward Sonshine, Non]

Yes. Let me take the first shot at that, and Jonathan can add as he wishes. Included in that 22% of what we call potentially vulnerable as opposed to vulnerable, are some pretty big names. And at the risk of insulting any of them, that includes Cineplex, that includes all our gyms, GoodLife LA Fitness, includes big chain bookstores. And in talking to those tenants, which we constantly do, yes, they're very committed to the post pandemic future. Does that not mean, as Jonathan mentioned, there may be less theaters a year or 2 from now than there are today? Yes, there probably will be. We're expecting that. And in fact, in some cases, where we have redevelopment plans, we're encouraging that. But certainly, gyms, I have no doubt that once they're allowed to operate in even a relatively normal way, they will be back in business and just the way it was before, essentially. GoodLife, I know is so committed to their survival, if I'm not mistaken, they announced they had taken a large government LEEFF program loan, I think in the neighborhood, if my recollection is correct around in excess of $300 million. So that's how committed they are to getting through this thing because if you remember the details of that, that's quite an intrusive program.

[Jonathan Gitlin, President, CEO & Additional Trustee]

Yes. And so I'll just add a little bit to that -- that good answer, which is that we do speak to our tenants that we consider potentially vulnerable all the time. And this ranges from the larger ones like Ed said, which are some of the gyms and book stores and movie theaters, but also some of the midsize and smaller ones. And the response that we have received is exactly that, "Hey, we've made it this far. We want to enjoy the other side of this." And I think there's a general sense, and I think they've gleaned this from also what's happening in the U.S. that there is going to be commercial exuberance in Canada once there is an ability to open up in a safe manner. And I -- the same way we are optimistic about the end of 2021, they, too, are optimistic and really don't want to miss out on this. And because they've weathered the storm so much, and granted, a lot of those storms were floated through on the backs of generosity of landlords and the government programs that are out there. However it's arisen, a lot of these tenants feel that there is a lot of upside coming at the end of 2021 or hopefully in the middle of 2021, and that is certainly the feedback we've received from a number of them.

[Tal Woolley, Research Analyst]

And if you look at like some of your smaller tenants, a lot of them have gotten sort of pushed into offering some sort of online e-commerce, click-and-collect kind of service that maybe they probably weren't offering before. Like has their tone changed about how they're thinking about the business, their own businesses, too?

[Edward Sonshine, Non]

I think they all know that they have to have more online capabilities. Using myself as an example, I can tell you at the beginning of the pandemic last spring, I ordered some books from Indigo. At the time they were using the Canada Post effectively for the delivery. It took almost, I think, about 10 days to get here. And I ordered some books about, well, at the beginning of this week. And they took 2 days to get here. So clearly, in their logistics, Indigo has adapted. And because a 10-day on delivery time is unacceptable to anybody. So -- but does that mean they're giving up stores? No. The people who love books, love browsing in a bookstore. I'm one of them. And while I'll order online when I have to, I far prefer to go to the store. And I think you'll see a lot of the particularly smaller retailers continue to build their online presence. But I think the model is the Target stores down in the United States, even though I hate using their name because of what they did to Canada, where they make the store the center of their online business. And I think you'll find a lot of these smaller tenants will be in exactly the same position. The ones that are going to succeed, they must have an online presence. But they also have to have that bricks-and-mortar store. The take-up in our curbside Collect program that we started really pretty early in the pandemic, I think, is increasing by the week. Anyway, Jonathan, anything you want to add?

[Jonathan Gitlin, President, CEO & Additional Trustee]

Yes. I think that -- I mean, there's a reason Shopify is doing so well. A lot of the tenants, big or small are figuring out how to establish online presence. But as Ed said, I mean, what we're trying to do is help our tenants change or adapt because this buy-online-pick-up-in-store or click-and-collect model is taking on a lot of prominence, and it's really much more efficient for these retailers to do it that way rather than delivering to one front door. And delivering to one front door is also not ideal for a consumer either. And this is the feedback we're getting from a host of our tenants who really do believe in the economic virtues of having these, what are really just fulfillment centers that have penetrated deep into neighborhoods. And so we do believe that there's absolutely a need for these tenants to pick up their game when it comes to online, but they also recognize the need to make their stores more valuable and useful in furtherance of getting consumer goods to consumers' homes.

[Tal Woolley, Research Analyst]

Okay. On the balance sheet side, the debt-to-EBITDA ratio, it's obviously above your longer-term target of 8x. You've got a fairly hefty development planning commitment this year. How should we expect to see that ratio kind of evolve over the course of '21 and '22? Obviously, it will be better by -- the further out we go. But I'm just wondering in the near-term quarters, like should we be anticipating that ratio to probably rise through the first half of the year and then maybe start to come down after that?

[Edward Sonshine, Non]

I think you may see a gentle rise of it, and it will be gentle in the first quarter or 2. I think it's going to depend. And again, we're always juggling a few balls, as I say, on how quickly we're able to move on some of our disposition plans. As we responded to Mark and -- right at the beginning of the question time. And but we're going to have one eye on that. I don't think you'll see it move much in the first 6 months, but I definitely think that after we get past midyear, you'll start to see the ratio improve.

[Tal Woolley, Research Analyst]

Okay. And then just lastly on the Hudson's Bay JV. In 2000 -- I can't remember whether it's 2014 or '15 when this deal got struck, I remember that you guys had a committed -- a capital commitment that they could -- that the JV could call over time as you put some more money into that. Have you committed the full amount now?

[Edward Sonshine, Non]

Yes. It's a 100% invested. There's no further call.

[Tal Woolley, Research Analyst]

Okay. And when do you anticipate the process of starting to rethink some of those urban flagships will begin?

[Edward Sonshine, Non]

Well, I think it has begun in some ways. I know Hudson's Bay, which is taking the lead of it, has been exploring the market, for example, specifically with Vancouver and Montreal. They've got to figure out, which I know they are in the process of doing, what they want their own footprint to look like in those properties on a go-forward basis. But the -- and they want the pandemic to be finished. So I mean, quite frankly, I don't think you'll see anything happen until 2022 or even a little later. But I know there are constant discussions. I mean the property in Vancouver, which is an incredible property, whether you look at it for -- I mean, it's attached to Pacific Mall, from a retail perspective, underground, and it's in the heart of the city. And, so whether you look at it from an office perspective, a residential perspective or a retail perspective, it's got incredible value. And you can say the exact same about the one in Montreal. Calgary may take a little longer just because it's in Calgary. Ottawa, I think, may move forward fairly quickly, too. So -- but we're sort of in the hands of HBC. Keep in mind, we get paid a pretty good rent, and they're totally current on that, I might add, on the joint venture rents while we're waiting.

[Tal Woolley, Research Analyst]

And that pretty good rent, would you -- do you feel that, that's like market -- at market levels, given how the environment has changed?

[Edward Sonshine, Non]

Yes. Given how the environment changed it's probably above market. But keeping in mind that Hudson's Bay is paying 80% of that rent to itself, it's really not a problem. Like I say, it gets paid, and we're confident that we'll get paid and it gives us, I think, Jonathan, pretty close to a 6% or about a 6% return right now on invested capital?

[Jonathan Gitlin, President, CEO & Additional Trustee]

About that. Yes.

[Edward Sonshine, Non]

While we're waiting for some transactions to happen, which I have no doubt they will. Mr. Baker is a very clever creative man.

[Tal Woolley, Research Analyst]

Okay. Congratulations, Ed.

[Edward Sonshine, Non]

Any further questions, Melissa?

[Operator]

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

[Pammi Bir, Analyst]

Ed, Jonathan, Qi. Just -- I'll try to be quick because I know we're -- kind of hit the 60 minutes. So last year was obviously more pronounced in terms of bankruptcies and closures. But maybe just based on your discussions and, I guess, an extension of some of the comments you made on the call, what are your thoughts on how this year may shape up?

[Edward Sonshine, Non]

Jonathan?

[Jonathan Gitlin, President, CEO & Additional Trustee]

Yes. So last year, we had, I mean, about 0.9% or under 1% of our income was affected by bankruptcies, stores that actually closed because of bankruptcies. Because remember, a lot of these are CCAA restructurings where, in fact, the leases are restructured and they subsist beyond the CCAA filing. And truthfully, usually, in the normal course, we see a lot of fallout in January. And quite honestly, we didn't see really any this January. And hopefully, that's a sign of the fact that there's generally a little more health out there than perception would dictate. But we're not -- and we're not hearing any rumblings of additional filings. I mean if you think about it, most of the weaker apparel tenants already did this, right? And then some of the other tenants that are in a perilous situation, again, they are getting helped substantially by the government to bridge them through this. And I think their uses are actually quite relevant in a post-COVID society. So I don't see a huge number of bankruptcies coming. But again, it's always unpredictable. You never know how tenants are looking at the world. So I mean, it's a bit of a vague answer because it's a bit of a vague concept, but that's the sense we're getting. And as I said, usually, it's January where these things happen.

[Pammi Bir, Analyst]

Got it. No, that's good color. And just maybe lastly, coming back to the theater exposure. You mentioned you're anticipating or planning for, I guess, less exposure over time. But how much of your exposure do you think may actually decline over the next, call it, 12 to 24 months?

[Jonathan Gitlin, President, CEO & Additional Trustee]

Well, declines -- I mean it has declined recently through dispositions, and we fully expect that over time, just through normal course, redevelopments, dispositions, et cetera, it will decline a little more. And we're certainly -- it's going to also be we're not doing any more. I mean, I can't imagine there'll be any more growth in that part of our portfolio. So I do think over time, it will continue to decline, but it's going to be incremental.

[Pammi Bir, Analyst]

And Ed, congratulations again on retirement.

[Operator]

Your last question comes from the line of Dean Wilkinson from CIBC.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Ed, I timed this to be your very last question.

[Edward Sonshine, Non]

Okay. Thank you.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

If Tom Brady doesn't have to retire, I don't think you do, but that's an entirely different subject.

[Edward Sonshine, Non]

Yes. I'm a couple of years older than him, but -- but just as good looking, I think.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Yes, exactly. As you look back on the 27 years and thank you for the education, what do you think the biggest change in the business has been and what does that mean for the next 27 years for Jonathan? And kind of what can we take from what you've seen and how the industry has kind of evolved over that time?

[Edward Sonshine, Non]

Well, I think the biggest evolution over the years has been the concentration on the major markets. I think we were first to figure that out and -- but everybody else has figured that out. And the second, whereas it used to be back in the first, I'll call it, 5, 6, 7 years of this industry, well, $1 of Loblaws' income in Sault St. Marie was probably worth $1, it was the same kind of income as a dollar of Loblaws' income in Toronto. Over time, everybody started to figure out that, that wasn't really the case because you were able to get better growth from your ancillary tenants, Loblaws was doing more sales per square foot in the major markets and all of that related back to population growth. So you saw a movement over the years to the major markets. I think starting about 7, 8 years ago, certainly, in our case, maybe even longer, everybody also started to realize that the biggest asset in these major markets that the REITs had was these large landholdings at critical locations. By definition, you built a shopping center at the intersection of 2 major streets so people could get in and out easily. And guess what, that's where the cities are growing, and -- because transit lines are being put on in those major streets. And everybody realized that to -- as the internet grew in popularity, you really needed to create value from the assets you held. It means everybody had to go into development. When we first started doing development in ways, probably close to the beginning of this century, we were the only guys doing it. And now I think everybody is doing that right from us to Crombie, maybe not CT REIT, but those captive REITs are a little bit different. But the -- I think those are the biggest changes that the growth is important. 20 years ago was, "Hey, you actually sent me a check this month. Thank you very much."

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Well that's great. That's -- and I can say, I think we're all looking forward to the post-COVID retirement party, so. Stay well.

[Edward Sonshine, Non]

Thank you. Melissa, I think that marks the end of this conference call. I'd like to thank everybody who's still on that called in. And I won't say I look forward to speaking to you next quarter because you'll get to hear from younger and smarter people than me. Exclusively. Anyway, thank you, guys. Thank you, Jonathan. Thank you, Qi. Thank you, Jennifer. And you know what, I guess, that's it. And I'm sure, Qi will be talking to many of you one-on-one later in the day. And for those who have any interest, I'll be on CNN in about 23 minutes.

[Jonathan Gitlin, President, CEO & Additional Trustee]

BNN.

[Edward Sonshine, Non]

BNN. CNN, they only got time for the Senate. Okay, everyone. Goodbye.

[Jonathan Gitlin, President, CEO & Additional Trustee]

Bye.

[Qi Tang, Senior VP & CFO]

Bye.

[Operator]

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