RioCan Real Estate Investment Trust

TSX:REI.UN

Earnings Call Analysis

RioCan's Robust Results and Optimistic Outlook

In the face of a robust real estate market, RioCan pledges $800 million from inventory sales primarily for debt repayment, targeting a net debt to EBITDA ratio of 9x by year-end and aiming lower in the subsequent year. This strategy aligns with RioCan's savvy focus on densely populated areas, boasting average incomes around $140,000, ideal for securing strong retail tenants. Echoing this strength, a 3.5% FFO per unit increase to $1.77 in 2023 paves the way for projected growth, with FFO guidance for 2024 set at $1.79 to $1.82 per unit. Complementing this, a 2.8% distribution hike marks the third consecutive yearly rise, demonstrating confidence in sustainable growth. RioCan also maintains a tight payout ratio (55-65% of FFO) and plans $250 to $300 million in mixed-use development, with a net debt to EBITDA goal well within the 8-9x range by 2025.

Strategic Capital Allocation and Debt Reduction

As a part of their strategy to strengthen the balance sheet, the company anticipates around $800 million from inventory proceeds, primarily for debt repayment. These are not speculative sales but are backed by concrete condominium closings. There was a reduction in net debt to EBITDA by 23 basis points in 2023, concluding the year at a multiple of 9.28 times and aiming to reduce it further to 9x by year-end. With prudent measures like scaling down construction spending, they're channeling capital into debt repayment and selective opportunities that offer good returns, ensuring a downward trajectory in the net debt to EBITDA ratio and aligning to their 8 to 9x target range by 2025.

Robust Operational Performance and Portfolio Resilience

The company's operations shine with excellence, demonstrated by top seating in the 2023 GRESB Real Estate Assessment in Canada. RioCan's strategic focus on key urban markets has crafted a resilient and coveted asset portfolio. A combination-length average population of 260,000 with household incomes around $140,000 within a 5-km radius of their assets, accommodates the needs of stable retail tenants. They face a supply shortage and intense demand for premium locations - a niche RioCan comfortably occupies.

Dividend Growth and Fundamentals-Driven FFO Increase

Reflecting a belief in its growth prospects, RioCan raised its distribution to unitholders by 2.8%, marking the third year of consecutive increases. FFO growth in 2023, pegged at 4.8% for same-property NOI, is attributed to record occupancies and a robust leasing environment. With developments and residential assets contributing to growth, they forecast an FFO of $1.79 to $1.82 per unit in 2024 driven by expected 3% same-property NOI growth, among other factors.

Capital Recycling Impact and Portfolio Quality Enhancement

RioCan offloaded lower-quality, higher cap rate assets to reinvest in ongoing developments and superior quality assets, enduring a temporary impact on FFO. They envisage neutral impacts on FFO by 2026 with subsequent NAV accretion. About $450 million in fair value losses on investment properties were recognized, largely due to increased capitalization rates but balanced by higher income from a tightening operating and leasing environment. Positive developments in portfolio quality are reflecting in their IFRS valuation metrics.

Balance Sheet Solidification and Financial Planning

The company ended 2023 with an improved net debt-to-EBITDA ratio at 9.28x with liquidity at $2 billion. Expecting liquidity to normalize in subsequent quarters, they also succeeded in extending their weighted average term to maturity to 3.5 years. Through diverse capital access, they've arranged significant financing at competitive rates and foresee further enhancement in their credit metrics through 2024 and 2025. They remain confident in their portfolio and long-term value generation capacity, backed by an experienced team and quality assets.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust Fourth Quarter and Year-End 2023 Conference Call and Webcast. As a reminder this conference call is being recorded.

I would now like to turn the conference over to Ms. Jennifer Suess, Senior Vice President, General Counsel, ESG and Corporate Secretary. Ms. Suess, you may begin.

[Jennifer Suess, executive]

Thank you, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel, ESG and Corporate Secretary of RioCan. Before we begin, I am required to read the following cautionary 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 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 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, 2023, 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.sedarplus.ca.

I will now turn the call over to our President and CEO, Jonathan Gitlin.

[Jonathan Gitlin, executive]

Thanks so much, Jennifer, and thanks to everyone that's joined RioCan's senior management team today. First, I want to start with the recognition that RioCan recently celebrated its 30th anniversary. I had the pleasure of marking the occasion by ringing the opening bell at the TSX with our Chairman and Founder, Ed Sonshine along with RioCan's senior team. It's actually not really a bell. It's more like pushing a button, but it was very cool in any event.

Being Canada's longest standing REIT isn't just a status symbol. Our 30th anniversary provided the opportunity to reflect on how we've curated an irreplaceable portfolio of high-quality properties and leveraged every opportunity to strengthen our assets, foster strategic growth and create value for our unitholders.

So I speak to you today from that position of strength with the perspective and knowledge afforded by a long history and a clear vision for the business. RioCan's 2023 operating results again, reflect the excellence with which we are executing our strategy. We showcased historic operational strength, enhanced efficiency and achieved our financial objectives.

In light of this, we're pleased to announce that RioCan's Board of Trustees has approved an increase in the annualized distribution to $1.11 per unit. This is the third consecutive annual increase as we provide sustainable distribution growth to our valued unitholders, while maintaining our payout ratio targets.

I'll take a moment now to share some notable 2023 operational achievements. RioCan's superior property fundamentals, coupled with extensive demand for our space, led to outstanding leasing spreads and record occupancy. The consistent delivery of new and diversified NOI from our development projects further contributed to our strong operational performance.

Commercial same-property NOI growth for the year was 4.8%, which exceeded our 3% annual target and providing the foundation to deliver FFO per unit of $1.77, a 3.5% increase over 2022. Leasing velocity remained a dominant theme as RioCan's high-quality necessity-based retail portfolio propelled results.

New and renewal leasing spreads of 14.7% and 9.8% resulted in a robust blended leasing spread of 10.7%. New leasing in 2023 generated an average net rent per square foot of $27.75 well above the portfolio average of $21.50 per square foot. This expanding spread indicates a significant growth opportunity, as an increasing number of contractual fixed rate renewals burn off.

Retail committed occupancy reached an all-time high of 98.4%, a 98.4% retail occupancy positions, that’s exceptionally well. When weaker tenants vacate these short-term transitions while creating nominal downtime, presents opportunities to backfill with more productive leases.

That will happen with tenants such as Rooms + Spaces and Bad Boy who ceased business operations in the first quarter of 2024. We've already leased most of these spaces, or have garnered solid interest from strong and stable retailers that will enhance our shopping centers, and with rents on average more than 20% higher than the incumbent retailers.

These types of failures are not atypical in the year's first quarter. This year, there may be some additional turbulence from the less than 3% of our portfolio, comprised of what we characterize as transitional tenants, as these are the types of businesses more susceptible to macroeconomic volatility.

We view these as healthy transitions necessary for long-term portfolio health and outsized growth. It's opportunity that represents evolution. Any vacancy that arises, allows us to accommodate the significant space requirements of high-growth tenants, such as Loblaws, Sobeys, Shoppers Drug Mart, Dollarama, and TJX, along with numerous quick-service restaurants that are seeking to enter the Canadian market, and these are just to name a few categories.

The robust demand for our space, coupled with our team's deep experience, will continue to create positive tension and lease negotiations when there is a vacancy. Our ability to capitalize on these opportunities, safeguards our occupancy levels and enhances our portfolio's overall productivity and profitability.

Our income is further supplemented by our RioCan Living residential rental portfolio, which generated $21.5 million of net operating income in 2023, an increase of nearly 58% over 2022. With close to 3,000 residential units in operation, we're well on our way to achieving our goal of between $50 million to $60 million in residential rental NOI by 2026.

Our growth in 2023 was further punctuated by delivering nearly 600,000 square feet of development projects, which are expected to generate more than $27 million of stabilized NOI. These deliveries included The Well, where 96% of the commercial space is leased and 91% is in tenant possession. There is no more excellent reflection of RioCan's boldness than the vision and scale of The Well.

November marked a significant milestone for the project as we celebrated the launch of the retail component with a community ribbon-cutting ceremony. A steady stream of tenant openings will continue throughout the first half of 2024, offering diverse experiences, innovative and service-oriented tenants and inspired food offerings.

Throughout 2023, we continue to demonstrate the strength of our portfolio, both in terms of asset mix and locations. We also showcased our operational agility by pivoting in key areas. This included increasing our focus on debt reduction to help offset the impacts of an abrupt and sustained high interest rate environment.

Entering 2024 in the context of today's high and persistently uncertain interest rates, it was important for us to consider our 2024 guidance, and the longer-term targets we discussed at our 2022 Investor Day.

With the compounding influence of interest rates on FFO, we believe the prudent approach is to focus our FFO outlook on our 2024 guidance, rather than the longer-term targets we set 2 years ago under a very different interest rate environment. What is particularly important for me to emphasize, is that numerous operational elements factor into our FFO outcomes for which we remain on track.

In fact, we've not just met, but in many instances, exceeded the operational and balance sheet targets that we established back in 2022. We have seen the benefits of our sustained strong performance in a more normalized interest rate environment. Our cumulative FFO results for 2022 and 2023 were within our 5-year target range of 5% to 7%.

That said, for 2024, we expect FFO to be in the range of between $1.79 and $1.82. This is strong 2.3% growth in the face of a material increase in interest expense, due to the higher for longer interest rate environment we find ourselves in. To drive continued FFO growth and help offset the continued impact of higher interest rates, we're focused on 2 critical areas, debt reduction and operational performance.

We have a clear and proven path forward for both. Strengthening our balance sheet and reducing debt allows us to lower the cost of capital moving forward. We have a well-defined road map to do so, starting with utilizing repatriated proceeds from the dispositions of inventory properties.

Over the next 2.5 years, we anticipate approximately $800 million in inventory proceeds, most of which are earmarked for debt repayment. These aren't speculative inventory sales. They are contractually bound condominium closings. In 2023, we reduced our net debt to EBITDA by 23 basis points, ending the year at 9.28x. We expect to reduce our net debt to EBITDA ratio to 9x by the end of this year.

We plan to drive this ratio down further as additional proceeds are realized. We are also exercising prudence by reducing our construction spending this year relative to what was planned in 2022. This is a proactive measure. By temporarily scaling down construction spending, we allocate capital to highly productive and accretive uses such as debt repayment, providing third-party mortgages and where appropriate, opportunistic acquisitions.

Operational performance is the second pivotal factor in mitigating the impact of interest rates. Quarter after quarter, starting from our February 2022 Investor Day, RioCan's team and portfolio have consistently delivered exceptional operating results. RioCan's portfolio is at its greatest desirability and defensiveness.

This results from our commitment to maintaining a resilient and sought-after asset base. Our strategic focus on major markets has resulted in a portfolio concentrated within densely populated areas. Within a 5-kilometer radius of our assets, the average population is now 260,000 people, with a high average household income of around $140,000.

This profile aligns perfectly with the requirements of strong and stable retail tenants. The operating environment remains strong, marked by a supply shortage of available retail space, combined with intense retailer demand for high-quality locations. Precisely the kind found within RioCan's portfolio.

And while we maintain a steadfast focus on our operations, balance sheet and progressing our development pipeline, we've also been recognized for our ongoing commitment to sustainability, ethical governance and of course, people and culture.

RioCan continues to take steps to mitigate the impact of climate change, and has set an overall target to reach net 0 greenhouse gas emissions across the value chain by 2050. We are pleased to confirm that our targets were approved by the science-based targets initiative this year, a significant validation of our commitment.

In addition, I'm proud to report that we maintained our first rank amongst our Canadian peers in the 2023 GRESB Real Estate Assessment. Before I turn the call over to my colleague Dennis, I will reiterate that retail real estate dynamics are in our favor and are producing meaningful long-term demand drivers for our products.

We've taken meaningful steps to make our business viable in any backdrop. Our consistency, vision and demonstrated commitment to responsible growth will continue to serve our unitholders as well and at the same time, position the trust for continued stability.

We have the foundation for a return to outsized growth. The quality of our assets fuels long-term growth and mitigates downside risk. RioCan is operating a best-in-class retail portfolio in the most desirable markets in this great country.

We remain committed to prudent financial management, and we have an exceptional team. Importantly, we are delivering our third consecutive distribution increase, which signifies our confidence in RioCan's long-term prospects. The increase also acknowledges our unitholders' ongoing support and loyalty.

We believe returning value to our investors through a higher distribution demonstrates our dedication to creating long-term unitholder value.

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

[Dennis Blasutti, executive]

Thank you, Jonathan, and good morning to everyone on the call. RioCan's results for 2023 tell a story of operating strength and progress in development deliveries. FFO of $1.77 per unit represents growth of 3.5% over the prior year. Combined with 2022 growth of 6.9%, the compound annual growth rate over the last 2 years was 5.2%.

Our confidence in our growth prospects along with our payout ratio, which is the lowest of our peers, and our disciplined approach to capital management is reflected in our decision to increase our distribution to unitholders by 2.8% to an annual amount of $1.11 per unit.

This is the third consecutive year of distribution increases, and we are set up to continue with sustainable and reliable distribution increases for the foreseeable future. 2023 FFO growth was driven by strong fundamentals across our business. Same property NOI growth from our commercial portfolio of 4.8% or 3.6%, excluding the impact of provision reversals, drove $0.09 of growth.

This was fueled by record occupancy and a very strong leasing environment. Development deliveries led to $0.05 of growth and contributed materially to a portfolio quality with remarkable assets added in the country's best markets. Our residential assets added $0.03 of growth as the supply demand dynamics for purpose-filled rental remains incredibly favorable for that asset box.

On a same property basis, NOI growth for our stabilized residential properties was 13.8% in 2023. This metric was achieved with no CapEx required, as our residential rental portfolio is comprised entirely of new built properties. Prior period NCIB activity led to $0.03 of growth in 2023 and all other items added a combined $0.01 per unit.

Offsetting the above growth drivers were $0.10 as a result of reduced NOI related to assets sold. I will address this momentarily when discussing capital recycling initiatives. And we had $0.05 of a reduction due to higher interest expense, net of hedges, reduced debt requirements due to retained operating cash flow and debt repayment from asset sales and higher interest income.

Looking ahead to 2024, we have provided FFO guidance in the range of $1.79 to $1.82 per unit. Growth will be driven by 3% same-property NOI growth from our commercial properties, and incremental NOI as our development deliveries and residential portfolios continue to ramp up.

Other key assumptions include the following, G&A expense, excluding ERP implementation costs, is expected to be flat due to past restructuring and disciplined cost management. Our weighted average interest rate on new financing activities was assumed at 5.64%. And we have a $0.02 impact related to 2023 and early 2024 dispositions, net of acquisitions.

And as I mentioned earlier, I will address this further in my comments on capital recycling. In addition to FFO guidance for 2024, we provided the following. We expect to maintain our industry low target payout ratio of 55% to 65% of FFO.

This ensures that we can fund their distribution and maintenance CapEx from operating cash flows, while retaining approximately $150 million of cash flow per year for reinvestment in our balance sheet and business.

We expect to spend $250 million to $300 million on mixed-use development, mostly relating to construction of already underweight projects as well as the advancement of our extensive pipeline. We do not intend to start any new mixed-use construction in 2024. We expect to spend $50 million to $60 million on retail construction. These are infill opportunities such as strips and pads at our existing sites.

While the cost of construction of new retail remains high, with replacement costs well above fair value. We have had tenant interest in some of our well-located sites at rents and support construction. These types of opportunities are an attractive use of capital, and we will remain disciplined to ensure return requirements are met.

Finally, we have good visibility for net debt to EBITDA and expect to achieve our 9x target in 2024, and will be well inside our target range of 8 to 9x in 2025. Now moving to other aspects of our results.

Capital recycling has long been one of RioCan's core competencies, as we continuously improve our portfolio quality and surface greater opportunity for future growth and generate enhanced risk-adjusted returns.

This has been a theme over the last number of years as proceeds from the sale of lower-quality, higher-risk assets were redeployed into premium assets through development and acquisitions, while also improving our balance sheet. The result is a portfolio that is major market focused with an excellent demographic profile.

2023 was a continuation of this program. We disposed some $295 million of assets, including an enclosed mall in Winnipeg and 3 cinema anchored centers. These are centers that we consider noncore and nonstrategic from an asset class, geography, tenant mix and growth perspective. Sales proceeds were partially recycled in strategic asset acquisitions in major markets.

Acquisition cost was $263 million, which included assumed debt of $120 million and a deferred density payment of $41 million, resulting in a net investment of $102 million. Assets acquired include a managing interest in a growth grocery anchor center with development upside in Toronto, new build residential buildings in Calgary and Montreal, and a few small land assembly opportunities.

The acquired debt was key to making the acquisition economics work as the weighted average contractual interest rate was 2.68%, significantly below market and a weighted average term to maturity of 5.3 years.

We allocated $9 million to our loans receivable program, with $84 million of new loans written offset by $75 million of loaded pay. We maintained a disciplined lending policy, where we are lending to retail and residential assets in major markets, leveraging our in-house underwriting capabilities to gain comfort over the security provider.

We have also partnered with an institution that specializes in this type of lending to provide expertise and administration. The weighted average interest rate on new loans written was 11.1%. The remaining un-invested proceeds of $177 million was used to reduce corporate debt.

Given that we have been selling lower quality and therefore, higher cap rate assets over the last few years and reinvesting that money into developments that are still in progress and higher quality assets with lower cap rates, there is a short-term impact on FFO.

I mentioned this impact in the analysis of 2023 results and 2024 forecast. Pulling the pieces together, the impact of dispositions over the last 2 years, partially offset by acquisitions, NCIB and interest savings from reduced debt balances is $0.04 on our 2024 FFO per unit.

Said another way, our 2024 FFO per unit would be $0.04 higher if we had not sold these assets and recycled capital as described. However, real estate is a long-term business. And so we make capital allocation decisions using 10-year model.

Looking specifically at the capital recycling over the last couple of years due to the differential in growth rates expected, we expect FFO neutrality by 2026 and accretion thereafter, which drives NAV accretion over time.

We believe that the improvements to our portfolio quality enhances the health of the business, improves future growth potential, and reduces risk by constructing a portfolio that can weather all economic environments. The impact of this significant quality improvement over the last number of years should appear in our valuation metrics, which brings you to the next area of focus.

During 2023, we recognized $450 million of fair value losses on investment properties, driven by judgmental increases in capitalization rates in light of the higher interest rate environment, partially offset by gains related to higher stabilized income, reflecting the strong operating and leasing environment.

On a cumulative basis, we have had about $1 billion of write-downs over the last few years, which we view as reasonably conservative. Over the course of 2023, our weighted average cap rate increased from 5.33% to 5.41%, which also requires further analysis. Cap rates were increased by 14 basis points driven by a higher interest rate environment.

This was partially offset by 6 basis points due to improvements in portfolio mix with higher cap rate assets sold and lower cap rate assets invested in. Over the last 2 years, we see the same trend. Cap rates increased by 31 basis points cumulatively, partially offset by 19 basis points due to the improvement in portfolio mix.

This demonstrates how our higher-quality portfolio, which we achieved through active capital recycling has translated into our IFRS valuation metrics. Finally, turning to our balance sheet metrics and financing activities.

We finished 2023 with a net debt-to-EBITDA of 9.28x down from 9.51x at the end of 2022. Liquidity stood at $2 billion, comprised of undrawn corporate lines of credit, construction lines and cash. This was higher than prior quarters due to timing of asset sales, acquisitions and debt repayment. And in the coming quarter, we expect liquidity to be more in line with recent norms.

Our weighted average term to maturity was 2.97 years as at our year-end. However, this was also impacted by timing as a significant amount of debt has already been refinanced so far in 2024, extending the weighted average term to 3.5 years.

In terms of financing activity, RioCan continues to have access to various forms of capital. Since we reported Q3 2020 results through to today, we have arranged $608 million of permanent financing at a weighted average interest rate of 5.4%, including debentures, commercial mortgages and CMHC mortgages.

Overall, we expect to see continued improvement in our credit metrics over the course of '24 and '25, driven by items that are largely in our control. As we reflect on 2023 and look forward to 2024, we are confident in the strength of our business. RioCan has an irreplaceable portfolio of top quality assets in the best markets in Canada.

With the team in place to operate and optimize this portfolio, we have the opportunity and capability to drive increasing value over the long term.

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

[Operator]

[Operator Instructions]. Our first question today comes from Dean Wilkinson of CIBC.

[Dean Wilkinson, analyst]

Jon, maybe starting with the new construction and the decision to sort of be shovels down there, is the decision going forward as simple as interest rates coming down? Is it interest rates stabilizing where we are, or is there a lot of other sort of stuff going into the gumbo on that?

[Jonathan Gitlin, executive]

These are complicated projects, and there's a lot that goes into the decision. Interest rates and construction costs are significant elements to it. But there's also predictability in the timing of the construction process, which we're working with municipalities as best we can to get a little more clarity on that.

And then there's also just decisions around how else to allocate proceeds or funds at this point in time. And so it's also a byproduct of whether or not there's other opportunities that may have a little less risk and a little better of an outcome for us, that all weigh into the decision.

But the short-term decision to be shovels down again, it doesn't reflect on our advancement of development sites, meaning getting more entitlements, meaning dealing with tenant encumbrances, meaning dealing with environmental issues, things like that.

But in terms of starting hard construction bean, interest rates and clarity on those definitely factors into it, but it's not the only factor. Andrew, any other additional thoughts on that?

[Andrew Duncan, executive]

No. I think everything you said is bang on, Jon. I think the only addition to it is where, in the case of some of the multi-residential sites where rents go, just the other side of the equation in terms of [indiscernible].

[Jonathan Gitlin, executive]

And that all being said, Dean, we are very much focused on growing that apartment unit count. We think it's a great mix with our retail portfolio, and we will certainly get back to it as soon as there is a little more clarity. And as it becomes more clear to us that it is the most efficient and effective way to utilize capital.

[Dean Wilkinson, analyst]

Second question is one that we probably don't spend almost any time on with you guys. That's the 10% of the portfolio, which is office. The year-over-year increase in rents seemed exceptionally strong, and it's close to 14%. Is that a face rent, or is there a net effective? And what kind of drove that? Because it looks to me like you're actually going to put up some very decent same-property NOI metrics in 2024 out of office, and that might be sort of counter conventional narrative?

[Jonathan Gitlin, executive]

Well, it's a reflection that we have a high quality office portfolio that is certainly unique in each one of the areas where it exists. So I think a lot of that growth is driven by The Well, where we've seen very good progress on the overall lease-up of the office space there. And otherwise, we are seeing some -- it's obviously an asset class that is going through some struggles.

We have a fairly, I'd say, insulated group of office product, particularly if you look at the GTA, where we have Yonge Sheppard and Yonge Eglinton, which, again, are, I think, stand out because they're part of mixed-use communities, and that provides an amenity for the office tenants that they quite like and they're both transit-oriented.

So even though occupancy in those buildings is, I would say, a fairly low point relative to historic numbers, we do see some uptick there because there's infrastructure that's being completed here Yonge Eglinton and the Yonge Sheppard is being recognized for the strength of that mixed-use facility.

So I think it's -- listen, it's not going to be our biggest growth driver, but it's certainly something where we've seen a lot of diminishment in occupancy over the last little while. And whenever there's diminishment in occupancy, it always means that there's some upside potential, and that's what we're seeing right now.

[Dean Wilkinson, analyst]

Would that suggest perhaps that those assets could be salable, or do you want to hold them in the portfolio given sort of ancillary benefits to the other 2 components?

[Jonathan Gitlin, executive]

Look, everything in our portfolio, Dean, is always salable, right? We are -- I mean these are all assets that if they benefit our balance sheet and benefit the outcome for our unitholders, we would sell anything if it came down to it, but I think the circumstances would have to be very appropriate. And remembering too, that these are components are very vital mixed-use facilities that are a big part of those communities.

It makes it more -- it makes it a tougher decision for us because I think it does serve as a vital component to the residential that we have in these locations as well as of course, the retail. So they are an ecosystem. And when you strip out one of the limbs of that ecosystem, it makes it less of a compelling overall project. So we really do view it as a vital component of a good operating mixed-use facility.

[Dennis Blasutti, executive]

And Dean, the one thing I would add is just from a capital flows perspective on private markets, there's just not a lot of capital chasing these assets at the moment. It's not probably a great time. And because our balance sheet metrics will be achieved through organic means, we're under no pressure to sell anything going forward. So we have the ability to be patient and wait for the right market if we ever were to sell assets such as these.

[Operator]

Our next question today comes from Lorne Kalmar of Desjardins.

[Lorne Kalmar, analyst]

Just first, Jonathan, you mentioned Rooms + Spaces. There have been some chatter they've been having issues, but could you maybe give a little bit more color on the situation there?

[Jonathan Gitlin, executive]

I'm going to start, and then I'm going to hand it over to Oliver Harrison who's been -- or John Ballantyne, has been closer to this. But so Rooms + Spaces was a tenant that we didn't really seek out. They were inherited as part of the Bed Bath & Beyond bankruptcy or CCAA filing that they went through last year.

And so Rooms + Spaces was a tenant that acquired those Bed Bath & Beyond leases in that process. We didn't put any capital into those deals, but they did open up in earnest in the middle of last year, and it just -- we throughout the course of the year, were able to get those spaces back, which ultimately is a benefit to us, Lorne, because there is, as I mentioned in my address, a significant upside from the rents there, keeping in mind that these are historic Bed Bath & Beyond leases.

So we are going to see that tendency to part, and we are going to see 5 of them, and we're going to see 5 new tenants take their place who are, I think, more suitable and capable of paying really high rents. John or Oliver, anything to add?

[John Ballantyne, executive]

I would just add that no, we had the benefit of when we went through the CCAA process with Bed Bath & Beyond. There were a number of suitors who were stepping up to bid for those locations. They were ultimately unsuccessful and Rooms + Spaces kind of won the auction, but we didn't stop talking to the potential tenants who wanted the space.

So it's made it very easy for us to backfill them, quite frankly, with much stronger, better uses, including actually a couple of grocery operators for 2 locations. So we're very pleased with the results. There was a bit of a delay to get to where we're going to get. But ultimately, as always, we're going to end up with stronger tenants and as Jonathan said, higher runs.

[Lorne Kalmar, analyst]

And just a quick follow-up on that, other than the grocery operators, would it be sort of the usual suspects in terms of backfilling discount retailers, et cetera?

[Jonathan Gitlin, executive]

Yes.

[Lorne Kalmar, analyst]

And are you guys expecting much of an NOI impact from, I guess, the downtime in between the tenancies?

[Jonathan Gitlin, executive]

Marginal. I mean, as with any downtime, you're going to see a few months of degraded NOI. But it's something that we provision for, it's something that we always take into consideration when we're budgeting for -- or doing our business plan for the year. So it's really around the edges Lorne and will have no material impact.

But there will be a little bit of rockiness over the course of the first and second quarter just because of this evolution.

[Dennis Blasutti, executive]

Just to delve down on that we accounted for these in our guidance range, because we knew about all these things that were coming previously, so that's accounted for. And we had $9.6 million of provisions on our balance sheet at the end of the year. So we have been accounted for a number of these risks within that provisioning process.

[Lorne Kalmar, analyst]

And then maybe just switching over to the capital recycling front, on -- it looks like you guys did a pretty good job on the disposition side. You ended up doing a couple of strategic acquisitions. But I was wondering if there was consideration about focusing more on deploying the proceeds towards debt reduction, prior to the condo closings and if you guys have a disposition target for 2024?

[Jonathan Gitlin, executive]

Well, as Dennis had mentioned, we don't -- I mean, we're having -- we're making significant strides in the statistic of net debt-to-EBITDA, and that's without doing anything. As always, we will -- we don't have a prescribed target for dispositions. But if opportunistic situations arise Lorne, where we can really sell something that does have a significant amount of growth, but has a low cap rate attached to it, we will execute on that type of transaction.

And I would say the prominent use of those proceeds would be for debt repayment. And that is going to be the fundamental and main focus of our capital allocation process going forward. So it's something that, again, when it arises, we will absolutely take advantage of it. We have a lot of density in our portfolio.

And I think right now, we're in a bit of a trough when it comes to land values and density values in even in cities as great as Toronto and Vancouver. But that being said, given the obvious need for more housing, I think that market will bounce back. And at that point, we will avail ourselves of opportunities -- the reason we created all of this density was to have some optionality where we can either just leave the income-producing properties as they are.

We can partner up with potential purchasers like we've done where we set up a limited partnership and develop as sort of construction and development manager, or we could build it ourselves, or we could simply sell it out right, and we'll assess each one of those options as the market improves.

[Lorne Kalmar, analyst]

So as things hopefully stabilize, selling density is definitely an option for you guys?

[Jonathan Gitlin, executive]

For sure, it would be. I think it's like we put in so much sweat equity to create that density. And if we can optimize the outcome by selling it off in a wholesale manner or even keeping part of it, I think it really does do well for our unitholders. So it's something we will definitely take advantage of. We didn't put all that effort in for nothing.

[Operator]

Our next question comes from Mark Rothschild of Canaccord.

[Mark Rothschild, analyst]

Maybe just with regards to retail leasing. We hear some mixed data as far as how the economy is going, and definitely, the outlook is that it should be slowing. Are you seeing any signs of moderating demand, or something that would lead to maybe a drop in the pace of leasing spreads? Your comments kind of have been pretty positive.

[Jonathan Gitlin, executive]

They are positive. And I think the reason they're so positive is because I think we're in a very good dynamic Mark, where we really have a lot of retailers looking for a very limited number of square feet. And so that's available. So we're still seeing wherever we have available space, which is fairly rare, a significant lineup of a number of different types of tenants, both the stalwarts that are our Canadian retailers, as well as some new entrants into the market.

And it's actually a very good environment. And I don't see it dissipating maybe slightly, but I really don't see this environment slipping for us, just given the conversations that our leasing team is having with so many different tenancies. Happy to turn it over to Oliver Harrison, just to give you his perspective on all the growth categories out there or any other color?

[Oliver Harrison, executive]

Sure. I mean it really is a very unique moment in time. As Jonathan said, supply-demand dynamics are very favorable at the moment across all of the retail categories that we're looking to grow within our portfolio. And I think that's -- it's a function of immigration. It's a function of where our properties exist, and it's a function of the quality of the assets that we own and the quality of our management team that is responsible for that.

So I mean in terms of whether its grocery, pharmacy, value retailers, personal services, like we are seeing significant demand in all of those categories, and are very pleased with the operating environment as well.

[Jonathan Gitlin, executive]

And I'll add to that, I think another reason is because we have really focused on customer centers and making a better experience for these tenants. And it is starting to resonate where if a tenant has a choice to go to one of our sites or a competitor's site, because of some of the initiatives that we've undertaken. We're pleased to hear that they sometimes prefer to deal with RioCan, which is a really gratifying thing.

[Mark Rothschild, analyst]

So based on all these comments you're making and what you said about 2024 having some volatility or rockiness, it's fair to assume that 2025 should have significantly stronger FFO per unit growth?

[Dennis Blasutti, executive]

I think we do look at various scenarios, but I would say continued strength on the, let's say, the NOI growth side, we definitely feel quite strong about. FFO itself as I think we all know right now, is highly dependent on interest rate assumption. So I think that's how that flows down. But I think one of the things that we've focused on is that looking at our longer-term targets around operating metrics, NOI growth, development deliveries, et cetera, those all remain very robust.

[Operator]

Our next question comes from Mike Markidis of BMO.

[Michael Markidis, analyst]

Just maybe circling back to the guidance, first of all, to confirm the 3% same property NOI guidance, would that be on the adjusted basis that you provide, i.e., excluding the credit loss provisions, or any potential credit loss provisions in prior period adjustments?

[Dennis Blasutti, executive]

We don't have any budget for credit loss provisions in the number.

[Michael Markidis, analyst]

And then I guess the year-over-year would be apples-to-apples like x those items versus x.

[Dennis Blasutti, executive]

Correct. Yes, that’s correct. [indiscernible] I think from this year, we normalized for that. That's correct.

[Michael Markidis, analyst]

So then just within the $1.79 the $1.82 range, I'm just kind of thinking about other lumpy items, mostly your development and management fees tend to be lumpy and I guess, the condo gains. Is it possible to sort of give us a range of what the contribution from those 2 buckets may be?

[Dennis Blasutti, executive]

Yes. I think in terms of the fees, we'd expect them to be relatively actually flat year-on-year. Most of the fees are driven by property manager fees and development fees, which are a bit steadier. Where you get a bit of lumpiness can be the financing fees, where we get paid a fee for running the financing process for our partners.

And that just depends on what refinancing we have coming up in a given quarter. But on an annual basis, we'd expect those to be in line year-on-year. And in terms of condo sales, the number that we talked about before in terms of condo closing is in the range of $20 million to $25 million.

[Michael Markidis, analyst]

2025 for this year. 2024. Just on the increasing focus on deleveraging, I guess, the $800 million, that's always been part of your plan in terms of getting the condo sale proceeds back. So is the deleveraging of the increased focus really a function of just scaling back on the development spend in the interim, or is there another lever that you might potentially pull to accelerate that going forward?

[Dennis Blasutti, executive]

Yes, I would say it's predominantly that. We are -- as you said, those proceeds coming back were always in the plan. Of course, as those condos closed, the construction loans come out of the credit metrics and the profits go against corporate debt. So that is a big factor.

And in the near term, based on this environment, rather than redeploying those capitals back into construction sort of that capital back into construction, it is going on the balance sheet.

[Jonathan Gitlin, executive]

And then on the other side of it, obviously, there's the EBITDA side, of which we plan on driving additional EBITDA through a number of initiatives, ancillary revenue, but also reducing expense in G&A. And I think those things will contribute to the improved balance sheet metrics.

[Dennis Blasutti, executive]

Yes, that's actually a really important point. The 2024 story is really about EBITDA ramp-up. We've got these developments. We delivered $600 million of developments during 2023. The ramp-up of those assets, the NOI associated with those assets will drive the EBITDA, which will drive the credit metric. That's the big story for 2024. 2025, as you mentioned, is delevering through the condos.

[Michael Markidis, analyst]

And I guess just last one for me, I'm intrigued to see that you guys bought another stabilized purpose-built apartment in Calgary this time. Perhaps if you could just give us a little bit more color on that transaction? And I suppose it's opportunistic, or is this something that we should see more of sort of in the coming year, just given the environment?

[Jonathan Gitlin, executive]

Yes, and we forecast Mike, we forecasted getting some of our objective of $50 million to $60 million of residential NOI through acquisition. And so as much as we are focused on the existing in-the-ground developments that will be delivered over the course of the next 2 years, which will make up most of that NOI. We have stated that where we see great opportunity and good buildings that fit within the RioCan Living profile, we will avail ourselves to those opportunities.

In this case, it was one that did particularly that well positioned, and we saw a lot of growth prospects for it. In addition, it has some debt that was very favorable for us that we assumed. So -- and a great partner of well-established, really good managers. So we took into consideration all of those things.

So if you want to characterize that as opportunistic because all of those criteria were in place, then I guess that is the right characterization. We will take advantage of opportunistic acquisitions, but I can tell you this as well. Right now, based on everything that we have in our development pipeline that's in the ground and everything that we've already purchased, including a couple of options we have on assets that will be completed in the next couple of years, we will reach that goal without any more significant acquisition.

[Operator]

Our next question comes from Pammi Bir of RBC.

[Pammi Bir, analyst]

I just wanted to come back to the guidance again, specifically the 3% same-property NOI. What are some of the occupancy and renewal spread assumptions that were underpinning that forecast?

[Dennis Blasutti, executive]

Occupancy, generally given where we're at, is relatively flat. So it is driven predominantly by renewal spreads and just kind of contractual rent increases that we have going forward. Keeping in mind that 2024 NOI driven by renewal spreads is really based on renewals that were done in 2023. There's obviously a lag effect on that. So we feel pretty locked in, in terms of the rental growth that underpins those assumptions.

[Jonathan Gitlin, executive]

And there's also some ancillary revenue elements that contribute. And John, any other?

[John Ballantyne, executive]

Yes, you know, Jonathan spoke about our transitional tenant list that's under 3% of our total revenue, Pammi. And people are always asking us about watch list and where there's risk. I would say when we look at those tenants, it's really more, we look at it as opportunity. A lot of these tenants are paying -- they are either gross payers, or they are points, payers.

And quite frankly, they're not as strong tenants as we want in our portfolio. So we do have an opportunity. Our portfolio is basically full at this point in time at 98.4% occupancy. We do have the opportunity to now start working away at this space to really kind of supersize growth.

And when you look at the new rent spreads that we're getting, the spreads we're getting on new leasing. And in 2023, they were 30% higher than our average rent per square foot. There's a serious mark-to-market that we can realize, particularly on spaces like this and on our anchor premises as they roll. So to us, that's where the real opportunity is to really push growth.

[Pammi Bir, analyst]

And then just on the Toronto that the grocery-anchored acquisition that you did post Q4, what can you share just in terms of the partner -- yours and your partner's intentions there in, I guess, the long-term plans for that site?

[Jonathan Gitlin, executive]

Sure, Pammi. So the -- it's a very well-located grocery-anchored center that's been managed by the vendor. And I would say as good as they are, I think RioCan will absolutely be a little more. We have a depth of relationships with tenants that they might not have benefited from, and an ability to drive down costs which they might not have given our scale.

And so I think first and foremost, there is operational upside there from just leasing and operational efficiencies that I think will create short-term growth. And then long term, over time, it's a very well-positioned asset. So it's the combined intention of the partnership, and again, long term to extract density out of it and either sell that density, or utilize it for our own multi-res portfolio.

But again, that's not the immediate focus. The immediate focus is just getting this well positioned, grocery-anchored, major market asset into our hands, so we can manage it exceptionally well and create value for both our unitholders as well as our partners.

[Dennis Blasutti, executive]

There are a couple of things I just wanted to make sure we're clear. We do earn fees, so we're a property manager. We'll get property management fees, and we'll get development management fees and financing fees. So these will all supplement our income going forward.

We did note in our disclosure, there is an accrued density payment that we have to accrue it now based on the requirements of the accounting rules. That is payable upon noting. So it's -- that $40 million amount is not cash payable until a number of years in the future. So we're creating the option of earning these fees through time.

We get the zoning. And then at that point with our partner, we have full optionality to either build it ourselves, or sell it, or do something else with the property. So that's where we'll get some value creation there. The actual acquisition price is a market cap rate for a retail center that debt repayment comes much later.

[Pammi Bir, analyst]

Yes, that was sort of my follow-up question just in terms of the -- you stripped out the residential density payment, what sort of cap rate range, but I'm not sure if it's fully stabilized yet in terms of the commentary with respect to leasing. Is that fair?

[Jonathan Gitlin, executive]

No, I would say it's a stabilized asset, but I think there will be opportunities with renewals coming up and some of the small vacancies that’s there. We can extract more value. But no, I definitely characterize it as a stabilized asset.

[Dennis Blasutti, executive]

Yes, it's a market cap rate based on in-place income. Upside comes from -- you had technically the fees that we're going to earn on top of the NOI as well as Jonathan mentioned, NOI growth from improved leasing. I'll provide upside above that.

[Pammi Bir, analyst]

And last one for me. Just coming back to that Calgary acquisition, the residential. What was sort of the price per door, or again, cap rate range in that asset?

[Jonathan Gitlin, executive]

We don't disclose price per door or cap rate range, but it's been keeping with our overall residential IFRS value. Like I don't think we disclosed asset by asset.

[Dennis Blasutti, executive]

Yes. Pammi, I could add it. For the Calgary market, it is a market cap rate and then we had the added benefit of having really, as we said before, below-market debt already on it.

[Jonathan Gitlin, executive]

With quite a bit of term left in that.

[Operator]

The next question comes from Matt Kornack of National Bank Financial.

[Matt Kornack, analyst]

Just a quick capital allocation question as most of my other questions have been answered. But just going back to RioCan Living and growing it to a certain scale. I know you said that creates optionality for what to do with that portfolio. If one, you could kind of give us a sense as to whether you've thought about that optionality a bit more?

And then 2, just broader capital allocation, if you do, in fact, believe that we are in a higher or longer interest rate environment, does that change kind of the approach to density and how to realize that value?

[Jonathan Gitlin, executive]

So on the first point, well, I'll start with the second point. Yes, it does change it. I mean our focus with interest rates being where they are, it's always pay down debt as aggressively as we can. And I think while that was always one of our focuses, it kind of become our principal focus, so that, I would say, is a change.

And then what was the first question?

[Matt Kornack, analyst]

RioCan Living.

[Jonathan Gitlin, executive]

Yes, RioCan Living. So we are still -- our thought is that $50 million to $60 million is an optimal range of NOI that does -- it was always based on the principle that, that level of NOI should get us recognition within the existing structure, meaning our multiple should benefit from it.

But if it doesn't, or if there's nothing -- if there are better options at that time that are giving -- that might give us a better outcome or more recognition from a multiple perspective, then we will follow that path. We are always thinking about those options, Matt, and we have a number of different scenarios that we've played out, both on timing, on structure and on various other elements.

So we're not bound to follow that sort of that number, but I think it still makes sense from an objective for us.

[Dennis Blasutti, executive]

It was just a scale that observing in the market that seemed to get recognition. And it's where we've seen other entities IPO at that sort of NOI level. So that just kind of gave us an indication of what that might be. But we're constantly thinking about it, as Jonathan said.

And I would say even going beyond thinking about it. We've -- this entity is set up as a stand-alone entity within our structure, all the financing is ring-fenced. It is effectively ready to go at the right time with the right opportunity. But I think that's credible.

In terms of capital allocation, just one other point, we mentioned that we run a process where we look at 10-year models, et cetera, to make decisions. The -- given the cost of debt repayment goes up the list and anything else that we do is using current market debt rates.

So even just thinking about some of the capital we mentioned around retail infill, we have to achieve rents that will cover the cost of construction, but also provide a return over and above the cost of debt -- current cost of debt. So we account for that throughout our processes in terms of capital allocation.

[Matt Kornack, analyst]

Just maybe one quick follow-up because you said you've thought about it. Is it as important if and when you spin out RioCan Living, or do something with it that it's still a captive partner that could acquire future kind of density, residential that you develop on existing retail sites?

[Dennis Blasutti, executive]

That would definitely be an option and probably an ideal position, if that's something that makes sense for any potential partners down the road or in a market. So we'll evaluate that. It's certainly a structure that we've thought about. And we think that would be an incredible opportunity for anyone to invest in what would be the only large-scale new build residential portfolio in the country with an embedded growth pipeline for development.

[Operator]

And our final question comes from Sam Damiani of TD Securities.

[Sam Damiani, analyst]

Most of my questions obviously have been asked at this point. But I guess just following on the last discussion, I guess you maintained the goal of $60 million of residential NOI in really just 3 years from now. So you're going to get there from a little more acquisitions than maybe you thought given the slowing of development starts, is that the right way.

[Jonathan Gitlin, executive]

No, I wouldn't say that's accurate. That number was set based on the existing developments that are already in the ground. I mean even if we started something this year, it wouldn't even be ready by that time period. So it's actually -- that was -- we always had a view that we were going to get to that number largely by our own construction activities, but supplemented with opportunistic acquisitions.

And between what we've already acquired and what we have rights to acquire and our existing construction that is underway, we will achieve that objective. So it's actually sort of on rails at this point.

[Sam Damiani, analyst]

Final question, Jonathan. You did mention the sort of the less than 3% of the tenant base that is kind of transitory, or whatever you want to call it. You mentioned that sector is a little more vulnerable to macro headwinds. Did you mention that because you think there's going to be some temporary vacancies in the coming months? And if so, what types of categories are you seeing that weakness?

[Jonathan Gitlin, executive]

Well, I'll frame that to say I hope there are some vacancies in that regard. Transitional tenants in our view are the ones that we've inherited, or ones that just are no longer relevant in our portfolio. And we oftentimes are paying rents that are below market. Quite simply, it's framed by the fact that the majority of rents in our portfolio are below market right now.

So any opportunity we have to take that space back and replace them with better users at higher paying rents, we actually covet that outcome. It's at 98.4% occupancy. We need that outcome. We want that outcome. In terms of the categories though, it's across the board. I mean, a lot of them are small businesses, either franchisees that aren't running a great operation, small restaurants, or smaller independent gyms.

Some of them are just smaller jewelry stores, just like very independent uses. And then some of them would be small chains, but that have 2 or 3 operational outlets that we just don't think are tremendous businesses. But in terms of broader brush categories John, do you have any insight on that?

[John Ballantyne, executive]

No. I think you spoke to them all, Jonathan. And to the extent there are maybe some small independent restaurants struggling, they're more susceptible to both the higher cost and lower supply of available labor. There are national restaurant brands, both on the sit-down and on the QSR side, we're really hungry for more space.

So again, as Jonathan said, it's a matter of kind of pruning through those tenants and putting stronger operators and growing revenues.

[Jonathan Gitlin, executive]

Yes, and just to reiterate, our portfolio is in such exceptional shape right now relative to any part of our history. And that's just because of some of the dispositions that we've done, which might have been FFO dilutive, but they provide these growth opportunities, because by definition, any space available by RioCan right now, as I said, it's under market. It's a major market location. It's got exceptional demographics.

So any time we have the opportunity to take back that space as long as it's not like a massive amount of space coming back at any given time, circa target 2015, we're quite honestly happy for the opportunity.