SmartCentres Real Estate Investment Trust

TSX:SRU.UN

Earnings Call Transcript 2020-Q1

[Operator]

Good day, and welcome to the SmartCentres REIT Q1 2020 Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Peter Forde, President and CEO. Please go ahead, sir.

[Peter Forde, President, CEO & Trustee]

Thank you, and good evening. Welcome to the SmartCentres Q1 2020 Conference Call. Joining me on the call today are Mitch Goldhar, Executive Chairman; Peter Sweeney, Chief Financial Officer; and Rudy Gobin, EVP, Portfolio Management and Investments. The agenda for the call will begin with comments by Mitch and myself, followed by Peter Sweeney, who will talk about our results for the quarter and financial position, and then we will take your questions. Our comments will mostly refer to the first 13 pages and pages 22 and 23 of our supplemental information package and the outlook section of our MD&A, which are posted on our website. I refer you specifically to the cautionary language on Pages 2 and 3 of the supplemental material, which also applies to comments any of the speakers make this evening. Our first quarter financial results show a strong start to 2020, flowing from our stable portfolio of predominantly Walmart-anchored shopping centers. Peter Sweeney will comment further in a few minutes.The financial results for the balance of 2020 are being negatively impacted by the COVID-19 pandemic. Our priority during this period of uncertainty is to protect our employees, the communities we serve, our tenants and our business, while doing everything possible to mitigate the financial implications. Our shopping center portfolio is 98% leased at March 31 and remains focused on essential services and value-oriented retail, not fashion, recreational or entertainment retail. It is well suited for these turbulent conditions. First, that 60% is based on revenue of the REIT's tenant base is comprised of essential services which continue to operate throughout this crisis, supporting local communities with its everyday groceries, pharmaceuticals, banking, liquor, general merchandise and other essentials. This 60% is closer to 70% for the non-Greater-VECTOM markets. We have shopping centers in markets where our centers are often the essential service hub of the area. And of course, this essential service list grew again today with Premier Ford's most recent announcement in Ontario.The value-oriented focus of our tenants, including Walmart, which anchors 75% of our properties representing over 25% of our rental income, is well suited to serving its community during these poor economic conditions, which will, no doubt, continue beyond the resolution of the pandemic itself. 98% of our revenues from shopping centers are open format, i.e., not enclosed mall space. They are outdoor centers, enabling customers to practice physical distancing while completing shopping for their everyday needs. And of course, the strength of the covenant of our strong stable tenant base, Walmart, Loblaws, Shoppers Drug Mart, Canadian Tire, Sobeys, Dollarama, Rexall, LCBO, Lowe's, Canadian Tire, Home Depot, the 5 major banks and more. We recognize the importance of small independent retailers to the Canadian economy. Our rent relief focus to date has been on supporting these nonessential business, small independent retailers, representing approximately 6% of our contracted rent, and have offered rent deferrals to over 525 tenants. Recently, the federal and provincial governments have announced the Canadian -- the Canada Emergency Commercial Rent Assistance, or CECRA, program designed to assist certain tenants, such that effectively, the tenant bears 25% of the cost; the landlord, 25%; and the government, 50%. Details of the program have gradually been developed and announced, but it is not yet clear as to which of our tenants will qualify and the mechanics of the relief. And with that, I'll turn it over to Mitch.

[Mitchell Goldhar, President of the Council]

Thanks, Peter. Well, rent collection in the second quarter will continue to be somewhat challenging. We should start to see some change in trend. We expect to be able to find ways to accommodate tenants with real need when appropriate and justified, assisting them with a way forward at the conclusion of the pandemic. Rent collected for April improved from the situation outlined in our April 21 press release. There's a new term that seems to be used in describing rent collected in this environment, and I will take the opportunity to use it, that term being expected rent, expected rent being the amount of contracted rent less the amount of rent deferred, offered and accepted by tenants. Excluding the 2 outlet centers, which were closed, we collected 72% of our expected rent in April or 69% of our contracted rent for the month. We expect to be collecting much of the remaining unpaid amount over time. Peter?

[Peter E. Sweeney, Chief Financial Officer]

No, I think actually [indiscernible].

[Mitchell Goldhar, President of the Council]

Yes. So in the first part of April, we collected 68% of tenants' contracted rents. And by the end of the month, we were at 69%, excluding the outlet centers. And in fact, we are still receiving rents related to April. We are experiencing the same level of collection in early May to date that we did for April and expect this to also grow throughout the month. We expect the stronger national tenants will ultimately pay their April, May rents. And if the government program is made available to the smaller independent retailers, we expect the combined overall receipts will end up, with this covered -- COVID-19 effective period, to end up being in the 85% to 90% range. And as we move through the second half of the year, we expect this to go back somewhere between that range and our original 98%. Now I'll turn it back over to Peter.

[Peter Forde, President, CEO & Trustee]

Okay, Mitch, thanks. Peter Sweeney will address our strong liquidity position, including cash operating line and undrawn construction financing. But I wanted to reinforce the focus right now on operational and general and administrative expenditures. Because most of our properties have operating Walmarts and other essential tenants, a certain standard of scheduled repairs and maintenance must be provided. We are cutting back to a level commensurate with the reduction in nonessential tenant customer traffic. However, optional upgrades and/or cosmetic expenditures that are not health and life safety-related are being postponed. And general and administrative expenses are being monitored and curtailed as appropriate but without impacting our ability to satisfy demands of current conditions and carry through with our longer-term prospective initiatives, which we'll be talking more about. We are investigating participation in any government programs available to assist in maintaining our workforce.One factor coming to play in this COVID environment is our experience with Penguin Pick-Up. 5 years ago, we partnered with Penguin Pick-Up, now a mature operating business that provides customers with more than just the curbside pickup that is happening every day now. It provides a one-stop pickup location for their online purchases from all sources with our rapidly expanding network of over 100 locations across Canada. 2 years ago, SmartCentres supported Walmart Canada's test and rollout of grocery pickup at our properties and introduced co-branded Walmart Canada Penguin Pick-Up locations to help expand their reach into areas of downtown Toronto, where access to their grocery offering is limited. With COVID-19 and the customer desire for safe, contactless shopping, our foresight and experience with the above-mentioned initiatives has proven to be an extremely valuable, and we are using our 5 years of last-mile logistics learning to help more of our retailers establish a curbside pickup option as a natural evolution of Canadian shopping habits. And with that, I'll now turn it back again to Mitch.

[Mitchell Goldhar, President of the Council]

So now let's talk about our continuing transition to a more diversified REIT. We believe it is in the best interest of the REIT to continue to advance our major developments and our intensification program while monitoring our cash flows. A few general reminders about our development pipeline and capabilities. Most of the development initiatives we are planning are on land we already own, unlocking value, supplemented by selected acquisitions with existing or new strategic partners. We use our in-house development team to drive these initiatives, all contributing to enhanced yields and profits over the long term. Remember, this in-house development team developed over 85% of the retail area we own. Plus, many shopping centers owned by our peers are developed by SmartCentres. We know the markets. We have relationships with municipalities. We understand every detail about each and every one of our properties. It is this team of in-house planning experts, developers, engineers, government relations, leasing, environmental, geotech specialists, construction managers and architects that makes us unique in our sector. This team is actively engaged from home using our technology to connect seamlessly to our office and to municipalities, which are also set up to operate remotely. Most municipalities are accepting and processing applications electronically and communicating with us through video conferencing, which is very much appreciated by both sides. Applications are in and being worked on for undeveloped lands as well as for any opportunities that may result from COVID-19.We have developed through turbulent times before, both as a private company and as a public group. For example, we developed through the early '90s, the SARS pandemic in the early 2000s, the financial crisis of 2008 and many less famous down periods. The potential intensification and development program continues to grow as we further review our portfolio for opportunities. The number of potential projects and towers to commence construction within the next 5 years is currently estimated to be at 105. 34 of them are underway, comprising some 12.4 million square feet that's our share of mixed-use space. A breakdown of these projects by asset type is provided in our MD&A.We carefully select our development partners, looking for expertise in these asset classes and with a good cultural fit and complementary skills. I am pleased to report that all new relationships are going extremely well. Revera, SmartStop, CentreCourt, Selection Group, Jadco, Premium and, of course, our long-standing relationship with Walmart and Penguin and others. Communication with these partners remained excellent during these challenging times. We continue to move forward with our projects with all of them. At the same time, we are now in a position to do all of these types of developments with our own in-house team. This makes additionally [ mix ] with partners. As a general reminder, across our portfolio of properties, we're seeing none of the additional land value associated with our as-of-right density or potential as-of-right density is reflected in our property IFRS values.Let's look, for example, at the first condominium projects at the VMC, Vaughan Metropolitan Centre. So Transit City 1, 2, 3, 4 and 5, all of which are under construction, [ sold all ] 2,767 units. We chose to partner up, a number of years ago, on each of those towers, so we own 25% interest, but many of our other projects we are developing, and we'll describe below, we will be doing on our own. So imagine the numbers at 100%. Imagine the numbers at 100% in each of these 5 towers at VMC. VMC is forecast to generate in excess of $360 million alone. In that regard, we still have the ability to build out many times that at VMC alone over the next 5 to 10 years. To date, we have recognized the increased land value, only when we close the sale of an interest in the land with a JV partner, at which time we recognize the uplift in our retained portion as well as through an IFRS fair value adjustment. And as a reminder, when we present development project yields or profits from condo projects, land is included in the cost side of the equation at an estimated market value, and all internal fees and capitalization costs are included in the cost as well, which I understand is not the way others may be presenting these same yields.Pages 22 and 23 of the supplemental information packet provide yields and profit expectations from our active projects anticipated from COVID. For the most part, there is no significant change. And you'll notice that for now, we have removed any outlook [indiscernible]. Some specific project highlights. Transit City condos at VMC, there are 5 towers, 2,767 units, 100% sold. 3 of these towers, 1,741 units, and we have 20% deposits in place; 2 of these towers, 1,026 units, we have 15% deposits in place. And in case of the last 2, 5% further deposit is due in the third quarter of 2020 coming up. Construction continues on all 5 towers. Closing in TC 1 and 2 is expected in the fourth quarter, maybe even some in the third quarter on or ahead of budget. VMC purpose-built residential rentals, 451 units, are under construction. One tower purpose-built residential rental, 171 units in Laval, Québec, construction complete and occupancy has commenced and almost 50% leased. Self-storage, 50% leased. One self-storage development in Leaside complete, waiting for occupancy permit. Three others are under construction, paused due to COVID, government emergency orders. Expect -- we expect that they will be permitted to restart very soon. Five others are in process of gaining municipal approvals. In seniors' housing space, first, let me clarify with all the troubling COVID information that's in the news, almost all of it sad news relates to long-term care facilities, a business we are not in. With our key partners, we are developing seniors' apartments and seniors' residences, 6 with Revera, 2 with Group Selection. All of these are in the municipal approval stage. As I mentioned earlier, our internal development team has been very active during this time, operating remotely. A few examples.The development of up to 5.3 million square feet of predominantly residential space in various forms at Highway 400 and 7 in Vaughan, and we have a 3-tower mixed-use phase application that we just put in during the last weeks, and that of course is just right across from the VMC, and we expect support for that approval.The development up to 5 million square feet of predominantly residential space in various forms over the long term in Pickering, Ontario, in one of our shopping centers, 2-tiered -- 2-towered mixed-use Phase 1 application was just submitted in the last few weeks. The development of up to 5.5 million square feet of predominantly residential space in various forms at Oakville North in Oakville, our shopping center at Dundas, and 2-tower residential Phase I underway. The development of up to 3 million square feet of predominantly residential space in various forms at Westside Mall in Toronto, Eglinton Avenue, mixed-use single tower, planning underway. And this is, for all intents and purposes, right in the city. The development of up to 1.7 million square feet of residential space in various forms, including townhomes, with Fieldgate, and seniors' residential towers with Revera and condominiums and residential rental buildings at the Vaughan Northwest shopping center in Vaughan, Ontario at Weston Road and Major Mac, just across the highway from the new hospital. We can be [indiscernible]. The development of up to 1.5 million square feet of residential space in various forms in Pointe-Claire, Quebec, just west of Montreal, [ suburb of ] Montreal, immediately, Phase 1 and 2 purpose-built residential rental towers. The development of 4 high-rise purpose-built residential rental buildings comprising approximately 2,000 units with Greenwin, in Barrie, Ontario on the waterfront. The development of high-rise purpose-built residential rental towers on Balliol at Yonge & Davisville with Greenwin. The development of up to 1,600 residential units in various forms in Mascouche, Quebec, just outside suburbs of Montreal and next to one of our shopping centers. The development of the first phase of a 42-unit rental building which is part of a potential 10-phase master plan in Alliston, Ontario, on the shopping center site. This is just to name a few. And as far as I'm concerned, our REITs unit [indiscernible] [ price ], assuming they only be a function of our historic NOI and no additional value has been reflected from the [ deeply ] embedded value that we are extracting from the development program. And now I will turn over to Peter Sweeney.

[Peter E. Sweeney, Chief Financial Officer]

Thanks very much, Mitch, and good evening, everyone. Our financial results for the first quarter of 2020 reflect the continued strength, stability and security of our 34 million square foot, predominantly Walmart-anchored shopping center portfolio. Because of the current environment, we will focus on those operating and financial metrics experienced during the first quarter that underline that stability and security in our portfolio. Accordingly, during the quarter, this portfolio generated the following strong results: number one, cash flows provided by operating activities, which is a GAAP measure, increased by $23 million, or 41%, to $79 million from $56 million in the comparable quarter; number two, funds from operations, or FFO, which is a measure of our income-generating capacity, increased by $8 million or 8.7% to $96 million from $88 million in the comparable quarter, on a per unit basis, FFO was $0.56, which is $0.04 or 7.7% higher than the comparable quarter last year; number three, adjusted cash flow from operations, or ACFO, which is an indicator of our cash-generating ability, increased by $11 million, or 13%, to $90 million from $79 million in the comparable quarter last year; and then finally, number four, the surplus of ACFO over distributions, which is an empirical measure that identifies our ability to fund unit distributions from actual cash generated by the business, increased by $7 million, to $10 million from $3 million in the comparable quarter and reflects a payout ratio of 88.6%, which is a demonstrable improvement over the comparable quarter last year. These continued strong operating metrics are indicative of our portfolio's continued unique ability to demonstrate steady growth and strong cash flow generation. We often speak about our portfolio's stability, which is highlighted by our same-property NOI growth level, which for the quarter was 0.3%. This is indicative of a high-quality portfolio with continued industry-leading occupancy levels, anchored by our core group of tenants led by Walmart. And we've committed us to generate stronger rent collections, as Mr. Forde and Mr. Goldhar mentioned earlier, in these uncertain times. These improved quarterly results can be attributed to the following primary factors: number one, an incremental net operating income or NOI being generated from new tenants at both the KPMG and PwC towers; number two, continued increase in net operating income being generated from both the expanded Toronto Premium Outlets and the continuously improving Premium Outlets in Montreal, in addition to recent earn-outs and other developments; number three, lower interest costs associated with our portfolio of maturing mortgages and unsecured debt continue to provide unsecured fixed rate refinancing opportunities at lower rates than the outgoing maturing rates; number four, additional percentage rent, parking revenue and other miscellaneous revenue; and lastly, number five, lower general and administrative costs.And now let's focus on our balance sheet. As we know, these challenging times will affect the balance sheet of most real estate companies. However, for many years now, we have encouraged the capital markets to focus on our commitment to the balance sheet and our unyielding attention to both conservative capital management and liquidity, our discipline in the deployment of capital on acquisitions and developments, and our continued desire to manage gearing and similar debt levels to the long-term nature of our assets. This strategic focus on long-term viability and growth will assist us to manage through this current period of uncertainty.In this regard, we note the following highlights relative to the comparable quarter last year: number one, our unencumbered pool of assets of $5.6 billion has increased by $1.1 billion or 24%; number two, our debt to aggregate assets ratio continues at a very conservative 43.3% level; number three, our weighted average interest rate for all debt was 3.4% as compared to 3.7%, and even in this challenged period, we continue to be in a position to attract debt capital at historically low rates for longer terms; number four, our interest coverage ratio improved further to 4.1x from 3.8x, and our adjusted debt to adjusted EBITDA multiple was 8.2x, both metrics reflecting the business's strong ability to fund its obligations in uncertain times; and then lastly, number five, as the result of this ongoing commitment to the balance sheet, in December of 2019, we received an upgrade to our credit rating from DBRS to BBB high. Recall that when we embarked upon this strategic initiative over 2 years ago, approximately 2/3 of our debt was sourced from secured lenders, a metric that has now almost reversed, whereby 64% of the REIT's debt is now sourced in the unsecured market.From a liquidity perspective, as we look to the immediate future and plan through the current environment, in addition to the conservative debt metrics noted above, please also consider the following.Number one. We do not have any maturing debt in the second quarter of this year, and only $70 million, that's 7-0 million dollars, in mortgages maturing later in the year as well as $250 million in unsecured debentures that come due in December. And it's interesting to note that we continue to speak with market participants concerning appropriate repayment alternatives associated with these maturing amounts. Number two. With the support of our Board and as both a conservative and a strategic initiative and to ensure that we have ample liquidity when and if needed during this period, we recently drew down on $410 million from our operating line. And in addition, we have a $250 million undrawn accordion feature which is available to us. Number three. We continue to deploy a strategy that permits construction of any large development project to begin when it has appropriate project financing in place. And in this regard, we have ample undrawn amounts available on our construction facility line to ensure project completion of each of our various development projects.Number four. We continue to receive reverse inquiries and other strong levels of support and interest from participants in the bond market, and the overall costs of issuance have returned to those levels that were in place at the end of 2019. And in this regard, we continue to closely monitor these debt capital markets. And then lastly, number five. The closings of the first 2 phases of the Transit City condos are expected to begin in Q3 of this year. And we expect our share of the net proceeds to exceed $60 million, that's 6-0 million, which will be used to further fortify our liquidity needs both in 2020 and in 2021. And finally, we'd like to take a moment to thank all of our friends in the capital, banking and financial markets. You continue to demonstrate your willingness to offer your assistance to us in these unprecedented times. And to our team of professionals who have worked so valiantly at SmartCentres for your tireless effort and sacrifice to get the job done in these most unusual of circumstances, we say thank you. And then lastly, to those frontline workers who continue to sacrifice so much on our behalf, never before have so many owed so much to so few, we say thank you. And with that, I will turn the call back to our operator, Angelle, who will coordinate us in addressing your various questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Michael Markidis of Desjardins.

[Michael Markidis, Real Estate Analyst]

Mitch, you gave some interesting, I guess, interesting look in terms of how you expect rent collection to unfold in the second quarter and sort of the back half of this year. I'd start off by asking if you have any sense or more time line or forecast as to how your economic occupancy may trend at the same time.

[Mitchell Goldhar, President of the Council]

Can you hear me?

[Michael Markidis, Real Estate Analyst]

Yes.

[Mitchell Goldhar, President of the Council]

Good. Well, not sure exactly what you mean, but do you mean where we think we're going to sort of level off by the end of the year in terms of occupancy?

[Michael Markidis, Real Estate Analyst]

Exactly. Yes.

[Mitchell Goldhar, President of the Council]

I mean it's hard to say because obviously, everybody is looking at the rent collection number and percentages and so on, but it's not -- it's a bit -- it's turning out to be a bit misleading because we're not collecting from tenants that are strong. So -- and I think we and our -- pretty much everybody that's not collecting rent from strong tenants is expecting to collect. In fact, we're starting to see some of that happening. So I was sort of talking more to that when I was talking about those numbers. Look, there are a handful of tenants that are not strong or not as strong, and their survival will kind of depend on exactly how long this goes. And of course, if there's a program for them, and I guess, ultimately, how we do when things come back. So yes, we've modeled it every -- you can imagine, we've modeled every which way. So I mean, if nothing changes and nobody -- there's no casualties, then we'll see ourselves back where we were. And that's why I said between 85% and 90%, that's our range for when things all get collected and if government programs as stated come through, but -- [ and 98% ], but we don't know what will happen with the ones that are not in that calculation. Now if there are some bankruptcies along the way, that doesn't mean that we won't get any rent from them. I mean very often, it does result -- in retail, it very often results in pruning of locations and reopening, and reopening can actually mean reopening with a new, improved concept and obviously a stronger company, but it does result in some vacancies and lost revenue. But it's not on the COVID, while [ with greens ] kind of orders of magnitude, it's kind of more normal course stuff that might get accelerated as a result of the COVID, but that's kind of embedded in the range. So sorry for the long answer, but hopefully that helps.

[Michael Markidis, Real Estate Analyst]

Yes. That is helpful. And maybe just for Peter. I think you mentioned that you have construction financing in place for the stuff that's actually active, I mean, under construction. Is that correct?

[Peter E. Sweeney, Chief Financial Officer]

That's correct, Michael.

[Michael Markidis, Real Estate Analyst]

Okay. And just curious, are there any projects that will get -- or planning to get underway throughout the rest of this year? And if so, how is the market for developing financing today? Is that still something that's available to you?

[Peter E. Sweeney, Chief Financial Officer]

Well, it's a 2-part question. So maybe Mitch and Peter can answer the first part as far as projects starting this year. And maybe I'll take the second part of the question as far as the market for project financing.

[Mitchell Goldhar, President of the Council]

Just probably -- on the first part. I mean we will proceed where every box is checked twice, including financing. And I'm sure the lenders will also be wanting every box checked twice. So we do anticipate is that we will start some projects that are [ hashed out ], but if they're not and we don't feel right, we won't start them. But we're not starting without a project financing. We're not starting with development suspenders in a claim. But I do foresee that we would -- I do foresee us starting some projects with all those [indiscernible].

[Peter Forde, President, CEO & Trustee]

Michael, it's Peter. Just to follow on, on Mitch's comments. We, at least, are fortunate to be in what I would describe as the enviable position where we have a number of vendors who are -- we're working very closely with them establishing several new construction facilities. And so the simple answer from a market perspective is that construction financing for us is very much available. And it's more than competitively priced, notwithstanding that rates have gone up since this initiative took place 6 or 7 weeks ago. We've seen the spreads on some of our facilities increase, and that's disappointing. However, on an overall basis, given that the bond rates and the [ A rates ] have declined, there were some savings in that regard. But to maybe to get back to your question, we certainly do see an ample supply of available credit for construction financing.

[Michael Markidis, Real Estate Analyst]

Okay. So no new projects unless there is specific project-level financing, and that market [ is still permittable ]. That's it from me.

[Operator]

[Operator Instructions] And we will now take our next question from Sam Damiani of TD Securities.

[Sam Damiani, Analyst]

I may have missed this similar to the fourth quarter call, but I just read that you did draw on the [ $40 million ] line, looks like cash in the bank at the end of March. What was the reason for doing that? And is there an immediate use of proceeds for most of that cash?

[Peter E. Sweeney, Chief Financial Officer]

Sam, it's Peter. So in simple terms, as I think I mentioned, we did it as sort of a strategic initiative to ensure that we had more than ample liquidity to be able to accommodate the needs of the business over the next 6 to 8 months. So as far as having a specific use for it currently, we don't have a particular or specific use, per se. But certainly, as we would expect, it would be used in part at least to accommodate the needs of the business as we go through the next several months.

[Sam Damiani, Analyst]

So basically, the revenue shortfall is from tenants kind of deferring rent payments at the moment, is that sort of [indiscernible]?

[Peter E. Sweeney, Chief Financial Officer]

Yes. But don't -- I mean let's make sure, and I want to make sure everybody on the call understands that we don't anticipate or we're not forecasting the quantum of the rent deferrals from our tenants to even come remotely close to the amount that we brought on the line. As I mentioned, this initiative or reason to draw on the line was done strategically in an effort to be -- to take a very conservative approach to managing the business. The amounts that we foresee the business requiring at least for now, and I think Mitch mentioned, we've gone through a plethora of various sensitivities on expectations in collections. And given those various sensitivities that have been prepared, it's unrealistic to think that we would ever need the full amount at least for now on what's been drawn. So again, it's more of a defensive measure to ensure that there's more of an ample liquidity required -- or sorry, available as we move forward.

[Sam Damiani, Analyst]

Okay. And just on the rent collections, I certainly don't want to belabor the point, but I just want to be clear because the presentation of the information is a little bit different from some of the [ wording ]. So did you collect the same amount of rent in April as you press released a couple of weeks ago? Or was it up by a percent or 2? Just trying to be clear.

[Mitchell Goldhar, President of the Council]

April has gone up by a percent or 2, to use your words.

[Sam Damiani, Analyst]

Okay. And just finally...

[Mitchell Goldhar, President of the Council]

I do want to point out that it may go up smaller, actually, April. I mean we got a note today from a major defaulter who's strong that they're going to pay April's rent. I mean we don't calculate until it's happened. But -- so we do anticipate April's rent to still go up. And we haven't factored in any of the deals that the government are offering to small business. I mean correct me if I'm wrong, Rudy, I think that represents about -- is it $6 million? I can't remember how much it is a year. But there's a lot of our small tenants, doesn't make up a huge percentage of our business, but it's still a lot of money. That if we were to apply for it and it was all -- or equal, everything else being equal, we would collect 75% of that, whereas right now, we deferred them all. And obviously, it was an unknown a month ago exactly how to treat that. In that number range that I gave you, we used that as 75%, 75% of the small tenant. Just to reiterate that.So -- and we expect May to be the same, and I know we all, everybody was wondering what was going to happen in May. But May seems to sort of be trending. One -- everything seemed to be almost identical to, starting off to the beginning of May, similar to the beginning of April with 1 exception. And maybe we're seeing there might be 2 exceptions. But I don't want to go into those level of detail right now, but we expect May to be sort of similar to April the way April panned out, the way April turned out, and maybe even a little better.

[Sam Damiani, Analyst]

Okay. That's helpful. And just finally, can you give any -- what's your best visibility on the trend in occupancy for the second quarter at this stage?

[Mitchell Goldhar, President of the Council]

I mean occupancy as defined as open, or I mean, just in terms of like actual legally held leasehold interest? I mean I guess, leasehold interest, we had 98% going -- legally, technically, we have -- we legally technically have 98%, I guess, occupied, but I don't think that's what you mean because we have a lot of defaulting tenants, which we have not terminated. But we have set up such that we have the right to terminate, and we are obviously monitoring and evaluating the pros and cons of that every day. But I mean 60% of our space rate off of that is open because they are essential services as defined by most all the provinces. And so yes, I mean I'm not sure if I answered your question, but...

[Sam Damiani, Analyst]

No, that's helpful. Thinking more on a committed basis, if you're 98% today, is there expected to be slippage just because of the lack of our ability to get leasing transaction completed as efficiently as it was 2 months ago?

[Mitchell Goldhar, President of the Council]

Yes. You got to figure there's going to be slippage. I mean we don't have a specific -- we don't have anything specific as imminent. But sure, of course, now that I've said that, tomorrow somebody will announce some slippage. But you got to figure there's going to be some slippage. And there's probably going to be some slippage just anyway. This might have induced some of it. But we don't have any -- we're not aware of anything that's about to happen. And the ones that are the most fragile, we are going to try and help as much as possible. But in terms of where we're going to end up, I mean if we got to sort of just pick a number, we haven't picked a number. But whatever it is, it's very workable. Some for us, both from the point of view of financially and from the point of view of taking the opportunity because, thankfully, we are dealing with well-located real estate. It's not like we're embedded in some deeply wasteland of industrial business park somewhere, and it's all fungible. This stuff is not fungible. So obviously, we'll be trying to turn any setback into an advance, and it plays right into our development regimen. I guess I didn't mention the fact that these defaults do open up opportunities for us to accelerate certain things. I don't think that the really public markets fully appreciate how much development or certainly land-use amendments are worth. But you don't see a lot of publicly traded peer development companies because there's a lot -- they're making too much money to be public, to be honest with you, and most developers don't have an interest in that. But it is a very liquid end of the business, and we will be using some of these, which you call slippage or any other situations, to seize upon and if they, in fact, will play into or in the service of our more long-term vision of any site. And we also point out in default, a lot of tenants will have given up rights. They may end up paying. They may have given up rights that they had over the site from various points of view, and that's not even to talk about municipalities. Motivation to generate economic activity and their openness and willingness and what not even sympathetic to what's happened with this period of time on retailers and retail owners, retail real estate owners in terms of land-use amendments. So it's not all would just be for the naked eye. So yes, on the surface, there probably will be some slippage, but nothing that's going to -- it's not going to rock our world. We'll deal with it.

[Operator]

And we'll take our next question from Jenny Ma, BMO Capital Markets.

[Jenny Ma, Analyst]

I had one question for Peter Sweeney, but I'm trying to reconcile the cash drawdown. If you could speak a little bit more color sort of around the thinking because I'm just wondering if this is done sort of in the depths of the market downturn. And you had made some comments about the unsecured market opening up at rates that were similar to what we saw at year-end. So with that development, does it change your view on this? And I recognize we're talking 5-year terms versus just a draw on the facility. But I guess, is the -- improvement in the credit markets gives you more assurance that the credit will be there if you need it and not to actually hold on to all that cash?

[Peter E. Sweeney, Chief Financial Officer]

It's a good question, Jenny. And I think the simple answer is, and I'm certainly not trying to be coy or cute, but the simple answer is it's -- for us, at least, it's too early to say. We did draw the funds on our line just before the end of the quarter. But as you say, we were sort of in the depths of uncertainty vis-à-vis the financial markets. And since then, at least in the bond market, there has been a continuous improvement and further clarity of that market opening up. And as I mentioned, our 10-year rate today would actually be lower or a little lower than what we were able to secure money for back in December. Having said that, however, our Board wanted us to be both conservative and strategic in how we ventured into this pandemic period. And in that regard, we established a group of different measurements and initiatives that we thought would be appropriate to roll out to ensure that coming through this we were fortified in both financial and operational -- from both an operational and financial perspective. And so the simple answer is we haven't thought yet about repaying this and notwithstanding the improving in the markets. And there's still perhaps a few chapters left in this COVID-19 pandemic that have not been written yet that none of us can predict. And so for anybody who's been through, as Mitch mentioned and Peter mentioned earlier, this company has been through lots of different challenging periods over the last almost 30 years. And the one thing we know coming through these periods is that there will be things that will surprise you. And by taking this strategic move or initiatives we did, we're at least hoping that we can mitigate or diminish perhaps any potential surprises that we haven't factored in into our plan.

[Jenny Ma, Analyst]

Okay. That's a good answer. I'm just wondering -- so I guess in that sense, would it be fair to expect that this cash will be outstanding for the balance of the year, regardless of how the credit markets shape up then?

[Peter E. Sweeney, Chief Financial Officer]

No, I don't think we've made such a strong statement. I think it would likely be an expectation that we'll monitor this almost on a weekly basis to see. And to be able to make that kind of prediction, at least at this point, I think, is almost impossible. So we'll see, and again, I'm not trying to be coy or avoid your question at all. I'm just saying for now, we're unsure. And when you're unsure in situations like this, you do what you think is appropriate to safeguard the business, to safeguard the viability of the business and to put yourself in a position, as I think we've done, to accommodate any of the unexpected or unknown needs that might come our way over the remaining months of the year. So we'll see. That's really the simple answer.

[Jenny Ma, Analyst]

Okay. And then wanted to ask about Reitmans. Have you heard anything from them directly about what their intentions may be? And whether or not maybe at a view towards them looking at certain labels that they might reconfigure or rationalize, or sort of any color you have on the Reitmans story.

[Mitchell Goldhar, President of the Council]

Reitmans have themselves indicated some vulnerability. So obviously, yes, we all have to take that seriously. But no, they have not -- we have no additional information that we'd be able to determine what the, I guess, future is of the various banners. But maybe -- they've been forthright with us. And so you kind of have to wait and see partly to see if they qualify for any of the government programs that have been proposed -- are being proposed -- certainly being discussed to be ultimately proposed, help that forward for large amount of central retailers. Yes. I mean look at if any large retailer, large in terms of number of units like that doesn't make it, we will just have to deal with it. We've got big exposure to Reitmans and we would be doing what we can to help them that we think is reasonable. And we'll be certainly turning on to get it together in terms of coming out of this -- hit the ground running. But if anyone with any exposure like that doesn't make it, as I said earlier, we will just -- we will deal with it. We will start with re-leasing and or repositioning of that space. And the ones that we see that fall into that category, we don't want it, we're not happy about it, but we'll deal with it. It's not going to cripple us or anything, and we'll lease it up or redevelop it in a reasonable period of time.

[Jenny Ma, Analyst]

Can you comment on whether or not they paid rent in April or May?

[Mitchell Goldhar, President of the Council]

No, we -- out of respect, at the moment, for the discussions that are going on with all our tenants, basically, we've chosen not to discuss specific tenants at this time. I think some people have and so you probably know from other sources maybe about some of them, but -- but no, we're choosing to just deal with that for now directly with our -- entirely with our tenants.

[Jenny Ma, Analyst]

Sure. That's fine. Well, I guess maybe I'll ask about another example that is public in terms of The Gap not having paid rent in April, and now saying that they're looking to open a number of stores by the end of May. I'm just wondering from a landlord's perspective, sort of what the mechanics of that are in terms of -- if they're not paying April rent and it is actually May, do you say to them you can't open stores until you're current on your rent? Or do you leave that discussion for another time, just given the current circumstances? Like how do you reconcile that situation?

[Mitchell Goldhar, President of the Council]

It's a good question because -- so the answer is, it depends. And I think every landlord would say the same thing. I think you would say the same thing if you were in our shoes, or if you had a tenant in anything that you might -- it just depends. And so each one is unique. In fact, it's partly a good thing because it gives landlords an opportunity to discuss the lease in totality because they're in default. So they need to come to terms, and landlords do have rights. Same time, we're not in the business of creating vacancies. We're in the business of collecting rent. So it's a balance between the benefits and costs of whatever they can -- whatever they're prepared to deal with, whatever we're prepared to accept, keeping in mind where we're headed. I mean most of our real estate we see as having higher and better uses. But we obviously would like to get there, collecting as much rent along the way in its current lease or term. So we'll be weighing all those things. So each and every one depends on which center they're in, where they are in the center and what they're prepared to pay and what are the terms in the lease. So it's very interesting. It's obviously this is all of our first pandemic. So we are working our way -- we have had to do these things in the past, but not with so many tenants at once. But we've all got it before, so yes, it'll all become clearer, Jenny, in the next month or 2. Some of the stuff will start to happen and be capitalized, and it's just in the middle of it right now, so we don't know.

[Jenny Ma, Analyst]

Okay. That's fair. And then just my last question on -- in terms of rent deposits, I haven't had a chance to look through everything, so I'm not sure if you disclosed it. But just a general question on commercial rent deposits. Like how does it really work in terms of the amount you collect? Do you collect it from everybody? And is it sort of like the last month rent situation for residential tenants? Anything that you could help us [ with ]? Can you provide any color on that?

[Mitchell Goldhar, President of the Council]

Yes. Like internal growth, like -- yes, like internal growth. The stronger the tenants, the lower your internal growth is going to be. But you're going to collect more of your rent. And the same thing is true with deposits. The stronger the tenants, the less deposits. So I think we have about $14 million in deposits. And they are actually related mostly to last month's or security deposits. And so the fewer smaller independent retailers you have -- let's put it this way. The more sort of independent retailers you have, that's where you take the bigger security as last month rent. You might even get a letter of credit for a full years' rent, if it's somebody you put up money for and they're not strong, but you wanted to bet on them. And I mean, and you might even have a full year's letter of credit for rent. But those are generally related to the smaller, more independent -- like I mean just -- generally speaking, I'm not going to ask Walmart for their last month's rent and/or Loblaws or those kind of [ states ]. They just don't -- they don't -- it's just not industry standard. So yes, if they default, you get their deposits, but you don't -- that's the last resort. Generally speaking, you want to work out deals with everybody. And the beauty is that we are in the times business, and we can -- we are in a very specific moment in time, it is temporal. And so we can look at time to help out most tenants, not necessarily have to end up taking your deposit and creating a vacancy. But if we did, we have up to $14 million of those.

[Operator]

And we'll take our next question from Tal Woolley of National Bank of Nova Scotia.

[Tal Woolley, Research Analyst]

If you look at -- in your supplemental on Page 16, you got your sort of gross rent exposures by retail category. I'm just wondering like where that sits now. Like are you guys happy where that mix is right now? Or just wondering how your thinking is changing going forward, like should we expect to see those exposures shift going forward?

[Mitchell Goldhar, President of the Council]

So [indiscernible]. But I mean, we are happy with our mix. I mean look, we are a -- we set out and continue to set our own price. Just like Walmart owns price in retail, we sort of own value and price in retail centers. We have very low average rents. We're probably the lowest in terms of average rents in our industry, and we probably have the lowest coverage on our properties. And we probably have the lowest amount of closed malls per footage. That's all part of really of saying the same thing. And we like all of those things, and we don't really want to change it other than the fact that we are very development intensification-minded and have been for the last 5 years. It takes a lot of time to get those things airborne. So yes, there's always going to be -- it's Darwin. There's always going to be some weakness and weak links. Maybe there's some places where we have a huge center and we ended up with categories that are not our bread and butter. So we will be, generally speaking, shrinking the overall retail square footage of our portfolio continuously ad infinitum and have been and obviously, we'll want to keep the strongest where it's possible. But generally speaking, we do like the value-oriented space. And of course, it includes banks and it includes restaurants and includes lots of things that are complementary to it. But our bread and butter is to cater to surely all Canadians in terms of their budget and their income and their family structure. And [indiscernible], I'd say, pretty happy and we don't see ourselves doing an about-face. The only about-face is that we want to shrink our retail in general, and we want to increase the other, I'd say, categories to the other sectors.

[Tal Woolley, Research Analyst]

On the new income side, you guys, what you said, you've got a good niche in sort of value retail. Do you have any -- like given your long history in the market, like in a sort of period like that's where the market gets disrupted, do you have a sense of is trying to do anything core value retailers? Is that easier, harder, like the same versus a market where things are really strong? Like do you have any sort of history that you can...

[Mitchell Goldhar, President of the Council]

Well, I think that the trend is -- so it's funny, when things are hot and there's more money flowing, we see -- first of all, I should stop to think, everybody shops at Walmart, just like they -- everybody shops at Loblaws. And there's no point in trying to define that demographic because same person who shops at a [indiscernible] shops at Walmart. And so yes, I mean, Walmart in Canada is not the same as Walmart in certain other countries. Walmart in Canada is the general merchandiser, the discount general merchandiser and the department store all in one, along with the grocery store. And Walmart is used to operating and winning in markets that are fiercely competitive, much more so in Canada. And that's not to say that in food we don't have some fantastic and competitive retailers. But in general merchandise, there's nobody that touches them, and consumables and so on. But still, on groceries, they're the largest grocer in the world. I think most people know that. But then in tough times, of course, people spend less, but more people go -- the people who go there less frequently, go there more frequently and generally [ taking every day ] as the average checkout is lower. So maybe what we found over the last 30 years is that when things are piping hot, the bread and butter customers spend more. And the wealthier end of the spectrum goes there less frequently, but still go. And in tough times, the wealthier go more often, and the bulk of the market spend less on an average checkout. So for Canada, the value-oriented is very well, I think, fit well, very well suited, pretty much aligned with the Canadian reality. And that's sort of just one of the things that swings. It ends up being six of one, half-dozen of the other. That's what we have found over 30 years. And when I started out, I wondered that myself, by the way

[Tal Woolley, Research Analyst]

And then, Peter, you made reference to $15 million, I believe, in cash flow from condo gains this year. That is both the gains and the capital coming back to you. It's not just the gains?

[Peter E. Sweeney, Chief Financial Officer]

No, wait, Tal, what I did say was that we expect in 2020 and 2021 on a combined basis, from TC 1, 2 and 3, we would receive approximately $60 million of profit. That's in excess of our capital coming back, so to speak. That is allocated between '20 and '21, Tal. The expected net proceeds for 2020 at this point would approximate about $36 million of the $660 million, give or take. So that's -- at least for now, that's where the expectations are.

[Tal Woolley, Research Analyst]

Yes. Just lastly, we've had -- just a question about the accounting for -- as these relief programs come down, one of the difference between you guys doing your own deferral is that you still book -- you started booking the revenue within FFO. But if you participate in these programs, like the haircut that you have to take on the rent, that would get reflected in FFO, correct?

[Peter E. Sweeney, Chief Financial Officer]

Yes, it's a good question. The simple answer is for now, there are so many unanswered questions, Tal, associated with any of these programs, and it's too early to say. But I think it's fair to say that we would expect to the extent that we participate in one of those programs, and we would have to absorb some of that, that there would be an expected impact to FFO. How it gets distributed over what time frame remains to be seen, and we're trying to work out that detail, i.e., did it get reflected in the current year, does it get reflected as a pickup over the remaining term of the lease. And in some cases, I think as Mitch mentioned earlier, we have an opportunity now to extend some leases given the negotiations that are going on. We may have an opportunity as well to perhaps take some of these potential discounts and apply them over what would otherwise be an extended or should be viewed as an extended period. So at least for now, those are the -- that's the thinking. How it actually impacts the 2020 FFO or financial results for now is frankly unknown. And as I said, there's still a number of other questions associated with these programs that us and every other major landlord in the country are trying to get certain details and a further understanding of. So we'll be able, I think, to come back with a little more clarity sometime down the road, but for now, it's still early days.

[Operator]

And we will take our final question from the line of Pammi Bir of RBC Capital Markets.

[Pammi Bir, Analyst]

In the past years when there's been closures from apparel retailers and restaurants, can you just comment on the types of tenants that have helped backfill that space over the last few years? And whether that source of demand gives you that source continuing going forward?

[Mitchell Goldhar, President of the Council]

Yes. I mean I think it will be tougher this time if there's bankruptcies failures, large bankruptcies and failures. And within what I was referring to, the ones that are on the margins, than it has been in the past. So -- but interestingly enough, I mean, especially in Canada, where we do have much fewer square feet per capita than in most other countries and certainly in the U.S., good retail locations have been resilient. The good retailers are always looking at new concepts, they're looking for additional space for expanding. I do though think just intuitively, my gut says it will be a little bit slower. In the past, there's always been when somebody is busting, somebody is booming. And TJX was booming when -- I don't know, when there are certain other categories, I don't want to name names, were not doing well. And so a lot of it just continues to move. Without the square footage per capita continues to shrink in Canada, because we're not the only ones shrinking retail and nobody is building new retail relative to purchases. So -- but I do think it will take longer to lease it up whatever the vacancies come out of this particular event. Having said that, though, I do think that there would be -- the silver lining is, in a number of cases, the redevelopability of that -- of those spaces to alternative uses, I think would be quicker in terms of getting approvals and would be more lucrative, ultimately, than re-leasing them. But there will be the exceptions and there will be lots of cases that will sit around empty for prolonged period of time. But ultimately, I think the benefits of all this, like that, the opportunities develop, if you can do it and you have good locations we'll outweigh the cost, but I do think there will be some vacancies that will take a lot longer to lease up at the end of this month, yes.

[Pammi Bir, Analyst]

Got it. Just one last one. I have realized, obviously, it's early days, but as we kind of work through this pandemic, have you seen any new sources of demand for space at your centers?

[Mitchell Goldhar, President of the Council]

We've seen retailers calling up about the renewals and renewing or negotiating, commencing negotiating for renewals. Yes, I mean everybody needs to factor in both sides of this equation. It's not like a one-way thing because, for example, I mean with deferrals and other negotiations, it could result in renewals, not just the renewals I was just referring to, but renewals that aren't even due, that aren't even up. I mean I'm sure you would do the same, that if a tenant needed some accommodation in a handful of locations that you have, you would say, okay, that's fine. But I -- you have 3 years left on your lease. It's time to renew, but we'd like to exercise your first 5-year renewal. And so we have seen that in the medium term, it will result in fairly less turnover and longer average lease terms, and some tenants have -- who have their renewal up now are. But in terms of calling up and saying, your vacancy over there and wherever, whatever, we'd be interested in talking about that, not a lot of that going on. As you can imagine, everybody is just -- certainly, the last month everybody is just hunkering down in a way for the worst potential scenario. And -- but the ones that we were already negotiating, ones that were going on, nobody's really wanted to walk away from those. Those negotiations are just sort of been put on positive, everybody is keeping everybody warm. So it's hard to say. It's certainly more or less what you'd expect. And now that things are a little bit more clear, I'm not saying they're good, but they're a little more clear, people are starting to talk about the things that we were talking about before all this happened. So I don't know, Rudy, if you want to add anything to that.

[Rudy Gobin]

No, Mitch, I'd say a lot of what was happening, it's exactly what you just described. A lot of what was happening before the Christmas and into the early part of the New Year was already happening with some of the retailers who didn't want certain locations were already talking to us about not wanting locations, the certain locations they were in, and we were already talking to the likes of service and food and medical and ethnic grocers and Farm Boys and dollar stores. Like we were already in the midst of all of those discussions in the first sort of 2 to 3 months of this year, TJX expansions into the combos, [ the Winners], HomeSense and health foods. All of those conversations have just been paused, and nobody has come back to us and said, we don't want to do those. So we're still -- we still have all of those alive. Everything is just right now paused.

[Mitchell Goldhar, President of the Council]

Yes. So they haven't said they don't want them. That's for sure. And that's pretty interesting. But I don't want put in such a -- I don't want this all seem like, oh, everything is roses, because obviously, it's not. But there are some examples. I mean we were about to start construction on something where the tenant is like just asking us to start construction of their new unit in a particular market. Solid tenant, but solid company. And in Aurora, don't think it's a, sorry, a REIT site, but just however indicative maybe, a Farm Boy with a TJX and some other retail is all set and ready to go. And they are -- they all call up about when are we getting our unit. When we paused it, because we wanted, like everybody else, wanted to see what we're dealing with. But if we're talking about short time frame [indiscernible] obviously operates in geological time frames. So a month to us is like an hour in real life. I mean it's nothing to pause for a month. But no, they wanted, and we're the ones who were saying let's just hold tight. [indiscernible] not a great amount of data points there, but there's lots more to it than you might think.

[Operator]

And there are no further questions at this time. I would now like to hand it back over to Mr. Forde for any additional or closing remarks.

[Peter Forde, President, CEO & Trustee]

No, I appreciate that. Again, I want to thank you all for taking the time to participate in our first quarter call and just say, please stay safe. Good night.

[Operator]

And this concludes today's call. We thank you for your participation. You may now disconnect your lines, and have a wonderful day, everyone.