SmartCentres Real Estate Investment Trust

TSX:SRU.UN

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, welcome to the SmartCentres REIT Q1 2023 conference call. I would now like to introduce Peter Slan. Please go ahead.

[Peter Slan, Chief Financial Officer]

Good afternoon, and welcome to our first quarter 2023 results call. I'm Peter Slan, Chief Financial Officer, and I'm joined on today's call by Mitch Goldhar, SmartCentre's Executive Chair and CEO; and by Rudy Gobin, our Executive Vice President of Portfolio Management and Investments. We will begin today's call with some comments from Mitch. Rudy will then cover some operational items, and I will review our financial results. We will then be pleased to take your questions.

Just before I turn the call over to Mitch, I would like to refer you specifically to the cautionary language about forward-looking information, which can be found at the front of our MD&A materials. This also applies to comments that any of the speakers make this afternoon. Mitch, over to you.

[Mitch Goldhar, Chief Executive Officer]

Thanks, Peter. Good afternoon, and welcome, everyone. We kicked off 2023 on a much higher note than we experienced just 1 year ago. Operational results continued to improve, driven by Canada's best retailers driving higher consumer traffic to our convenient open-format centers. Occupancy improved to 98% from 97.2% in the prior year.

Renewals are up 3.4%, NOI improving by 4.3%, and collections in excess of 99%. All in all, retailers, who set the agenda and who make up our core retail base, are investing in their physical platforms in the form of renovations, expansions, e-com fulfillment integration and new stores. Toronto and Montreal Premium Outlets are fully leased, with 12-month rolling sales now exceeding 2019 levels. Rudy will get into the operational details in a few minutes. On the land use permission front, so far this year we achieved residential zoning approvals in 3 projects, which added yet another 3.4 million square feet to our future.

2 are in Ontario and one is in Quebec. We continue to stay focused on getting valuable permissions, laying the groundwork for providing us with ready-made options for future growth. Recall that, in 2022, we achieved over 6.1 million square feet of new mixed-use permissions in urban locations with high demand for housing. So 2023 is off to a great start, ahead of last year's pace. I will remind you that these proposed developments are on lands we already own, sitting in the midst of highly populated communities in every major market across Canada.

You can read the details of many of our developments planned for in the portfolio in our MD&A. So I will not go through them all here, except to say that Transit City 4 and 5 sold out condos at VMC. 1,050 units will all be closed this year. The Millway purposely built rental building here at the VMC is near completion, with occupancies already commencing. Art Walk, our new condo at VMC, is sold out of the released units, and preconstruction mobilization will commence within 60 days.

Mascouche, our purpose-built rental in the Greater Montreal area, is 76% leased and is expected to be leased out by October, ahead of schedule. Our 240,000 square foot industrial initiative in Pickering is complete, and the first tenant for half the building has moved in. In Ottawa, our 402-unit seniors residence, which is under construction has been delayed because of financial challenges of our partner, which are close to being resolved. In root of that, we have taken over the development and construction management contracts. Earthworks are now complete, and construction will commence within 2 months on our townhouse development with our partners in Vaughn Northwest.

With respect to self-storage, we opened our eighth in this quarter, the 133,000 square foot Brampton facility on the surplus lands we own at Kingspoint Plaza. Two others are under construction in the GTA, Whidbey and Markham. We have commenced discussions with potential new partners and buyers of selected assets within the portfolio, which will assist in funding development, debt reduction and diversification. Although only a small part of the portfolio, we see this as an ongoing capital recycling program, which will not only strengthen our balance sheet but de-risk future cash flow streams. Once again, you can see this current construction activity in our expanded disclosure in the MD&A, as well as a list of additional projects scheduled to commence construction in the next 2 years.

And while we have delayed the start of a few projects owing to the current market conditions, our efforts in obtaining additional land use permissions, such as residential, continues in the normal course. On the financial side, Peter will provide a full update in a minute, but let me emphasize a few of the more pertinent elements. Maintaining our conservative balance sheet remains a significant priority for us, along with maintaining a significant unencumbered pool of assets, which now stands at $8.7 billion. Our respectable debt level at 43.2% is important to us, along with maintaining significant liquidity and the strong support from our partners and lenders, all firmly in place. We are committed to doing the right thing for the long term, like decisions made in the past resulting in our strategic real estate, current occupancy levels and our strong tenant mix and rents collected, so is the approach to decisions taken today to ensure a stable and sustainable growth tomorrow. Very recently, doing the right thing has been encapsulated in the term ESG, Environmental, Social and Governance, a concept that has been sweeping the corporate world.

But for us, ESG is just a different way of describing what we have been doing all along. It is woven into the fabric of our organization in how we oversee our business, interact with our tenants, and engage our associates and communities. Of course, it also means careful consideration for the environment. Our 3-year action plan in which we are developing and implementing our ESG strategy is posted on our website, and I invite you to assess our portfolio, where you will see ESG principles applied throughout. On a final note, I would like to once again offer my thanks and appreciation and an exceptional team of associates for their commitment and dedication to delivering on this long-term vision of improving the lives of the communities we serve every day.

And with that, I will pass the call over to Rudy.

[Rudy Gobin, EVP, Portfolio Management and Investments]

Thanks, Mitch, and good afternoon, everyone. I'll just touch on a few of the things Mitch has said and give a little bit of an operational update. The first quarter continued to build on the momentum of last year, with strong interest from many of our dominant retailers who shape the open format shopping landscape. TJX, Canadian Tire banners, pet stores, banks, dollar stores, liquor, QSR, full and ethnic grocers were all very active picking up vacant space in our high-traffic Walmart-anchored centers. And given our proximity to residential, being in the center of communities and their strong financial footing, a few new entrants were engaging us with their space needs, including discounters, experiential, entertainment, gaming, logistics and a few light industrial users as well, finding their preferred locations on our website and calling with competitive rents and covenants to match. It's interesting that for a lot of this latter group, they have figured out what our national retailers always knew - location matters.

High traffic matters. It matters who you co-locate with if you want your name and brand remembered. It matters that their customers enjoy the experience, access and convenience of their weekly trip. We've heard it from so many retailers. Our real estate strategy is simple - find a Walmart-anchored center and get into it.

The cross-shopping, high-traffic convenience, frequency of visits and the value to our customers is clear, in their words. For SmartCentres, delivering on this vision and strategy have led us to the results we have seen before and continue to see this quarter, which speaks to themselves. With a sector-leading 98% occupancy, over 99% collections, 4.3% same-property NOI growth, even planning new build retail and not just in urban centers, but in places like Carlton, Cambridge, Alliston, Chilliwack, renewal spreads on over 3 million square feet of leasing at 4.3% ex-anchors. So while the pandemic gave retailers good reason to pause and rethink their strategy, their path is now clearer than ever. They stay close to their customers, offer great value, make it convenient, in proximity and access, and co-locate with the best in the country so that customers have one place to do all of their shopping for their daily needs.

Even with this strong recovery, there is no doubt that the market will see a small handful of retailers struggling to adapt, mostly in the enclosed mall space, which is not our space. Bed, Bath & Beyond is one such example. But for us, that was only 2 locations in our 35 million square foot portfolio, and both locations have already been taken without any rental interruption. The strength at the top keeps getting stronger - Walmart, Canadian Tire, Winners HomeSense, grocers, Dollarama, are reinvesting heavily in their store network and simultaneously growing their footprint. And as a reminder, virtually all of the SmartCentres locations across the country includes a full grocery, accessible ad-grade parking, and a tenant mix that satisfies the weekly living needs of its community.

With that said, here are a few other operational highlights. In addition to the larger dominant retailers, a number of smaller-sized tenants are wanting space across the country for personal care, beauty supplies, spas, hair salons, day cares. When combined with entertainment, such as indoor golf, gaming and racket sports facilities, we're developing well-rounded centers, most of which, as you know, are in the planning, preconstruction or construction phases of becoming city centers, utilizing our excess lands for residential and other mixed uses, as Mitch mentioned earlier. Development of our Millway apartments is on track and the first phase of units in the North Tower being brought to market, and 50% of those leased. That being said, there's lots more to go, and leaving just over 350 units on stream to come over the balance of the year in the East podium and West Tower.

Our first prelease industrial newbuild tenant took occupancy just after the quarter, in our Pickering project. And given the modern design, location and current discussions, we're expecting the balance of the space to be leased shortly. Our premium outlets in Toronto and Montreal continue to exceed our expectations and dominate their markets. Tenant sales in Toronto are well over $1,000 per square foot and have exceeded all prior years. 2023 EBITDA is trending to exceed the 2022 levels by over 10%.

With traffic continuing to grow, plan your trips accordingly to take advantage of the great luxury brands such as Prada, Kate Spade, Gucci, Hugo Boss, Balenciaga, Versace and Ferragamo, to name a few, and all at affordable outlet prices. All in all, even with a few economic challenges facing us all, 2023 is shaping up to be a step-up over the prior year in nearly every metric, delivering NOI growth, leading occupancy levels, stronger tenant covenants, all while executing on our mixed-use development strategy for the long-term. Thanks.

And now I'll turn it over to Peter.

[Peter Slan, Chief Financial Officer]

Thank you, Rudy. The financial results for the first quarter reflect continued solid performance in our core retail business, with a strong contribution from our mixed-use development portfolio through the initial closings at the Transit City 4 condominium project. For the 3 months ended March 31, 2023, FFO per fully diluted unit was $0.54, an increase of 6% from the comparable quarter last year. These results include $3.8 million, or $0.02 per unit, of profits from the closing of 194 condominium suites at Transit City 4. Higher rental income was partially offset by higher interest expense.

While G&A expenses were also higher this quarter, we note that a majority of the increase was due to a onetime write-off of some capitalized costs related to a discontinued development project. We expect G&A costs to revert to their historic trend line in future quarters. Net rental income for the quarter increased by $4.1 million, or 3.4%, from the same quarter last year. Including our equity accounted investments, however, net rental income increased by $5.5 million, or 4.4%, largely due to continued strong performance at our Montreal and Toronto Premium Outlet centers. Same-property NOI, including equity accounted investments, increased by $5.3 million, or 4.3%, compared to the same period in 2022.

Leasing activity remained strong during the quarter, which is expected to drive continued modest growth in NOI over the balance of the year. Our occupancy level, including committed leases, was 98% at the end of Q1, unchanged from the prior quarter but up 80 basis points from a year earlier. In terms of distributions, we have maintained our annual cash distribution level of $1.85 per unit throughout the COVID-19 period, and we are proud to be one of the very few Canadian REITs that has never cut its distributions. The payout ratio to AFFO for the 3 months ended March 31, 2023 was 93%, an improvement from 96.1% for the same period a year earlier. Total assets, including our proportionate share of equity-accounted investments, were $12.1 billion at the end of Q1, unchanged from the prior quarter.

During the quarter, IFRS fair value adjustments in our investment property portfolio, including equity accounted investments, resulted in modest net gains of approximately $35.4 million, principally reflecting additional leasing activity. We did not make any portfolio-wide changes in our capitalization rate assumptions this quarter, although we did use modestly higher cap rates on a small number of select properties. During the quarter, we closed on the sale of the first 194 condominium units in our Transit City 4 development for gross proceeds at the REIT's 25% share of $24.8 million and net profit of $4.1 million. The remaining 832 units at Transit City 4 and Transit City 5 are expected to close over the balance of the year, as Mitch mentioned earlier. Adjusted debt to adjusted EBITDA stood at 10x in Q1, representing a modest improvement from 10.3x at the end of 2022 as a result of both growth in EBITDA and the repayment of approximately $20.8 million of debt during the quarter.

Our debt-to-aggregate asset ratio was 43.2% at the end of the quarter, an improvement of 40 basis points from the prior quarter. We expect to continue to repay debt over the coming quarters, particularly with the profits from the forthcoming condominium closings. As we disclosed previously, during the quarter, we completed the sale of approximately 6.4 acres of land at the Vaughn Metropolitan Center for gross proceeds of $95.6 million, or $58.4 million at the REIT's share. The land parcel was comprised of 4.3 acres in VMC West, where the REIT has of 2/3 ownership, and 2.1 acres in the eastern part of VMC, where the REIT's interest is 50%. While this makes the accounting a little complicated, we recorded a modest net gain of approximately $3.7 million between the 2 parcels.

However, this amount is not included in FFO. The proceeds from the sale were used to reduce indebtedness. Our unencumbered asset pool stood at $8.7 billion at the end of Q1, up from $8.4 billion at year-end. Our unsecured debt of $4.1 billion was unchanged from the prior quarter and represented 79% of our total debt of $5.2 billion. From a liquidity perspective, during the quarter, we extended the term on both our principal syndicated operating line as well as one of our bilateral facilities.

We are very comfortable with our current liquidity position, with more than $675 million of undrawn liquidity as at March 31, 2023, including our share of equity accounted investments, but excluding any accordion features. The weighted average term to maturity of our debt, including debt on equity accounted investments, is 3.9 years, with a weighted average interest rate of 3.89%, an increase of 3 basis points from the prior quarter. We remain comfortable with our conservatively structured debt ladder, where the most significant aggregate maturities are in 2025 and 2027. We are actively engaged in evaluating refinancing alternatives for our $200 million Series I debenture that matures later this month. Approximately 83% of our debt is at fixed interest rates, which has been a significant benefit to us as rates have been rising in recent quarters.

Finally, I want to touch briefly on our mixed-use development projects that are underway. Last quarter, we added some new disclosure in our MD&A focusing on these development projects, those that are currently under construction. Of the 11 projects that we highlighted in Q4, one was completed during Q1, which Mitch touched on earlier. It's our self-storage facility at Kingspoint Plaza in Brampton. So there are now 10 projects that were under construction as of March 31.

The REIT's share of the total capital cost of these projects is approximately $533 million, with the estimated cost to complete standing at a relatively modest $217 million. We expect all of them to be completed by the third quarter of 2024. We will continue to update this disclosure each quarter to reflect the ongoing progress with these new projects. As the year progresses, we expect to see more of these projects reach completion and come off the list, while additional projects will be added as construction commences. Note that, as projects come off the list, they are also reclassified from properties under development to income-producing properties with the exception, of course, of condos and townhomes, which move out of residential inventory upon closing.

Upon completion, each of these projects is expected to drive continued FFO growth as well as allow us to recycle capital into other opportunities in our development pipeline and facilitate prudent management of our capital and liquidity needs. And with that, we would be pleased to take your questions.

So operator, can we have the first question on the line, please?

[Operator]

[Operator Instructions] So our first question is going to be from Tal Wooley from National Bank Financial.

[Sam Damiani, National Bank Financial]

Sorry, it's Sam Damiana with TD Cowen. So congratulations on the good same-property print. I was wondering what your thoughts were for the balance of 2023 on same property, just looking at the Q1 sort of contribution. Looks like it got a lot from occupancy gains and possibly from the outlet centers. And so, as the year progresses, how do you think that year-over-year comparison is going to play out?

[Rudy Gobin, EVP, Portfolio Management and Investments]

Sam, it's Rudy. We see a continuation of what we are starting in Q1. Last year, as you know, was rebuilding 2021 into 2022. So it's building from Q1 to Q1. So we do see a trend of discontinuing.

We are at 98%. So again, the churn was going to make that difference. But the interest is so good from that number of retailers that I mentioned, we are getting a good uptick, as you saw, in the renewals as well. So new leasing for vacant space and renewal uplifts, we should be able to keep this momentum going.

[Sam Damiani, National Bank Financial]

So would you be comfortable putting out sort of a range? I wouldn't say, official guidance, but sort of best guess as to how the same property will play out for the year?

[Rudy Gobin, EVP, Portfolio Management and Investments]

Well, I'd say it this way. I would say, from an overall perspective, I wouldn't want to like take a number or a range because, as you know, every little tenant matters, every little one. Like we were fortunate about the Bed, Bath & Beyond, that we did not have a big exposure to those 60 stores. We have 2. But I'm going to say, generally, what we are seeing in Q1, we expect to continue throughout the rest of the year.

[Sam Damiani, National Bank Financial]

And maybe just on the development side. As you mentioned, Peter, there was one project that came out because it was completed, 10 left. As you look forward, what kinds of projects do you see added to active construction? And how are you looking at residential condo versus rental in the current environment?

[Mitch Goldhar, Chief Executive Officer]

Yes, it's Mitch. At the moment, we're going measured, step-by-step. We really have only one new construction start that we're absolutely committed to starting, and that's ArtWalk, which is in the Smart VMC here. It's a condo that's sold out, all the released units sold out. It has a rental building and a small boutique office component.

We're going to take the first step of construction on that. And we got our second deposits in January. They all came through. There was no recissions or defaults. So that's one. We are looking closely at some of the others, but at the moment, that's the only new residential start that we are committed to starting this year.

[Sam Damiani, National Bank Financial]

And how about, I guess, for other asset classes, either self-storage or industrial, arguably a shorter build time, little less risk, if you will?

[Mitch Goldhar, Chief Executive Officer]

Yes. I mean, as Rudy has said, we're cautiously optimistic about some new retail starts, net new on existing sites. Most of these sites, as you would, I guess, know, Sam, are zoned. So in terms of getting started, it's usually pretty straightforward. So we're cautiously optimistic. I mean, we could probably see a couple of retail stats.

In self-storage, we have 2 currently under construction right now, and it's possible that there'll be up to two. Probably won't get a third started this year, but I can definitely see 2 more starts this year. Yes, don't see an industrial start this year, but next year could be. We just finished the Pickering. So there may be some further construction on the completion of the interiors of the half of the industrial building that we've built out in Pickering.

It's negligible. And there will be some capital improvements and some renovations. Next year and the year after, depending on fundamentals, we have a number of things cooking, which we'll get into maybe later in the year, that might result in some commencements next year, as well as that retail program that I was referring to will most certainly start to manifest in all its potential next year, being food stores and others that we've mentioned here without getting into too many specifics. There's quite a few new retail initiatives, pre-leased, strong tenants going on.

[Sam Damiani, National Bank Financial]

Last one for me, just quickly. I just didn't catch what you said, Mitch, in your opening remarks. Millway, was it 50% leased already? I just want to make sure I heard what you said correctly.

[Mitch Goldhar, Chief Executive Officer]

No. Sam, at the moment, all we're leasing is the podiums, because they are the ones that, basically, some of them are now occupiable. So off the top of my head, I think we have --what's that, Peter?

[Peter Slan, Chief Financial Officer]

I have the stats.

[Mitch Goldhar, Chief Executive Officer]

Yes. Peter will give you the exact stats.

[Peter Slan, Chief Financial Officer]

Yes. Sam, there's 89 units between the 2 podiums that are currently available, and 42 of them have leases signed. So that's 47% of those that are available. But obviously, the big nut is the Tower, and we don't expect occupancy there to commence until sometime in the summer.

[Operator]

Sorry, that was a question from Sam Damiani. Our next question I believe will be from Tal Wooley.

[Tal Woolley]

You had mentioned you were looking at maybe adding some new food locations. Is this grocery or food service that you're talking about?

[Mitch Goldhar, Chief Executive Officer]

Grocery. I mean, food as well, but grocery.

[Tal Woolley]

Does Walmart not have an exclusive covenant at most of your properties?

[Mitch Goldhar, Chief Executive Officer]

Yes. So some of them. There’s a very, very specific thing we can talk about later, but, I mean, some do, some don't. And different circumstances, when they do or they don't, don't necessarily mean that those don't happen. But some do, some don't, and we have sites across from our sites, sites that are across some of the larger Walmart anchor sites, too.

So it depends on which market we're talking about. But suffice to say, I'm not referring to properties that we need to go and get a restrictive covenant amended or released. And just keep in mind, there are lots of Loblaws and Sobeys and other food stores currently operating on Walmart sites, along with Costcos, by the way, which I didn't mention are also included in some of what I was referring to.

[Tal Woolley]

And then I think you mentioned on the senior side, you're dialing back one joint venture. I believe that's the selection one in Quebec. Are you looking for a new partner in Ontario, too, on the senior side?

[Mitch Goldhar, Chief Executive Officer]

So I just want to correct you. I know why you said Quebec. It's actually in Ottawa. But yes, Groupe Selection are out of Quebec, and all the litigation and most of the properties are in Quebec. That's true.

Correct. So, I mean, we were always and are still in touch with all seniors operators. And so we had a number of Reveras on the go. The relationship with Revera is still very strong and very good, but we've slowed down that program. And we are in touch with others. And yes, I wouldn't be surprised if we have some information to share somewhere up the road about some seniors homes with some other than Revera.

[Tal Woolley]

Okay. And is there a particular reason those things are going slower? It's just, I mean, for one, I could imagine that just, generally speaking, the whole seniors industry kind of slowed down during COVID period, or is there anything specific sort of around the relationship you're trying to build?

[Mitch Goldhar, Chief Executive Officer]

No. It's really construction prices. I mean, the construction price of the simplest building have gone up. We're getting to, if you want to, whether they're coming down or not. But seniors, I mean, is probably on the spectrum of complex construction and exposure to price increases is probably on the outskirts.

So it really is really just around waiting for prices to come down a bit.

[Tal Woolley]

And then just on the balance sheet, I think you're making reference to that your sort average term to maturity was around in the 3-year range. With the shape of the curve and how you're thinking about interest rates, like what's sort of the goal as you do more refinancing, going forward? Do you look to try and lengthen term here? Or do you bid roughly where it is?

[Mitch Goldhar, Chief Executive Officer]

Peter can answer, but I could ask you. I mean, I guess you can read what the big brains are thinking when you look at the spreads and the embedded rates for the various terms. But I don't know. Everybody's got their own opinion. I personally think there's a lot of motivation to try to push them down a little bit.

I think we're never going to see, or we're not going to see those rates where we were before for a long time, or ever for the foreseeable future. But I think we're just getting our mind around the sort of the midrange in terms of term for now. I don't know. Right now if you ask me do we want to lock in for the long-term at these rates, long-term in 10-plus years, we're not super-excited about rates and locking in of them for 10 years. But everyone's got their opinion, and we're really only dealing at the moment with the one maturity.

[Peter Slan, Chief Financial Officer]

Tal, I think you said the weighted average remaining term is about 3 years. It's actually closer to 4%. It's 3.9%. I just want to make sure you understand -- it's a little longer than that.

[Operator]

Next question is going to be from Gaurav Mathur from iA Capital Markets.

[Gaurav Mathur, iA Capital Markets]

Just sticking to the balance sheet for the moment, with the upcoming $200 million maturity, Peter, would it be possible for you to discuss where pricing currently stands and whether it would be possible to replace a debenture with another one?

[Peter Slan, Chief Financial Officer]

So as I mentioned, Gaurav, we're looking at multiple options for refinancing, including debentures, including looking at drawing our lines and so forth. As for current pricing, I mean, you work for an investment dealer. Your insight on this is probably at least as good as ours, and you heard Mitch's views on the various tenors.

[Gaurav Mathur, iA Capital Markets]

Can't blame me for trying. And just lastly, on the AFFO payout ratio, is there a range that you're targeting to be within for 2023?

[Peter Slan, Chief Financial Officer]

So for 2023, you're not going to see all that much difference over the course of the year. We've actually just finished our budgeting exercise, and we do expect it to decline over the coming years.

[Operator]

Our next question will be from Lorne Kalmar from Desjardins Capital Markets.

[Lorne Kalmar, Desjardins Capital Markets]

Couple quick ones from me. You mentioned capital recycling. I was wondering if you could maybe give sort of a quantum as to how much you kind of expect to do over the balance of the year.

[Mitch Goldhar, Chief Executive Officer]

Well, we don't know. What we'd like and what we do, I mean, we're happy with our portfolio. We'd like to improve our debt metrics, so we're highly motivated. So it's really just going to be a question of market conditions. We've got very desirable assets, both IPP and surplus lands and zone surplus land.

So if we had our druthers, we'd probably be talking in terms of $200 million to $400 million, but that's just provided that they're fair pricing.

[Lorne Kalmar, Desjardins Capital Markets]

And, I mean, maybe just sticking with this. Have buyers started to come back? Obviously, there's a bit of a lull, but things seem to be hopefully stabilizing. Just wondering what you're seeing in terms of appetite.

[Mitch Goldhar, Chief Executive Officer]

I mean, obviously, there's not a lot of data points over the last 6, maybe even 12 months, but we do feel it. We get inquiries. We've been getting inquiries over the last month and a bit. On the land side, zoned land in good markets. Both the players in those markets, the private developers, and some institutional types are interested in a specific properties.

So that side of it, yes, we feel interest. Yes.

[Lorne Kalmar, Desjardins Capital Markets]

And then just a quick one maybe for Peter. Would it be fair to kind of extrapolate the FFO contribution from the Transit City sales in 1Q through the balance of the year? Is that kind of a fair way to look at it?

[Peter Slan, Chief Financial Officer]

Yes, although it's not going to be equally spread over the course of the balance of the year. It's going to be front-end loaded to Q2 and Q3. It will be a small number at the end of the year. P

[Lorne Kalmar, Desjardins Capital Markets]

And then, just lastly, on the Pickering industrial development, obviously, industrial's hot, hot, hot. What are our expectations for getting the rest of that leased up?

[Mitch Goldhar, Chief Executive Officer]

We have a lot of interest. It's all which you're hearing, at least it's been true for us in Pickering on the vacancy. So we have a number of things under negotiation right now. But until it's done, it's not done. So it's hard to say.

We really hope, in the next month or so, we'll have an executed agreement. And then, in terms of rent commencement, we still have to pour the floor, and a few other things that we did so as to accommodate any possible tenant. So, really, rent commencement maybe by the end of the year.

[Lorne Kalmar, Desjardins Capital Markets]

And what would sort of be the range of net rents you're looking at?

[Mitch Goldhar, Chief Executive Officer]

Depending on what kind of work you want us to do, we're sort of quoting $15 to $16 net with some reasonable -- meaning kind of inflationary-type increases on ideally a 10-year term.

[Operator]

[Operator Instructions] And it seems that there is no more questions in queue at this time.

[Mitch Goldhar, Chief Executive Officer]

Okay. Well, thank you for participating in our Q1 analyst call. Please reach out to any of us for further questions. Have a good day.

[Peter Slan, Chief Financial Officer]

Bye, all.

[Operator]

Ladies and gentlemen, this concludes the SmartCentres REIT Q1 2023 Conference Call. Thank you for your participation, and have a nice day.