SmartCentres Real Estate Investment Trust

TSX:SRU.UN

Earnings Call Transcript 2018-Q2

[Operator]

Good day, and welcome to the SmartCentres REIT Q2 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Peter Forde. Please go ahead, sir.

[Peter Forde, President & CEO]

Good evening, everyone. Welcome to SmartCentres Q2 2018 Conference Call. I'm Peter Forde, President and CEO of SmartCentres. Joining me on the call today are Mitch Goldhar, our Executive Chairman; Peter Sweeney, Chief Financial Officer; Mauro Pambianchi, Chief Development Officer; and Rudy Gobin, EVP, Portfolio Management and Investments. After my comments, Mitch will speak further about some of our exciting project developments. Peter Sweeney will then talk about our results for the quarter and our funding activities, and then we will take your questions. Our comments will mostly refer to the first 7 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. And I refer you specifically to the cautionary language at the front of the supplemental material, which also applies to any comments any of the speakers make this evening.So let me begin with a few highlights. FFO with onetime adjustment and transactional FFO increased by $6.1 million or 6.8% to $95 million and by $0.02 or 3.5% to $0.59 on a per unit basis. You will recall that the transactional FFO is the gain on sale of a partial interest in our lands to third party co-owners, i.e. to our partners, something that we expect to be 1% to 2% of our annual FFO on an ongoing basis as we will regularly be transferring land we own into our intensification and mixed-use development programs, realizing on the inherent value in our landholdings. Net rental income was $124.7 million as compared to $116.1 million for the same quarter last year, representing an increase of $8.6 million or 7.4%, much of that from the OneREIT property acquisition late last year. Same properties' NOI increased by $1.3 million or 1.1% compared to the same quarter of 2017. Continued high occupancy of our portfolio, 98.2%, including executed leases, as compared to 98.3% at December 31, 2017, and slightly higher than Q1 of this year. All in all, a strong and stable quarter's performance from our existing retail portfolio as the development pipeline fills and prepares to deliver results in many areas, namely late this year and in all of 2019 as the Toronto Premium Outlet expansion opens; in 2019, as the PwC tower is completed and the lease-up of the remaining space in the KPMG office tower at VMC; 2020 and '21, as our first residential developments are completed; and then on a go-forward basis, from the new business initiatives and developments described this evening and in our quarterly report.For the fifth year in a row, I'm very pleased that we've been able to announce a further increase in our distributions from the current $1.75 per unit up to $1.80 per unit on an annualized basis, a 2.9% increase, which will be effective for the November distribution payment. This increase reflects the board and management's continued confidence in our future growth and cash-generation ability. Our core retail portfolio remains strong and with its value-oriented, nationally focused tenant base is well suited to the changes taking place in the retail market. Studies in the U.S. and Canada show the gap between household incomes of the well-off and the not as well-off is widening. This is reflected in many retailers performing well with both the luxury brands and the discount brands outperforming the retailers catering to the middle. The middle class in Canada, always wanting to shop for good value, does so even more now, and our value-oriented retailers are benefiting very well in this environment. Also, more and more, there is an acknowledgment that online retail and bricks-and-mortar retail need each other. Those that can do both very well will clearly outperform. Bricks-and-mortar retailers that utilize their well-established locations can offer consumers convenient e-commerce options that pure-play online retailers cannot, things like convenient pickup, showcasing of products, shorter home delivery times from stores and convenient returns. We have 115 Walmart stores in our shopping centers. Walmart store traffic in Canada continues to grow with the value-focused dimensions. And with the departure of Target, Sears and Zellers, it has become the only large discount general merchandiser in the country. In addition, Walmart's focus on expanding its food business continues, and its market share in this area grows. Many of our value-oriented retailers continued to expand: dollar stores, Dollarama and Dollar Tree; TJX brands with its Winners, Marshalls and HomeSense; Canadian Tire with its mini store, Sport Chek, Mark's and other sporting good vendors; Indigo; food stores; restaurants; beer and wine, along with a host of other services such as pet stores. Our 98.2% occupancy continues to outperform, and I might remind you that we had no Sears stores in our portfolio and only 2 Target locations.In addition, there are a number of new international retailers coming to Canada. While many of them are of the luxury brand nature, a few are planning to tap in on the value-oriented end of the market, and we are in discussions with them. More news to come during the next 12 months, all of this reflecting a strong and stable base for our extensive development pipeline. There was an official planned change in leadership that we announced last quarter that is now in effect. Mitch Goldhar is very active as our Executive Chairman, obviously in development and leasing, but also with strategy, financing, management and HR matters. And as the new CEO, I continue to be very involved with driving the development strategy and initiatives, strengthening and growing our many JV relationships and building a strong executive and leadership team. Mitch and I each individually have over 35 years in the real estate development, retail and mixed-use business, and our respective skill sets and knowledge complement each other very well. We will continue to supplement, upgrade and promote from within our hands-on development and support teams as reflected in our recent changes with Stephen Champion, EVP Development, having most recently headed up real estate at Sears Canada; a new development leader for Eastern Canada; and 3 new development leaders in Ontario; new leadership in each of our property management, marketing and corporate accounting functions, all hired with a development focus in mind and with plans to hire additional leaders in the development area.Development, new business initiatives and intensification are clearly the focus of this new team, for the most part, utilizing our existing well-located shopping centers and landholdings. In this way, we are not only unlocking value in our existing sites but also drawing customer traffic to our existing centers. We are entrepreneurs, operating within the government parameters and discipline required of a public REIT, the best of both worlds: a private company culture within a public entity vehicle.First, a few retail developments I'll mention. Walmart has recently confirmed that we can proceed with the development of a 220,000 square foot shopping center anchored by Walmart in the Leslie and York Mills area. This is a site co-owned by Penguin and Walmart but to be developed by SmartCentres. The center is expected to be open in the first half of 2020. The Toronto Premium Outlet Center expansion of 145,000 square feet is on schedule to open on November 15 of this year and is expected to be virtually fully leased at that time. The new 1,800 car parking garage has been open for most of this year and expect an announcement in a few weeks of the coming tenants, some high-end very exciting brands.We continue to work with Simon Property on 2 specific sites in Canada for new premium outlet centers. We expect to be in a position to announce at least one of these before the end of the year.Now a quick update on some of our previously announced new business initiatives. Seniors residences, partnering with Revera, and self-storage, partnering with SmartStop, both relationships where SmartCentres will develop and construct the buildings, and our 50/50 partners will operate the facilities once complete. We expect each of these relationships will produce 3 to 5 new projects per year. For seniors residences, we expect to be announcing 4 specific projects on REIT-owned sites before the end of the year, all in the GTA, with an additional 5 in early planning stages for 2019 in the GTA and Western Canada. For self-storage, we are moving forward with projects in Leaside, Brampton and Vaughan. And today, at our board meeting, we approved an additional project in Oshawa. And we are in early planning stages for 8 additional REIT-owned sites in Ontario and recently toured the Greater Montréal area and cities in Western Canada with SmartStop in a search for additional locations. Decisions on sites in those markets are expected in the next 2 to 4 months. Now I'm going to turn things over to Mitch, who will tell you more about some of our other development initiatives. Mitch?

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

Thanks, Peter. I'm not sure where to start. We have so much development in the works. We are planning and reviewing for intensification and mixed-use on virtually all our centers and sites. I'll start with the Vaughan Metropolitan Centre project, which is the jewel in the crown. Things are advancing quickly. If you have not been up here in the last 6 months, you really need to come up and look for yourself. The VMC, as it's known, is really starting to feel like a downtown. A subway line extension is only 45 minutes from Union Station. It opened last December. We understand from the TTC that the VMC station is the busiest station on the extension, ahead of even York University. We added 900 surface parking stalls on our lands near the subway station to facilitate a smooth commute for new TTC patrons and to, of course, simultaneously get the commuters accustomed to coming to the VMC, to use the VMC as the center of their world in this -- in the northern part of the city. And these 900 spots are full before 9 -- before 8 a.m., I'm sorry, each weekday. When you add that to the very busy pickup and drop-off area around the subway, the bus commute -- the bus commuters who are transferring to and from the subway and to the more than 1,300 employees working out of the KPMG building, including the most recent tenant to open for business, FM Global insurance, our project is quickly becoming a metropolis. This will only increase in intensity as we complete the leasing of the eighth floor of the KPMG building. I am pleased to announce that just this week, we executed a lease for 13,000 of the 20,000 square feet on the eighth floor, and we have discussions underway with a very good tenant for the remainder of that floor. This will also intensify as we complete the internal and surrounding road networks. It will also intensify as and when the York Regional bus terminal, which is -- opens, which is expected to be at the end of this year. With the completion of the mixed-use tower to be occupied by PwC and the YMCA in the fall of 2019, it will bring an additional 500 PwC employees and an estimated 1,200 people a day to the YMCA. That building has taken shape. It's fully enclosed and will be -- also be a jewel and representative of what we're going to be doing up here throughout. It will also intensify with the completion of the 3 sold-out 55-story Transit City condo towers in 2020. That's 1,716 units. All 3 towers are under construction on schedule and on or ahead of budget. This will equate to between 3,500 and 4,000 people living in very close proximity to the bus terminal and the subway. Design work is progressing on the next phase with additional condo and rental residential components. We refer to it as the East Block. It's east of the bus terminal in the northeast corner of our site. An artist's rendering is included on Page 10 of the supplemental information package.I am also pleased to announce that the 350 employees from SmartCentres REIT and my private company who are currently working out of 700 Applewood will be moving to the SmartCentres Place project before the end of this year. We will occupy a retrofitted building, 20 steps away from the subway station. This is an interim move as we will ultimately end up in one of the new towers we build on the site. This will be exciting for our current and future associates to be at the center of our major project and to be so close to the subway and other transit. Overall, we now see 9 million to 11 million square feet to be developed on the VMC lands the REIT owns with my company as partner.In addition, the REIT owns a retail site of 20 acres on the west side, abutting Highway 400 slated for intensification. This site has the potential for another 2.5 million square feet of redevelopment, including residential, office and retail. The site is a primary site under the Vaughan Official Plan and is just east, abutting the 2 34-story sold-out towers which are occupied, along with a fully-occupied office tower.And then just west of that, across Weston Road, at a joint signalized intersection on Highway 7 and Weston Road, the REIT owns another 430,000 square feet of retail with the potential for significant residential intensification over time. This Vaughan retail and intensification node is, by itself, enough to keep both companies busy for a long time. We are reviewing and planning for potential residential, rental, condo and/or townhouses on all our sites. Redevelopment plans for the following shopping centers are underway: Pointe-Claire in Québec on the island of Montréal, a 385,000 square foot Walmart and Home-Depot-anchored shopping center we purchased in 2016. We have been working closely with the city of Pointe-Claire on a new master plan and have now obtained zoning for 1.5 million to 2 million square feet of density. Detailed planning is underway for the first residential tower expected to be completed in 2021, 2022. South Oakville Centre. This center in Oakville was anchored by a Target, 1 of our 2. We have now initiated discussions with the municipality, with tenants and with potential partners. If things go according to plan, this site will become a reconfigured 180,000 square foot shopping center, anchored by a Metro food store, which exists; Shoppers Drug Mart; LCBO; and Goodlife, that exist, along with other strong retailers, with an adjoining seniors residence building rental and a very attractive townhouse development. Westside Mall on Eglinton, Toronto. It's a 12-acre site that we own -- that the REIT owns, which will benefit from an LRT station being built on our lands and a pedestrian bridge connection to a new GO Train stop. So this is at the intersection of Eglinton, a LRT station and a GO Transit station. With indicative city and provincial government support, this site is now designated for over 2 million square feet of mixed-use development. It is surrounded by new construction, new [ concrete ] construction and many applications.Laval Center. This is our 43-acre site, which is currently anchored by a Walmart store in the center of the city of Laval. Construction of an office building, hotel and seniors buildings on the lands we have sold on-site and apartments we will own on the site will soon commence. We expect to develop the remaining 15 acres with primarily residential, condominiums and rental apartments and retail. Weston Road and 401. SmartCentres' share is 167,000 square feet of retail, and we are currently reviewing it for a major reconfiguration and re-tenanting of the retail on-site and a long-term development for residential rental. This site has great visibility and access from the 401. As a matter of fact, it is the, or very close to the busiest intersection on the 401 corridor.Chilliwack Mall in British Columbia. A 173,000 square foot shopping center purchased as part of last year's OneREIT transaction is in advanced planning stages for a de-malling of the existing enclosed portion, plus the addition of a seniors home on-site. Other sites for which residential plans are evolving include Oakville North at Trafalgar and Dundas; Vaughan Northwest; Major Mac in Weston Road down the street from the new Vaughan hospital, which is under construction; Hamilton, Stoney Creek across the road from Eastgate Mall; Hamilton Mountain Mall; Markham at Highway 7; and Woodbine with the Viva transit line stop in front; Mirabel, Laval East, [ Beljoy ]; Brampton; Kingspoint, just south of downtown Brampton, which was also purchased as part of the OneREIT transaction. And the list goes on. We have been in discussions with potential partners for many of these sites, and we are also exploring developing a few or -- if not more than a few on our own. In the residential space to date, we have partnered with CentreCourt for condos in Vaughan, Jadco for apartments in Laval and Fieldgate for townhomes in Vaughan, for example. We are careful in the selection of our partners. We look for the right fit, culture and work ethic. Until recently, we have not had that many partners, but the ones we have, have evolved into many partnerships on many properties. The largest relationship, of course, being Walmart with which we developed over 100 properties together.We have great relationships with our existing partners and expect to do more with them and with others. Last quarter, Peter indicated that over the 5 years we expect -- over the next 5 years, we expect to finish development, either alone or with various partners, on in excess of 50 projects, valued on completion between $7 billion and $8 billion. This was based on our budget planning completed at the beginning of the year. Our share of this investment is nearly $3 billion. And different from others, we'll be very diversified in terms of type: in residential, office, rentals, purpose-built rentals, condos, retirement residences, retail and self-storage; and in terms of geography, a mix of urban and suburban and some mixed -- midsized markets.Without factoring in any other initiatives, we estimate that 10 years from now, we will be generating recurring NOI from these specific and currently identified new rental businesses in excess of $75 million annually or equal to 15% of our total rental NOI, plus an additional $20 million to $40 million of profit proved -- per year, starting in 2020, from the sale of condominiums and townhomes. I have no doubt that as we embark on our next budget cycle, we will identify significantly more sites with residential and other mixed-use opportunities, and we'll be telling you about that later this year.With that, I will turn it over to Peter Sweeney.

[Peter E. Sweeney, Chief Financial Officer]

Thanks very much, Mitch, and good evening, everyone. The development initiatives that both Mitch and Peter Forde have spoken about are dependent upon strong and stable operating platform. And in this regard, our financial results for the second quarter of 2018 reflect the continued strength, stability and growth of our shopping center portfolio. During the quarter, this portfolio generated the following improved results: a, net rental income was $124.7 million, representing a 7.4% increase over the comparable quarter; b, cash flow provided by our operating activities was $101.1 million, representing a 36% increase, again over the comparable quarter; c, net income before fair value and similar adjustments was $93 million, representing a 13.2% increase, again, over the comparable quarter; d, FFO per unit, including onetime adjustments, increased to $0.57 per unit, representing a 3.6% increase, again, over the comparable quarter; e, ACFO exceeded both distributions declared and distributions paid at $17.7 million and $31.6 million, respectively; and finally, as Peter previously noted, our same property NOI increased by 1.1% over the comparable quarter. These improved results can be attributed to 4 primary factors. Firstly, the 12 properties that were purchased as part of the OneREIT transaction last year continued to provide tremendous operational and FFO growth, which are consistent with our expectations and further reaffirms the appropriateness of our purchase decision for these assets. Secondly, our portfolio of maturing mortgages continues to provide refinancing opportunities at lower rates than the outgoing maturing rates. Thirdly, the KPMG Tower continues to experience the commencement of new tenancies, which continue to provide incremental NOI and FFO. And lastly, our lease renewal program reflects further improvement whereby year-to-date lease renewal initiatives, including -- or sorry, excluding anchored tenants, reflect a 3.7% increase in average net rental rates, which is substantively improved over the prior year. From a financing perspective, our goals with respect to our funding strategy remain. Firstly, to ensure that we have ready access to funding for our extensive proposed development pipeline. Our approach is to maintain as flexible a balance sheet as possible, well within our relevant debt covenants. Each development project typically carries construction level debt, provided by a syndicate of financial institutions for the construction period. Our experience to date has been that our syndicate members have been both supportive in terms of providing financing and also very competitive in terms of the rates that...[Technical Difficulty]

[Peter E. Sweeney, Chief Financial Officer]

It's Peter Sweeney. Sorry to our audience. Obviously, there was some technical difficulties that caused us to lose our connection. Hopefully, everyone's stayed on the line, and we look forward to completing the call. I was chatting when we were cut off about our funding strategies, so I'm just going to sort of start again from where we left off when we were disconnected.So our experience to date has been that our syndicate members have been both very supportive in terms of providing financing and also very competitive in terms of the rates that they're providing us. Once each of these projects are completed, we then term them out with the appropriate funding. And with the inclusion of multiple well-capitalized joint venture partners, as Mitch mentioned earlier, this mitigates a significant portion of our funding needs and our funding risk.Secondly, to lower the cost of our future funding requirements by achieving a ratings upgrade to BBB high, so this, again, is a strategic objective. Our conversations with DBRS have indicated that we need to both balance our secured and unsecured funding portfolios and also demonstrate a plan that will result in increased EBITDA levels. We're well on our way to achieving both of these objectives. And based on our funding plan for 2018, we expect by year-end to have over 50% of our debt funded in the unsecured market, which is a significant change from just over 2 years ago. For the year-to-date, we've repaid approximately $300 million in maturing mortgages with a weighted average interest rate of approximately 5.4% and achieving substantively lower cost of financing with the alternative sources despite a rising rate interest - a rising interest rate environment. Also, we recently completed the early redemption of $36 million in 5.5% convertible debentures that were assumed by SmartCentres as part of the OneREIT transaction last fall. These initiatives contribute positively to FFO growth. Also, as a result, our unencumbered asset pool, we're delighted to say, has now grown to an excess of $3.9 billion, which is supported by income from many of our high-quality assets. For our payout ratio and distributions, we saw slightly higher lease allowances and leasing commissions in the first 6 months of 2018, which are expected to normalize over the balance of the year. As noted in our financial disclosure going forward, we'll be using the ACFO metric as our benchmark cash flow measure and reporting our payout ratio on this basis. For 2018 and '19, we do expect to be somewhat higher because of tenant allowances and related leasing commissions based on the commencement of new tenancies and the need to rework space to maintain occupancy levels. But our expectations are that our payout ratio will trend toward the 75% to 85% range over time.For the quarter, our surplus in ACFO over distributions declared of $17.7 million shows a continued healthy level of cash generation, reflecting the unique strength and core characteristics of our business model. When factoring in our highly successful DRIP program, the surplus of ACFO over distributions actually paid during the quarter totaled $31.6 million. And now for the fifth consecutive year, we're pleased to announce a $0.05 per unit increase to $1.80 per unit in our annual unit distribution. Our financial results for the quarter reflect our strong and stable business model that we believe positions us well to continue to provide our unitholders with stable and growing distributions while concurrently supporting our existing business, funding our growing development pipeline of retail and mixed-use initiatives, and lastly, permitting us to consider appropriate acquisition opportunities as they become available. And with that, I'll now turn the call back over to Peter Forde.

[Peter Forde, President & CEO]

Thanks, Peter. It's impossible, really, for us to cover everything we have underway. But hopefully, with our quarterly reporting and with this call, you now have a better sense of what this leadership team, with all of its employees, consultants and partners, has planned for the REIT. With that, I'm going to turn it back to the operator to coordinate us addressing your questions.

[Operator]

[Operator Instructions] We'll take our first question from Brendon Abrams with Canaccord Genuity.

[Brendon Abrams, Analyst of Real Estate]

In the [ yellow ] section when you quote a reference, the return expectations, can you just remind us what basis you're using for the land, like is it off fair market value percentage of the site?

[Peter Forde, President & CEO]

Sorry, Francis (sic) [ Brendon ], are you referring to the supplementary packet and the returns?

[Brendon Abrams, Analyst of Real Estate]

It's in the [ yellow ] section when you referenced the returns expectations for some of the projects.

[Peter E. Sweeney, Chief Financial Officer]

Yes. Oh, I'm sorry, Francis (sic) [ Brendon ], we're not -- Francis -- or sorry, Brendon, can you hear us?

[Brendon Abrams, Analyst of Real Estate]

Yes. I can hear you.

[Peter E. Sweeney, Chief Financial Officer]

Sorry. We can hardly hear you. That's one of the challenges we're having this afternoon. The simple answer, Brendon, when we quote those returns, we are quoting those returns based on the market values that the lands that we're rolling into the joint ventures are priced at on those roll dates.

[Brendon Abrams, Analyst of Real Estate]

Okay. That's great. And in terms of the premium outlets, you mentioned potential for expansion across Canada. Like, how much growth potential do you see this product having? Can you envision one being in potentially every major city in Canada?

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

No. We don't see one in every major city, in the most appropriate cities. I mean, obviously, it's a competitive sector, so we don't, at the moment, announce per se exactly where we're working. But we're only interested in the centers where we think there has a long, sustainable -- they're very specific things, their form, their build form, so we are only interested in the markets that we think have very long legs, so obviously major markets. We just haven't announced yet the ones that we are working on.

[Operator]

We'll take our next question from Pammi Bir.

[Pammi Bir, Analyst]

Just on the distribution increase, certainly sending a confident signal, so that's great to see. But when you think about balancing the funding needs between your developments, which are obviously quite substantial, and managing leverage, just curious how that factors into the decision.

[Peter E. Sweeney, Chief Financial Officer]

Pammi, it's Peter, and it's a great question. Thank you for asking. We see our distribution increases being driven off the success, as I think I mentioned earlier, of our core platform of predominantly, at least for now, Walmart-anchored shopping centers. And beginning in 2020, we expect to be able to generate a substantial amount of incremental cash flow and FFO from the initial closings of the townhouses in Vaughan Northwest and the condominiums here at VMC. And so we see the opportunity to repatriate some of that cash back to our unitholders, perhaps in the form of a special distribution to our unitholders, again, subject to discussion and approval of our board. But one of the other alternatives that we would consider at least is rooting some of those incremental proceeds back into the business to assist in perhaps reducing debt or assist in financing some of these new initiatives. The other thing that perhaps is important to remember is, over the last 2 years since we announced each of these initiatives, as we've been completing these initial joint ventures with the partners that both Peter and Mitch mentioned earlier, we've been finding that we've been able to trigger a substantial amount of what was previously unrecognized equity in the lands that are being sold into these joint ventures. And so that unrecognized, or previously, at least, unrecognized equity also forms part of the substantial amount of capital that we think is required and we expect to be contributed to these initiatives going forward. And this is sort of a preview of continuing coming attractions. So we don't see a reduction -- a substantial reduction, whatsoever in the identification of additional equity into joint ventures going forward.

[Pammi Bir, Analyst]

That's very, very helpful, Peter. Just maybe switching gears, looking at the VMC for a minute and the rental residential tower that's in planning there, the new one, sorry. Can you comment on the rents or the range that you're underwriting and what sort of growth you've seen in the past year or so in new purpose-built apartment rents, I guess, in the surrounding area?

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

Yes, it's Mitch. Thanks. Well, I mean, there haven't been any purpose-built rentals in the area for a long time, as far as I know, certainly not in the immediate area. There's actually quite a paucity of rental res in Vaughan, in general, of any vintage. So in terms of the anticipated rental rates, we are now just exploring the different approaches to the rental, of course, sweet mix segment of the market and so on. So we haven't completely resolved yet, although very soon, we will be probably announcing the building, but we are still working through some of the design features, and -- which will, of course, drive rents. So it's sort of a very soon, stay tuned. But it is our submission to the municipality that we've already met with to include a rental residential building in the first phase of the East block along with the 2 condo towers.

[Pammi Bir, Analyst]

Got it. I guess maybe just looking at it a little bit differently, if you look at the new condo supply that's been built in the area, to the extent that there are suites in those -- in that inventory that are being rented out, what's your sense of where those -- what the range of rents could be there?

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

Well, we're not competing with those. I mean, in a way, I guess there will be some overlap, but we will be differentiating ourselves, both in terms of average suite size and amenities. So we don't compete directly. We don't compete directly with the rental market in the condos bought, although obviously there will be some overlap. But at the moment, you really just have the Expo, which is just now occupied, and Centro, which is now occupied. They really are the only 2 condos that are completed up here very recently. And I don't think we know, per se, the rental rates, but we do know what they sold at. The other condos, and there are many, we are not the only developers up here, will be completed over the next few years, Plaza Corp. and Gupta, and of course, there a number of other sites around us being built. All sold out, I might add. So they're all condos. There's not 1 purpose-built rental in the lot. Keeping in mind, we are on the subway line. They are a little bit away from the subway. And keep in mind, we are 2 stops away from York University as well. So we see an opportunity for filling a void in rental residential. While we will overlap and compete, in some respects, we really see ourselves separating ourselves from the market that rents -- that will be renting the condos.

[Pammi Bir, Analyst]

Maybe just one last one, I guess, on your comments with respect to the condos. When you look at the next 2 condo towers at VMC that you're working on, what are your thoughts here on how much the pricing per square foot has changed relative to the first 3 towers?

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

We feel the market is there. In fact, I mean, we would probably go to the market sooner if we could. So at the moment, we would see we will be doing at least as well as we did on the third tower at Transit City. But we, I guess, are also anticipating that we will see a slight increase in price per square foot on tower 4 and tower 5. So we, of course, are not going to go to the market in the fall. We're going to go to the market early in the new year, so we'll wait and see, things can change. But I guess, you probably know that we sold, I guess, tower 1, 2 and 3, let's say, on average of just over $700 a foot, and we certainly don't anticipate selling for less than that. We do see potential increase in sale price per square foot there.

[Operator]

We'll now take our next question from Michael Smith with RBC Capital Markets.

[Michael Smith, Analyst]

Very helpful update on all the development initiatives. I wonder, Mitch, if you could just talk -- you have a different approach to development than some of the other -- some of your peers or some of the REIT peers, I guess. I think, I believe you have about 135 on staff. That number may have changed. First off, you've added people, how -- from what I understand, it's tough to find people, so I'm just wondering if you could give us some color on that. And secondly, how does your approach differ from others? And what do you think the advantages are?

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

Well, first of all, yes, we are hiring, we are also getting up a little earlier and staying a little later. We love what we do. We are -- come from this background, it is our DNA, development. Been developing for certainly all my working life and grew up around development. I feel like it's like anything. If you ask somebody who's -- grew up around, I don't know, being in a plane, you just have a certain innate understanding of the way things feel when they feel right and when they don't feel right. You can reduce all that to mathematics, but there is something in terms of circuitry that you have when you grow up around something. I'm sure all of you experience that. So I think that has grown into an advantage because the business has been built around that sort of nucleus. We have learned over the years many, many things from many others, including Walmart, in the way of disciplines and processes and procedures, reporting and so on, which we love, which has made us better, but we've never lost our development entrepreneurial circuitry. So for us, what we're doing is our -- it's our natural habitat that we're operating in. So I think you probably understand what I'm saying, to reduce it to actual individuals and skill sets, it's hard to say. But maybe our other -- our peers were not born out of that. We were born out of this and grew into all the disciplines and institutional cultures here. We were born out of development. So we're in our sweet spot in terms of looking at all of this that we're initiating, which we could've done many times. We could've started at any time over the course of this company, but for the sake that we were so preoccupied and busy with our retail growth, it just didn't make sense to do. But now, of course, it does and, hence, we are massively focused on it.

[Peter Forde, President & CEO]

I might just add to that, Michael. A specific example is, we use that team, the 135, and we have -- instead -- we obviously still use -- we use consultants, and consultants are an important part of what we do. But we have our own people always involved. We have engineers on the team. We have architects on the team. We have lawyers on the team who are very much involved with the projects and moving these things forward, and use consultants when necessary or when appropriate, but I think that's probably another -- would be a difference between us and some of the others.

[Michael Smith, Analyst]

Okay. Very helpful. Maybe you could just give us some color, I mean, on costs. And I know you've buttoned down a lot of your costs on the 3 condo towers and you came in under budget on the KPMG a couple of years ago, and PwC, I believe, you're on target for that. But we are hearing a lot about shortages, cost inflation. I wonder if you can just give us some color on what's going on there and how you're managing that.

[Peter Forde, President & CEO]

Sure. I mean, you're right about us being in good shape in terms of tendering on the buildings that we actually have under construction, and we are aware of potential cost increases in both the residential and the commercial, but we have a pretty good handle on it, and we are factoring that in to what we're doing going forward in terms of the next Transit City Condo towers or the rental tower that Mitch was referring to. We're factoring that in to the equations that we're using to move forward. So yes, there are some increases that we're starting to see, and yes, we're factoring those in.

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

As well, I would add that we're not going to -- we're not on autopilot. We don't develop on autopilot. We are not doing this because we want to say we're developing. I mean, we -- each development will be evaluated based on the market conditions, including, of course, any movement in costs. And thankfully, we have land across the country and we have opportunities in many different markets, so we'll be able to prioritize different markets if costs were, for example, to get so out of hand. But at the moment, we don't see that price increases at the moment in Toronto, for example, the GTA, are going to stop or slow us down from proceeding with our developments that we've announced or that we've talked about today in the GTA.

[Peter E. Sweeney, Chief Financial Officer]

And maybe specifically, Michael, I'll just mention on Transit City 1 and 2, we've tendered about 80% of the trades, 80% of the dollar value of the trade. So we're -- and Transit City 3 is about 55%. So we're in good shape in terms of where we are with those relative to our budget.

[Michael Smith, Analyst]

Okay. And last question, I wonder, is this -- like one of the things that some investors, there's so many, you have so much development on the go, and intuitively, we know it's profitable, but it's hard to put a number on that and -- when sort of analyzing the stock. And I'm just wondering if you're -- what your thoughts are like on, if you were to say you're going to build -- you're going to spend your share, $3 billion, over the next 5 years and some of that is going to be rental income and some of that's going to be condos and you'll get a profit. Is it -- what ballpark of profit or NAV creation would you, standing from a high -- from a bird's eye view, would you say is the range, either from profits from selling a condo or developing a property at a 6.5% cap and it's worth 5.5% cap, so there's an implied profit or NAV creation there. So if you spent $3 billion, it's your share, is that like a 20% kind of number, 20% of $3 billion? Is kind of NAV created either through generating profit or through higher valuations? Is that something you -- is that a way you think about it or...

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

I think you're going to get a different answer from a few different people here. I guess, first of all, obviously, we don't want to talk in those terms because each development has to stand on its own. And they're going to vary a bit, and they're going to have to be well -- safe within profitability. But there will be one return on a rental, day 1 rental building. There'll be a different profit on a condo at Eglinton versus a condo in, say, Mississauga. So I know you want just an overarching, what would the return be on the $3 billion, but it would be, I mean, it would be -- we'd be reluctant to try and find an average. But we certainly look at each one and make sure that every one of them will fly. The rental, I will comment, I mean, just to take initiative to comment. The rental, purpose-built rental, is not -- from scratch, is not day 1 huge returns, as you no doubt know. But their characteristics are very attractive to us, and that is that there's generally reliable increases every year, very, very low vacancy. And the worst day is the first day, and we're taking a long-term approach with rental. I mean, we're going to get into that game. We're going to understand that business, and real estate moves in geological time frames. I mean -- and so we will start that time frame and build very strong, very solid residential rental basis. Initially, day 1 will be -- we still plan on it for that to be accretive, but it will be better in day 2 and it will be better in day 3. Whereas a condo in VMC, I mean, it's just a fantastic, very potent return for us. So -- and then you've got everything else. So it'd be very hard to, and maybe a little bit -- yes, we wouldn't want to think in terms of an average, so I hope that helps a little bit.

[Operator]

[Operator Instructions] We'll now take our next question from Sam Damiani with TD Securities.

[Sam Damiani, Analyst]

I just wanted to touch on the distribution, the increase again. Just given the REIT also already offers a pretty healthy yield in the context of the market and other peers who have not dissimilar development plans and pipelines are -- tend not to be raising the dividend. I'm just wondering if there's some tax reasons or other reasons that you have for offering a distribution increase when you have such a capital need strategy.

[Peter E. Sweeney, Chief Financial Officer]

Sam, it's Peter. I think as we mentioned earlier to Pammi's question, we're -- perhaps, SmartCentres REIT is maybe more uniquely positioned in its ability to generate cash flow off its existing platform, A. B, as we mentioned earlier, we're not embarking upon so-called acquisition strategy of going out to buy expensive new lands to accommodate our development initiatives. The existing portfolio of 154 or so properties provides us with an ample supply of space and land and opportunity from which we can lever all of our development initiatives that at least are currently in the development pipeline. And so as I mentioned earlier, with those opportunities, we're finding that the value of the land as its currently recorded for IFRS purposes, which is predicated, as I think you know, based on existing income streams that are emanating from those properties, we're finding that when we take parcels of those lands, sever them and appropriate them into these joint ventures, that we're unlocking tremendous value. And so from the REIT perspective, I think it's fair to say, our board certainly considered alternatives due to distribution increases. But at the same time, recognized the continued success of our existing portfolio, A; B, the tremendous potential for value increments that exist in our portfolio of properties that form our development pipeline; and then C, given what we see over the next several years with respect to substantial cash being generated from the condo and townhouse completions, I think it's fair to say our board thought the appropriate thing to do was to send a strong signal to the market that we do expect to be in a position as a public company to find ways to grow our distributions. And so if nothing else, the decision by the board should be interpreted as a strong vote of confidence in the REIT's ability to continue to find ways of increasing distributions.

[Sam Damiani, Analyst]

That is helpful incremental information. So just to be clear, there were no tax considerations motivating the decision really?

[Peter E. Sweeney, Chief Financial Officer]

Not at all. Not at all.

[Sam Damiani, Analyst]

Okay. Just moving on to the premium outlet, the Toronto Premium Outlet sales, it looks like they slipped a little bit Q2 versus Q1 and the year-over-year growth also got a little slower. Just wondering if there was an explanation behind that sort of blip in the trend.

[Peter Forde, President & CEO]

Yes, we embarked on this construction and the buildout of a parking deck started earlier this year, and as a result of that, it's very, very obvious, the congestion in there was the result of that. We are now complete and tenants are fixturing in terms of the build out. And we might see a little bit of that, you may be seeing a little bit of that being a result of that construction. So keep in mind that the percentage growth is significant and was significant in '17, so you may just be seeing what's happening in this, I'm going to call it, seasonal period and just wait until November when this thing opens up. And we'll see with the new tenants that we'll hopefully be announcing in the next few weeks and months what's coming. So again all temporary.

[Sam Damiani, Analyst]

And when the expansion opens up, will you include that in same property NOI?

[Peter Forde, President & CEO]

No, we will not do that until we've got full year of it under our belt so we can compare apples-to-apples on that basis. But we will report sales on the center, but not in same property because it's new construction.

[Peter E. Sweeney, Chief Financial Officer]

Sam, it's Peter. Has there been a change in expectations, would you like us to include it in same property growth?

[Sam Damiani, Analyst]

No, I just want to be clear. And on that same point, I noticed in the quarter, the 1.1% same property NOI growth was largely due to roughly $900,000 coming from, I guess, the new parking at the VMC, which you have included in same property. So I'm just wondering if that's something that we'll continue to see for another couple of quarters before it cycles over and the growth kind of peters out.

[Peter E. Sweeney, Chief Financial Officer]

I think part of it was parking at VMC, and I think it's fair to say that, as I think Peter mentioned earlier, we're continuing to see more commuter traffic into that site. I think one of the challenges might be that we're full, there's no room at the inn, so to speak. So at least for the parking, the complement of parking opportunities to generate incremental growth as a consequence, I think, for now, at least, we may be some somewhat limited. We'll probably see further growth in that regard in Q3, but I think beyond that, it might be perhaps challenging.

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

I would add, I don't know if you know this or not or whether it was in the information, but we charge very little at the moment for parking there. And so there is also the opportunity to increase. We set our parking price there based on some estimates that we had early on which have been far -- which have been exceeded. So there is an opportunity potentially for small increment in the rate, parking rate there.

[Sam Damiani, Analyst]

That makes sense. Final question is just on cannabis. This is an opportunity in the marketplace. And with some retailers growing, I'm wondering if that's a sector the REIT is pursuing throughout the portfolio right now.

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

Rudy really wants to answer this question, the history.

[Rudy Gobin]

Finally, finally it's here. Yes, it is a sector we will be pursuing in our shopping centers. As you know across the country, this is not big space, small space, 1,500 square feet to 3,000 square feet. We already have a bunch of deals already signed up. We have a bunch of deals that we're in discussions with both here and in Western Canada. As soon as the Ontario government figures out which way which they're going, whether it's [ LCBO ] or private or both, which they're, I think, steering towards, we will take that forward. So yes, that is something that is on our horizon. But again, not significant dollars to our REIT.

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

And philosophically, we are obviously very much -- we're going forward with it. We, as a company, are not -- we have no issue with it. But it is small spaces. It will be much bigger space, if you're on cannabis, it'll seem like a lot larger space.

[Sam Damiani, Analyst]

Would you be willing to say the number of leases you've signed so far?

[Rudy Gobin]

Yes, I think they're upwards of 10 leases signed, and we are negotiating with at least the same number right now and a lot of -- there's a lot of frenzy with people calling us up because we're all over the country. And as you know, this is not a product for consumption in urban markets only. It's a consumption of products everywhere. So whether it's for the elderly, for the sick and so on -- so we're getting a massive amount of interest, so we are in discussions with a lot of parties on this.

[Peter E. Sweeney, Chief Financial Officer]

To back up on that VMC question you asked about the parking and same property growth levels, just for clarity, the $900,000 that's referenced in the MD&A that supports the $1.1 million bump is a function of 3 things. It's a function of the increased parking success of VMC, but it's also a function of additional revenue being generated at TPO as well as additional revenue being generated at the film studios on Eastern Avenue. So just in your thinking, just make sure that you're not thinking that the $900,000 is exclusive to parking, okay?

[Sam Damiani, Analyst]

I appreciate that. I think you'd said that parking was largest part, but thank you.

[Operator]

We'll take our next question from Tal Woolley with National Bank Financial.

[Tal Woolley, Research Analyst]

I just wanted to ask quickly on the premium outlets, there's quite the productivity gap between Montréal and Toronto and the centers are about the same size and the tenant mix actually looks a little bit more higher end in Montréal. So I was just curious is it just a question of time in the market, that, that center, that Montréal center needs to season more and do you expect that, that will center will close the gap to Toronto?

[Peter E. Sweeney, Chief Financial Officer]

When the markets opened, Toronto was 6 million population compared to Montréal. That speaks for itself. But Toronto, when Toronto opened, Toronto was the best-performing Premium Outlets in the entire Simon Property portfolio in its first year and it was off the charts on its productivity. And then the year after, we saw double-digit growth in both sales, tremendous ramp-ups, as you know. And Montréal looked, by comparison, I mean, it looked -- may have looked small, but it was doing fairly well compared to other premium outlet locations with Simon properties. So that gap is -- has been closing a little bit because the Montréal growth has taken off in terms of sales, tenant sales, and you'll see that gap starting to close. All except for now, the expansion that's planned for Toronto and with the banners again that we will announce shortly, you will see Toronto taking off even further. So Montréal is, by no means, with all of the lands we have around it and the expansion that is also possible and the lands that are available to that expansion in Montréal, and we see ourselves doing that and taking advantage of that as well in the near future.

[Tal Woolley, Research Analyst]

So look, is it possible like Montréal could be like $1,000 per square foot, too? Or is that just way too aggressive?

[Peter E. Sweeney, Chief Financial Officer]

I mean, at some point, I think Montréal will get there. And I think with the regards to the mapping of it, our plan was that it would be a year to 2 years between the 2 that we would expand Montréal. And Montréal is tracking very, very nicely in terms of where the sales are -- is going relative to where it started. So we don't see that, that is at all -- we see that as very, very possible in terms of where it's going and we will probably do that expansion long before it got there.

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

I would add, if you haven't been to the area, it is the -- area, meaning, actually the region, is growing around us. When we opened it, you would have seen the outlets kind of alone in a very large kind of off the highway in a very relatively underdeveloped area, which is not uncommon for outlet centers. But the area around us has actually grown rapidly. We are surrounded by residential development, to the extent that we are actually now even looking at some of our surplus lands there for potential residential because it's closing in on us. That's not the land for the potential expansion of the outlet center itself. We have additional lands. We are very happy with our position there. And whether we make it to that or not, I mean, that would be more or less our goal. I think we can get there, but it's a very, very strong steady outlet center. Toronto is just a little bit of an anomaly.

[Tal Woolley, Research Analyst]

Okay. And just in your development pipeline, your commentary, you made reference to the Westside project, the 407 project and the Pointe-Claire project and giving like sort of specific future densities that are available to you. And just to be clear because we get this asked this question a lot, are those densities that you're citing, those are zoned right now or not?

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

Yes, well, okay, in VMC, yes. In the lands at Weston Road and Highway 7, our neighbor is zoned for -- just to be clear, the lands at Weston Road and 7 are outside the planning district called VMC. But they are adjoining it and they are within proximity of the mass transit that the government's investing in. So there is implicit support for higher densities there, evidenced by our neighbor's 3 towers. We are immediately next to them. We are in discussions with the municipality for higher densities. And there is a secondary plan which has now been initiated by the municipality which means to study the area for the purposes of changing the zoning. It's right next to the VMC. I would not bet against those lands being zoned for high density, so VMC type density. But technically, they are not currently zoned. Having said that, the lands on Eglinton Avenue right next to the transit infrastructure there, they are designated. So they are already approved for the concept of high density. And the implementation in technical terms of that vision of the municipality has not been completed, but that is the implementation of their vision, and we will do that, and we are in the process of doing that, and I certainly would not bet against. It is the cities' initiative, by the way. We did not initiate the zoning there -- the designation there. And in Pointe-Claire, it is approved. It was just approved very recently. And I don't know whether we mentioned this or not, but it is also within proximity to the proposed new rail line running from -- to and from Montréal out to the West Island. So like VMC, we think we are a step ahead in terms of we got a jump on the areas changing. So that one is zoned, and I don't know if there any others, but of those 4, I mean, those are -- they're as good as all zoned, but those are the technicalities over the question.

[Tal Woolley, Research Analyst]

That's very helpful. And my last question is probably one for Peter. Just when we're thinking about transactional FFO going forward, you'll be vending in [ distinctive ] partnerships. That FFO though, like, it is FFO and I understand that you're booking a gain on it from that, but it's not really a cash gain most of the time the way these transactions are structured, is that correct?

[Peter E. Sweeney, Chief Financial Officer]

Actually, it is a cash gain because typically, the way these transactions are structured is our going-in position with our partners is that they're expected to pay for their share of the respective properties upon establishment of the joint ventures. And so yes, in fact, they are very much expected to be cash gains. There are circumstances from time to time. I think last year in Q2 when we established the partnership with Fieldgate that instead of taking cash, we took financing back, which was accretive. We thought it was an appropriate risk, et cetera, with more than sufficient security. Having said that, most recently, in the case of the joint venture in Leaside, there was certainly cash contributed by our new partner there, SmartStop. And then similarly, with the third phase of Transit City that we've established in Q2 of this year, our partner CentreCourt did contribute cash to purchase their respective share in that joint venture. So it absolutely starts with an expectation of cash being paid to the REIT by our partner. And to the extent that we think it's appropriate on an interim or short-term basis to take back financing, then we'll think about that as we did in the case of the Fieldgate situation. But otherwise, we do and we'll expect to receive cash.

[Tal Woolley, Research Analyst]

Okay. And just to be clear going forward, the condo sales that you're talking about in 2019, 2020, that's -- those will be like operational FFO, not transactional FFO?

[Peter E. Sweeney, Chief Financial Officer]

Yes. Absolutely. So just for clarity, I know we spent some time with you and your counterparts on this issue. When we think about closings of the sales to final owners of both condos and townhouses, the proceeds and income that will be derived from those closings will be considered by the REIT to be FFO. We'll clearly identify it so it's easy to identify it and see. But because it's becoming, as you should've heard over the last hour or so, a big part of our business, you should expect those proceeds to be part of our standard FFO.

[Operator]

It appears there are no further questions at this time. I would like to turn the conference back to Mr. Peter Forde for additional or closing remarks.

[Peter Forde, President & CEO]

Okay. Thank you all for being part of our second quarter call. I guess just in summary, it's really our healthy financial situation, our outstanding locations, the tremendous development growth initiatives and our leadership and development teams offering a bright future. Thank you all for your interest and investing in our REIT. Good evening.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect your lines.