SmartCentres Real Estate Investment Trust

TSX:SRU.UN

Earnings Call Transcript 2019-Q2

[Operator]

Good day, and welcome to the SmartCentres REIT Q2 2019 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 & Trustee]

Thank you, and good evening, and welcome to the SmartCentres Q2 2019 Conference Call. I'm Peter Forde, President and CEO of SmartCentres REIT. Joining me on the call today are Mitch Goldhar, our Executive Chairman; Peter Sweeney, Chief Financial Officer; Mauro Pambianchi, Chief Development Officer; Rudy Gobin, EVP, Portfolio Management and Investments.The agenda for the call today will be a few overall comments by me; followed by Peter Sweeney, who will talk about our results for the quarter and our financing activities; followed by Mitch, about some of our developments; and then we will take your questions. Our comments will mostly refer to the first 10 pages and Pages 24 to 25 of our supplemental information package and the outlook section of our MD&A, which are posted on our website. I refer you specifically to the cautionary language at the front of the supplemental material, which also applies to any comments any of the speakers make this evening. First, some overall comments. SmartCentres REIT is a stable portfolio in excess of 34 million square feet of well-located, value-oriented shopping centers with tremendous mixed-use intensification opportunities. Regular and growing positive results from our new mixed-use initiatives are about to commence next year. Towards this end, we added the following to our already long list of initiatives. For Vaughan Metropolitan Centre, VMC, we finalized the design of our purpose-built 34-story residential rental tower adjacent to the 5 sold-out condominium towers. In VMC, the KPMG Tower office space is fully occupied and the PwC-YMCA Tower is now fully leased. We announced the execution of an agreement with Selection Group to develop a mixed-use complex at our Laurentian Place shopping center at the corner of Clyde and Baseline in Ottawa. The development will consist of a 13-story apartment building with 180 units and a 14-story independent supportive living tower with 230 units, as shown in the rendering on Page 11 of the supplemental information package. Construction of this $150 million project is expected to commence in spring 2020.As you will hear from Peter Sweeney, we had a strong and stable quarterly performance from our existing retail portfolio with notable mention going to the strong results from Toronto Premium Outlet expansion, which opened in November last year. Average tenant sales for the center are at $1,150 per square foot, our high tenant retention with over 80% of maturing tenants already renewing and the completion of the VMC PwC Tower and the full occupancy of the remaining office space in the KPMG Tower and then going forward for 2020 and '21 as the profits from the first of many recurring residential developments are completed and from a variety of new business initiatives and developments, some of which are described this evening and in our quarterly report. Our core retail portfolio remained strong and with its value-oriented nationally focused tenant base is well suited to the changes taking place in the retail marketplace.On executed leases, our shopping centers are 98% leased. As has always been the case in our business, retailers do come and go. And in that respect, Bombay and Bowring Canada closed other locations before March 12. We had 12 term leases with Bombay and Bowring in our portfolio along with a few temp deals representing less than 1/3 of 1% of our portfolio. And all of those locations are in shopping centers that are anchored by a Walmart Supercenter. Payless Shoes closed all locations in Canada including its 46 locations with us early in the second quarter. All but one of these locations are in the center anchored by a Walmart store. We anticipate executing new deals for all of these locations within the next 12 months to 18 months and are well along the way in doing so. We are in advance discussions and/or have executed deals for approximately 60% of the Payless locations and approximately 40% of the Bombay and Bowring locations with rents at or at a higher than the previous rents.Home Outfitters has closed their 6 locations with us and across the country with everyone else as well. They have continued to pay rent for the remaining terms, which extend over the next 4 years ranging from 2020 to '23. We are already working on backfill opportunities, including a food store and then a few cases of seniors residence and/or a self-storage building. The Toronto Premium Outlets Center expansion of 144,000 square feet opened last November is virtually fully leased and exceeding expectations. The expansion in high-caliber tenant mix makes this center one of the top-performing Premium Outlet centers in the world.Several successful retailers in Canada are taking advantage of the opportunities to expand their platform across the country. Retailers such as TJX with its 3 banners, Winners, Marshalls and HomeSense, Dollar Stores, Quick Service Restaurants and Fitness and several new retailers are coming to Canada, and we are working with them on several locations. Jollibee, F45, Wahlburgers and others are yet to publicly announce their arrival. Our strong and stable retail portfolio provide a solid base upon which we will grow income and NAV through mixed-use intensification.A few general reminders about our development pipeline and capabilities. Virtually all of the development initiatives we are planning are on land we already own, unlocking value and not requiring us to buy very expensive land to develop this density, and we use our in-house development team to drive the initiatives, all contributing to enhanced yields and profits over the long term. With 34.5 million square feet built on approximately 3,500 acres of land with less than 24% utilization of that land and primarily all at ground level, we have over 100 million square feet of land to accommodate mixed-use growth throughout the country. And this doesn't count the additional 340 acres or nearly 14 million square feet of undeveloped lands, for much of which we have plans for building out mixed-use and specialty retail. Retailers and the new uses we are bringing to the centers, residential condos and apartments, seniors residences, office and self-storage are aware of the synergistic benefits of bringing this all together in one location. The new uses of course benefit from the great locations, access and visibility of our centers, while progressive retailers in the centers recognize the benefit of having these additional customers at their front door. And I will point out that virtually none of the additional value of the density we are creating is reflected in our IFRS values. We reflected only when we sell it interest in the land to a JV partner once it is zoned, at which time we recognize the uplift on our retained portion as well. Or for retained properties, when zoning is obtained, tenant permissions are in place, and we have an overall mixed-use plan ready for implementation.And now I will turn it over to Peter Sweeney.

[Peter E. Sweeney, Chief Financial Officer]

Thank you, Peter, and good evening, everyone. Our financial results for the second quarter of 2019 reflect the continued strength, stability and security of our 34-million-square-foot, predominantly Walmart-anchored shopping center portfolio. During the second quarter, this portfolio generated the following strong results. Number one, rental revenue from investment properties of $194.4 million was marginally higher than a $193.8 million recorded in the comparable quarter last year, and NOI as a percentage of net base rent was a 100%, which is consistent with the comparable quarter last year. These strong metrics were realized notwithstanding the impact of the 2019 bankruptcies, as previously announced by Peter. Number two, FFO with onetime adjustments increased by $5.1 million to $96.1 million, representing a 5.6% increase over the comparable quarter. And this increase can be primarily attributed to increased NOI, reduction in interest costs and lower net G&A expense.Number three, FFO with onetime adjustment per unit was maintained at $0.56 per unit, which was predominantly caused again by the dilutive impact of our $230 million equity issuance in January of this year that we have spoken about in the last quarter. Number four, ACFO with onetime adjustment increased by $7.2 million or 8.2% to $95.6 million as compared to the same period last year. Number five, ACFO exceeded distributions declared and distributions paid by $18.6 million and $35.7 million, respectively. Number six, same-property NOI growth declined by 0.3%, which was principally caused by the 2019 bankruptcies previously announced. When we exclude the impact of these bankruptcies, same-property growth for the quarter would have been approximately 1%. And then lastly, number seven, we renewed -- or we are near completion of renewing over 2.9 million square feet of retail tenancies, which represent approximately 80% of our 2019 lease maturities at average rental rate increases of 3.9%, and after excluding anchor tenants, this metric increases to 4.8%, both of which are substantially improved over the comparable quarter.For the second quarter, these improved results can be attributed to the following primary factors: number one, the incremental NOI now being generated from both the 144,000-square-foot expansion at TPO and recent earn-outs and developments; number two, the incremental NOI now being generated from new tenants at both the KPMG and PwC-YMCA office Towers; and lastly, number three, our portfolio of maturing mortgages and unsecured debt continues to provide unsecured fixed-rate financing opportunities at lower rates than the outgoing maturing rates.However, these results were impacted by both the dilutive impact arising from the issuance of the $230 million equity issuance in January and also from the bankruptcy of Payless, which resulted in a 107,000 square feet of additional vacancy during the quarters. I think as Peter also mentioned earlier, we are presently in discussions with prospective tenants for over 60% of these locations and expect to have all of these locations backfilled over the next 12 months to 18 months. From a financing perspective, with the assistance of our syndicated banking partners, we began the year with a very successful issuance of $230 million of equity. The proceeds were applied against some of our credit facilities to reduce our overall debt levels and related debt metrics to appropriately and also conservatively accommodate future levels of expected development financing, and the impact of these debt reductions is reflected in all of our debts and financial metrics being substantively improved over the comparable quarter. Also, during the quarter, we completed the early redemption of $150 million of Series L debentures and replaced them with a $170 million 7-year, 3.26% fixed-rate bank loan, and the balance of these proceeds have been used to repay other maturing mortgages.As compared to the second quarter last year, these capital initiatives have now resulted in the following substantively improved credit metrics: number one, our adjusted debt to adjusted aggregate assets ratio has now improved to 41.8% from 44.7%; number two, our debt to adjusted EBITDA ratio has been reduced to 7.8x from 8.5x; number three, our interest coverage ratio has improved now to 3.3x from 3.2x; number four, our unencumbered pool of assets continues to grow and has increased now by over $600 million to exceed $4.5 billion at the end of the quarter; and then lastly, our secured to unsecured debt ratio has now improved to 46% to 54% from 53% to 47%, furthering our strategic pursuit of increasing SmartCentres' overall unsecured debt and unencumbered asset levels.This is a key strategic initiative that we've been working on now for the last 2 years and you may recall that when we first embarked upon this strategic initiative, 2/3 of our debt was sourced from secured lenders.For our payout ratio and distributions, our ACFO payout ratio increased slightly to 80.5% from the comparable year's ratio of 79.9% and our payout ratio reflects the continued healthy level of cash flow generated by the retail portfolio, which is also reflected in our surplus of ACFO over both distributions declared of CAD18.6 million and distributions paid.When factoring in our highly successful DRIP program, the surplus of ACFO over distributions actually paid during the quarter totaled CAD35.7 million. Our financial and operating results for the second quarter reflect our strong and stable business model that we believe, positions us to continue to provide our unitholders with stable and growing distributions as evidenced by our Board's decision now for the 6th consecutive year to approve an increase of CAD0.05 per unit in annual distributions to CAD1.85, effective October 2019. As we have previously noted, the very successful bought deal that was completed in January of this year will dilute our growth expectations in 2019 by approximately 3% thus resulting in limited FFO per unit growth in 2019. We are looking forward to 2020, when we expect to grow an FFO per unit and that growth is expected to exceed 10%.I will now turn things over to Mitchell Goldhar, our Executive Chairman, who will provide you with an update on some of our upcoming development initiatives, Mitch?

[Mitchell Goldhar, Executive Chairman]

Thanks, Peter. In our seniors residence partnership with Revera and our self-storage partnership with SmartCentres, will be developing and constructing the buildings and our 50-50 partners will operate the facilities once complete. We expect each of these relationships to produce 5 new projects per year. In the first quarter, together with our partner, Revera, we announced 3 specific seniors residence projects on REIT-owned sites, 2 in Vaughan and 1 in Oakville, and we are in the very final stages of documentation on another REIT-owned site and another on a site owned by my company.In addition, we also have entered into a partnership with select group for a seniors complex in Ottawa. For our large 120,000 square foot plus self-storage initiatives, we are under construction now in Leaside and soon to be approved and under construction in Brampton, Oshawa and Vaughan. And we recently announced 2 additional projects, Scarborough and a second location in Brampton, and our Board today approved a soon to be announced additional GTA project. We were in the planning stages for many additional REIT owned sites in Ontario and Greater Montreal area as well as in cities in Western Canada with SmartStop.Now a quick update on the Vaughan Metropolitan Centre project. Things are advancing quickly with the subway commuters and the more than 1,300 employees working out of the KPMG building alone, our project is quickly becoming and feeling like a metropolitan area. This will only increase in intensity as we have now completed the office-leasing of the KPMG building and is a 100% leased, the office. Second, the completed -- second, we've completed the mixed-use tower in which the PwC will open for business this fall, we've recently leased to Scotiabank one floor in a ground floor retail will open in early 2020, and the YMCA in the first half of 2020, an additional 600 employees and an estimated 1200 daily visits to the YMCA. Third, the previously sold out 355 story Transit City condo towers scheduled for delivery in 2020 and 2021, 1,741, units are under construction and are below budget. It is expected that we will top off the first two towers by the end of this year and the third tower early in the New Year. And fourth, the execution of yet another new partnership with CentreCourt for 2 additional residential condo towers, 11 -- I'm sorry, 10, 1,015 units, and 145 and 150 story condo towers. And we are thrilled to report that these 2 towers sold out in essentially 2 weeks. The 45-story tower at an average price of CAD835 per square foot and the 50-story tower at CAD865 a square foot, well above the CAD710 square foot average of the first 3 towers. Construction of an 1,100-unit multi-level parking facility adjacent to the first 3 Transit City towers, for the residents and for commercial use in the VMC. Also constructing an additional 500 surface parking spots immediately to the east of the subway station, to supplement the parking once we [ lose ] some current availability to accommodate the condo towers 4 and 5 when construction starts later this year.Lastly, we are also, we also announced the 35-story rental residential tower and podium rental units under the condo towers totaling 451 apartment units. We expect this to be built concurrently with the 2 new condo towers. A rendering of these 3 towers is in the supplemental information package. We are already designing the next phase of the VMC to include among other things, a 600,000 square foot office tower and additional residential towers. Overall, we now see 9 million square feet to 11 million square feet being developed on the approximately 50 acres of VMC lands the REIT owns with my company as partner. We are reviewing and planning for residential, rental, condos and or townhouses on all our sites over time. Master planning and active participation with the various municipalities are underway on most of these sites. Redevelopment plans for the following shopping centers are well underway. A retail site of 20 acres directly across from the VMC project is slated for intensification with a potential of 2.5 million square feet of re-development including residential, office and retail. The site is just east of the 34-story sold out and occupied condo tower at the corner of Weston Road and Highway 7. This site is essentially an extension of the VMC and owned a 100% by the REIT. Pointe-Claire, Quebec on the Island of Montreal, we have obtained zoning for up to 2 million square feet of density. Today, our Board approved the first 2 residential rental towers expected to be complete in 2022 and 2023. South Oakville Centre, this center in on the south side of the QVW in Oakville was anchored by a [ Target store, one of our two ]. We have now initiated discussions with the municipality with tenants and with potential partners, as we continue to execute our plan, this site will become a reconfigured 180,000 square foot retail center anchored by Metro, Shoppers, LCBO and GoodLife, Winners and other strong retailers with an adjoining new Revera seniors' residence building and a townhouse development.A sketch of the plan for this project is included on Page 13 of the supplemental package. Westside Mall in Toronto, our 12-acre property on Eglinton Avenue West, will benefit from the LRT station currently being built on our land and a pedestrian bridge connecting a new Go Train stop adjacent to our lands. This site is now designated for just over 2 million square feet of mixed-use development. Laval Centre, this 43-acre site is anchored by 150,000 foot Walmart store, construction of our first 2 apartment towers we own on-site with our partner, Jadco is underway. We expect to develop the remaining lands with primarily residential rental apartments, condominiums and retail.Weston Road and 401, a 167,000 square feet at SmartCentres share retail center is under review for a major reconfiguration and re-tenanting of the retail onsite and longer term for residential rental. This site has great visibility and access [ in the ] 401, the busiest highway in North America and the busiest intersection at the 401.Other sites for which residential plans are evolving quickly include Oakville North at Trafalgar and Dundas, Vaughan Northwest at Major Mack and Weston Road, just west of the new hospital, which is under construction. Pickering at 401 in Brock, Hamilton Stoney Creek off the QVW, Hamilton Mountain plaza, several Mississauga locations, Markham at Highway 7 and Woodbine, Mirabel, Laval East [ Wood Roy ], Mascouche in Quebec and Langley, Maple Ridge, Chilliwack and New Westminster in British Columbia.As you can see, our significant development plans extend across the country in all types of markets, where we are already owners of the real estate and where we are generally already the dominant center in the market. We have been in discussions with potential residential partners for many of our sites and will likely be developing some on our own.We are also in discussions with hotel operators, about partnering on various sites, more news to come on these in future quarters. The potential intensification development program continues to grow as we further review our portfolio for opportunities. The number of potential projects and towers to commence construction in addition to our retail development pipeline within the next 5 years is currently estimated at 82. This mixed-use and retail development will have an estimated value of CAD9 billion on completion with SmartCentres REIT's estimated share being over CAD3 billion.In addition, another 86 projects or towers have been identified, on which we will commence rezoning, design and site plan approvals and marketing during the same 5 years, with construction commencing after that.And the review continues. We expect that the budget process currently underway within our business groups will bring forward many additional opportunities for around the same time frame. We estimate that 10 years from now, we will be generating recurring NOI from these new rental businesses, seniors homes, apartments, office and storage in excess of 20% of our rental NOI plus significant profits in the 10s of millions every year starting in 2020 from the sale of condominiums and townhouses. With that, we will turn it back to the operator to coordinate us in addressing your questions. Thank you.

[Operator]

[Operator Instructions] And we'll go first to Brendon Abrams with Canaccord Genuity.

[Brendon Abrams, Analyst of Real Estate]

That's quite the rundown in terms of projects and development pipeline there you went through in the opening remarks. I'm just curious from your perspective, do you have any concerns or where do you foresee the challenges with respect to maybe, do you see yourself taking on too much at one time or do you feel that you have the people, the resources, the team to handle it and I guess the projects are staggered enough in terms of time line that you don't see it as an issue in terms of execution?

[Mitchell Goldhar, Executive Chairman]

No, we don't see it as taking on too much. Obviously, we will monitor everything, every day, I mean, so we are aware of the risks associated with development. We understand the workload. It's our core, it is our main, traditionally, our main core skill and we're very comfortable in that world and arena. But we have been a development company for over 30 years, every type of development, we're doing here, we have done, so but we are acutely aware of the various issues that you've raised. And along with debt levels and other financial metrics, all of which will regulate or will influence the program, so we are not preceding lively but if you listen closely to all the things that we just talked about here, you know, they are well past for all [ test versus ] they are well past the danger zone. There is virtually no spec.And it's not just in development, it's not just what you do. It's what you don't do and maybe we should also list what we are not doing in choosing not to do, so it's a fair question and we will continue to be vigilant in all respects of those potential risks.

[Operator]

And we'll go next to Sam Damiani with TD Securities.

[Sam Damiani, Analyst]

That was a great, very comprehensive overview. Pretty much, appreciate it. I just wanted to touch on, I guess, 3 questions, first being the Vaughan Northwest and the Pointe-Claire apartments. The scope of those 2 projects dropped versus the Q1 disclosure each by around 1/3. Just wondering what the right reason was for the decline in those, the scope of those projects.

[Peter Forde, President, CEO & Trustee]

Sure. Where are you seeing that? Sam?

[Sam Damiani, Analyst]

I believe the number of apartments and the dollar invested in those projects, is down about 30% from the Q1 disclosure?

[Peter Forde, President, CEO & Trustee]

Okay. Yes, like, yes, the Vaughan Northwest that actually we can explain that. We have [ boost ] the amount of townhomes that we're going to build on the land that was sort of designated originally for townhomes. But what we're going to do instead, and have not reflected in the numbers in the table is the -- there is about 6 acres of what was originally allocated for townhomes that we're now going to do something higher density, something more density, not exactly sure how many stories yet, but, and it will phase nicely into what we're going to do on the corner, which is much more density on the corner of Major Mack and Weston Road. So we'll go from the townhomes perhaps to something 6 stories to what's going to be on the corner, which will be much higher.

[Mitchell Goldhar, Executive Chairman]

And that's because the area is changing rapidly. I guess about the new laws in terms of the construction and so we feel that there is more opportunity to do 6 story-ish potentially rental then the townhomes. So that's the reason [ for that ], is it Pointe-Claire...

[Peter Forde, President, CEO & Trustee]

And I think Pointe-Claire is just we're reflecting in this table, Phase 1 and basically what got approved at our Board today, as we said, there are, we intend to do 7 towers or 8 towers on that site. But what we are reflecting in this table is what got approved today, which is just the first 2 towers in Phase 1.

[Sam Damiani, Analyst]

Okay. That's helpful. And then with the Premium Outlets, the Toronto Premium Outlets that you, it's helpful that you disclose the sales per square foot every quarter and they have declined above 3% over the last 6 months, and I am just wondering if there's a reason there and how you see that in the coming quarters.

[Peter Forde, President, CEO & Trustee]

My mother, when my mother was out of town. I think during the second quarter. But there might be another reason, Mauro.

[Mauro Pambianchi, Chief Development Officer]

That's a productivity number, Sam, you have to appreciate that. We expanded the GLA at this center by 40% and normally, what you would see is significant sort of dilution as the market share builds of the new retail that we added. And this instance, we're very close to the original productivity which I think is exceptional, that we actually expanded our -- we preserved our market share, in other words, we expanded our total sales by almost 40% to remain at the same productivity.

[Sam Damiani, Analyst]

Oh, I see. So the new number includes the expanded area?

[Mitchell Goldhar, Executive Chairman]

It does. So if you multiply it by denominator that is 40% larger, that's how much extra sales we are taking out of the marketplace. That is remarkable.

[Sam Damiani, Analyst]

Okay. Understood. Absolutely. Just finally on the G&A, Peter, there was about CAD0.01 give or take of savings in Q2 relative to kind of the run rate, do you see that reversing in Q3 and going forward?

[Peter E. Sweeney, Chief Financial Officer]

Yes, we see sort of returning back in queue, 3 and 4 back to our conventional run rate of approximately CAD20 million a year. Sam, on average, so that would be CAD5 million a quarter, so to speak.

[Operator]

And we'll go next to Jenny Ma with BMO Capital Markets.

[Jenny Ma, Analyst]

Just had a question about, Peter Forde, one of your comments about recognizing value of density in IFRS, you had mentioned that you're waiting for density to be zoned, you have a tenant use in place and then when you have a mixed-use plan in place before you recognize that, does that inform how SmartCentres would look at recognizing density value going forward or is that really a reflection of what you've been doing to-date?

[Peter Forde, President, CEO & Trustee]

That's certainly what we've been doing to-date. Peter, do you want to, I mean...

[Peter E. Sweeney, Chief Financial Officer]

Sorry, Jenny. Just maybe take a step back, just ask the question again if you don't mind?

[Jenny Ma, Analyst]

I guess what I'm getting at is that some of your retail peers have been going out recently talking about valuation of density with zoning really being that milestone that we need to cross before value is being recognized. So I thought it was interesting that you mentioned that not only do you need zoning in place, but you have a couple of more steps before you recognize it, so I'm just wondering, on a go-forward basis if that sort of the approach SmartCentres is going to use when you think about your density value?

[Peter Forde, President, CEO & Trustee]

I mean I think it's a prudent thing that we're doing so far and we may alter it and obviously zoning is key, but so is dealing with any existing tenants on-site and having obviously a master plan for the whole site that ties in with the tenants, and so on, that are there so, but that's currently what we have been doing and currently the plan, but we may alter it going forward.

[Mitchell Goldhar, Executive Chairman]

Especially with places like Westside, where it's designated. I mean if we were to sell that property. Notwithstanding the fact that we haven't implemented the zoning by-law and there is some relocations involved. I mean you would achieve a price that would reflect the very close to the full value of the property when it's completely cleared for development. So yes, in certain situations, we may feel comfortable starting to reflect the true value of the site in the marketplace today. Like that one.

[Jenny Ma, Analyst]

So if you think about those 3 steps that you mentioned, is it fair to say that the bulk of the value recognition happens at zoning or is there quite some way to rearranging the tenants as well as having the mixed-use plan in place.

[Mitchell Goldhar, Executive Chairman]

Zoning is a big part of it for sure. I mean providing you're zoning it for the right thing for what the market wants. But that's assumed implicit in your question. Yes, there is a lot of value created at zoning. But if you pro forma, some of the costs we are dealing with some of the tenant issues if there are any, or other things like you mentioned, then and you deduct some of that stuff. If you're conservative, it's probably the bulk of the value actually.

[Peter Forde, President, CEO & Trustee]

And the reality is, Jenny, that we're doing all of those things at the same time, it's not like we're getting zoning and then moving on to the next step. They're all happening at the same time. So but there are 3 important steps to the process.

[Operator]

And we'll go next to Pammi Bir with RBC Capital Markets.

[Pammi Bir, Analyst]

Can we maybe just switch gears to retail for a minute and just maybe talk about what you're seeing in terms of the health or the mood of retailers at the moment, you gave us some color on some of the tenants that are expanding. Just curious, if you can shed some more light on the leasing velocity and outlook.

[Peter E. Sweeney, Chief Financial Officer]

Absolutely, Pammi. It has been a robust quarter, we've seen a lot of activity this quarter and a big pick up since the first quarter in fact, a lot of the tenants that we have and you've seen it from our occupancy in maintaining the occupancy at the 98%, lot of our tenants are coming back to us and I think there, I'm going to call it the things that happened in the first quarter of every year where the restructuring happens and we had the Payless and the Bombay Bowring things are behind us and we're looking at all of our existing tenants. The Winners, the Best Buy, all the Canadian, entire banners, the Banks, the Dollar Stores, they're all coming to us and renewing, we mentioned, we have over 3.5 million square feet that was maturing this year and we're over 80% renewed in that category and that's only halfway through the year. So that speaks volumes in terms of what's going on in the market. We are value-oriented, National Tenants Centers so the kinds of tenants that are also re-filling and calling us up looking for those and you might have mentioned, heard Peter, mention that even with the Payless, we've got over 60% of those spaces in advance discussions or executed deals because of the activity and the interest in those spaces. So very good interest from Supermarkets, Fitness, Cosmetics, the DayCares, some discounters, and we have been looking at to some of the bigger spaces. We are looking at industrial uses. We're looking at office users, by the way, so because they co-exist in our shopping centers. So a lot of activity and we're little bit excited about what we're seeing in the market right now.

[Pammi Bir, Analyst]

That's helpful. I guess just if we look out over the next, I guess 5 years, there is, the lease maturity start to ramp-up and then they slow down again a bit after that, but I take it, the tone sounds like you're fairly confident, let's say at least over the next couple of years in the renewal outlook?

[Peter E. Sweeney, Chief Financial Officer]

Well, absolutely. Keep in mind, it looks like it's ramping down but leases renew every 5 years, so that's what the chart looks like now, so if a lease is expiring next year, 5 years from then it will be expiring again, so don't look at the 10-year outlook and assume that stays the same because you will have 2 sets of expiry from the same tenant within that 10-year period, but we are seeing strong interest and again, we're -- the realignment of how we use our space and what we're bringing to the center and sort of catering to that community with the services, we're bringing and again, it's the DayCares the pet stores, the learning centers, the DayCares, Fitness, Cosmetics, and -- have all shown up knocking on our doors wanting to be in the very high traffic Walmart anchored site, so that hasn't slowing down and I don't see how it could over the next many years, so.

[Mitchell Goldhar, Executive Chairman]

I would add also just to say that look at, obviously you're indirectly asking about online shopping and e-commerce, and we see no for all intent or purposes, no new retail being built, we see population growth and we see a reduction in retail like not just no new retail being built but existing retail being converted including ourselves. So in terms on a per-capita basis, the retail sector seems to be moving lockstep with some of the changes that you may be indirectly asking about. So it seems and we're in the value sector, so and Walmart of course does not have a direct discount general merchandiser competitor in Canada, so you put all those things together and we think, we're pretty well-positioned for those whatever you're talking about the next 5 years.

[Operator]

And we'll go next to Mike Markidis with Desjardins Capital Markets.

[Michael Markidis, Real Estate Analyst]

Just following up on Pammi's question with regard to the lease maturities, I guess there is a good chunk of your Walmart space over the next 5 years, I think it's more than 50% of your square footage and not to sound alarmist or anything like that. I mean you guys [ in various deal ] portfolio, but it's interesting to note that Walmart will actually likely be a net, have a slight net subtraction in their store count this year. So I was just curious if you had any insights into how their overall store base might evolve over the next several years and if there are any properties in your portfolio in particular that might be a cause of concern going forward?

[Mitchell Goldhar, Executive Chairman]

No. We anticipate at the moment that Walmart will be renewing in all of the sites that we have and that we are seeing -- as far as we're aware, and we're in regular and constant discussions with Walmart as you can imagine. So we're pretty, we're feeling in terms of Walmart renewals, we're feeling confident that we're, we don't expect any of the stores -- our stores to not be renewed.There were some stores that were renewed for other reasons, I don't want to get into, and I don't want to speak for Walmart but yes, there were some, but those were in a sense unique. I don't want to speak for them, so say, I believe they were unique situations.

[Michael Markidis, Real Estate Analyst]

Okay. That's fair. And just, there was some commentary about just sort of the re-alignment of how the use of the sites involves, introduction of more DayCares and office into the centers, et cetera and sort of I guess that would be outside of the mixed-use development story, if that activities sort of accelerates going forward, you guys have been holding the line at 98%, but is it conceivable that maybe the new sort of stabilized occupancy level for SmartCentres in accelerated pace of change declines a little bit or do you guys, do you see it hanging in at 98% for the long-run?

[Mitchell Goldhar, Executive Chairman]

Well, [ I won't really ] answer as well, but I don't think we're going to predict to you now for we're not happy with 98% by the way, so we want to be at over 99%, but we can't predict exactly what's going to happen in X number of years from now and it's not DayCares and Dollar Stores per se that are. We're not relying on DayCares and Dollar Stores to occupancy levels, they are just part of it, there's many, components to it. And right now the retailers that we have, and retailers have a lot more visibilities on what's going on out there. There was a lack of visibility a couple of years ago, so they're feeling a little bit less uncertainty about what's going on, so they're feeling better again about their physical retail and so we feel that somebody else asked that what the mood is like. Is it less of a -- an feeling of uncertainty now by most of the retailers.And don't forget, most of the retailers that we have are the retailers that are in the forefront of e-commerce, so it's not like there is a [ them and us ]. They are the them and us and so they have more clarity on that and so we feel that, for all intents and purposes, I don't want you to call me up in 2 years from now and say, I said, we are going to be at something, but we do feel that we're fairly comfortable with our occupancy level if that helps you at all. Seems like we're quite comfortable and it's being sustainable and it being reflective of the foreseeable future.

[Michael Markidis, Real Estate Analyst]

I appreciate that insight. And then just last one for me here, so on the master planning services agreement, it looks like the agreements, it looks, I think it was originally supposed to end in or the original term was 2020 and it's now being renegotiated for an extended term. With the REIT having its own in-house development capabilities, I mean obviously being a partner with Penguin on a lot of things, just curious on the sort of the give and takes there in terms of having the REIT being able to take on more development activity versus having Penguin sort of do more of it through that arrangement?

[Peter Forde, President, CEO & Trustee]

No. Well that you're right about the timing of that agreement, and you're right that we're in the middle of discussions and negotiations of extending that. I think with everything we do have going on and the extent of Mitch's and Penguins involvement with all of our developments. I think it would for sure makes sense to be extending that and that's why we've, it's part of the reason why we have started discussions and suspect it will be, those will be ending certainly before the end of this year, we'll be, have that wrapped up. So yes, it does make a lot of sense there as I guess Brendon said earlier, there is a huge amount that we have to do and with Mitch's expertise and development history and experience, it makes a lot of sense for us to be using Penguin to help us with all of what we have to do going forward.

[Michael Markidis, Real Estate Analyst]

Okay. And I guess with the option or the alternate be at the REIT just didn't have enough resources to do all the stuff that's being contemplated or from a, I guess a quantity of resource or quality of expertise I mean, I understand the unique situation in terms of the expertise you have access. I'm just kind of get a sense of that, you've got a very deep platform just sort of the -- sense the utilization rate or if you'd have to scale it up going forward?

[Peter Forde, President, CEO & Trustee]

We may have to add some people for sure, that's the intention actually, we will be adding some people as these programs ramp-up and we have to build the things that we have been talking about that we've got planning approvals for it. But remember that Penguin for the most part and the biggest resource that we get with Penguin is Mitch and Mitch is key to many of our development projects going forward. And so we need all hands on deck and his expertise and his wisdom.

[Operator]

We'll go next to Tal Woolley with National Bank Financial.

[Tal Woolley, Research Analyst]

I just wanted to start on Page 9 of your MD&A, you outlined, you sort of broke-down your current GLA into different types of markets, you have quantified those primary, large secondary, medium-secondary and I'm just wondering if you can sort of define what those category -- what those categories are? I know, a lot of times, we're looking more at like areas, the country and just how do you define those relative categories?

[Rudy Gobin]

Yes, the -- when we looked at all the markets that we're in, and the primary markets were obviously all the big cities across the country, the large cities, we look, with population growth, population and population growth, where I don't remember exactly what the number was but it was in excess of I think 250 or I think, it's on the chart, 250,000 within a certain kilometer radius, so it picked up all the big cities, obviously the Vancouver, the Ottawas, obviously Toronto GTA and so on. And when we looked at all of that, that picked up about 60% to 65% of our properties. Then you get to other markets where they are -- what we call large secondary markets, but we are so dominant in those secondary markets. And when you look at centers like Hamilton or Burlington or Halifax or Winnipeg, Golf, London, St. Catharines, those are major markets as well, where you have again large population, so again the large secondary markets picked up those and that's again 20%. And then, I'm going to call it out the last category, when we looked at what the last category was and we call it the medium secondary was simply because we're so dominant in those markets, and such a draw that our center with the trade area within which it exists is the dominant center. And draws from far away, such that we thought them as medium secondary, so that's the category general, if you will, I don't have the specific allocation in front of me, but generally, that's how we looked at them.

[Peter Forde, President, CEO & Trustee]

And I'll just add, Tal, to that. That Rudy, the number that Rudy was writing me off, they are the percentages that's the number of centers but in terms of NOI and so on the primary is even a larger percentage and the other interesting thing, we always like to point out in these tables is what Rudy said about the markets that those medium secondary and large secondary centers are in, they are 99% plus occupied and they are almost all of them have a Walmart as an anchor and driving the traffic to the center, so.

[Rudy Gobin]

Well, and I think it's fair to say the other reality for us, at least, Tal is that each of these properties have large parking lots or parking fields with opportunities to build at least a modicum of either rental residential or a hotel or some other mixed-use opportunity on that site over time, so I think, we've said in the outlook section that these centers are virtually fully leased, but the growth for the future on these sites and this is one of the reasons why we're reluctant to dispose off them is because of the growth that's inherent on the sites for future intensification of some of the surplus land.

[Tal Woolley, Research Analyst]

Yes. Okay. And just going -- pivoting back to retail, your sort of tenant watchlist right now if you compare it to how it's been like the last couple of years, like is it growing, is it shrinking? How do you sort of feel about some of them, you're going to have some tougher tenancies to deal with, if it, does it feel rest of the same as it's been the kind of the last couple of years?

[Mitchell Goldhar, Executive Chairman]

Yes, maybe even a little better, but of course, since as I say that tomorrow, there will be an announcement of. But I mean, it does feel a little bit better. There is always retail casualties going way back but now, of course, when there is when it, it just plays into everybody's love for the radically and oversimplified version of what's happening in retail, so it just seems to have more voltage, so just keep that in mind when you hear whatever -- whoever might fall into that categories over the next whatever 12-months, we don't have somebody per se.The ones that happened in the last 12-months, we sort of, I don't know, I would say, we kind of could have predicted at some point in the foreseeable future. But I wouldn't say that there is anything like that. Or maybe, there is one or two, not like that that we would say, it would be watch list, but nothing, I'd say, a little less on our watch list than in previous years.

[Tal Woolley, Research Analyst]

Okay. And also just, is there anything in the acquisition market right now for you guys that looks interesting at all, like I'm just curious because somewhere, there has been so much product put into the market over the last little while and it seems to be slowing down now. I'm just wondering, if you're seeing anything interesting out there?

[Mitchell Goldhar, Executive Chairman]

No. Not. Like there's lots of things interesting but not at the price that, like none at. The retail, it's on the market like pure retail with no other what we would see interesting potential, probably not, and then. But we still look just in case. And of course the other opportunities, yes, I mean, they just seem to be very fully valued. We've got so much land of our own, in a sense, and value lock-up in our already owned lands that it has to be pretty interesting and pretty compelling. But we will find some. We have a beat on a few properties that we think are interesting so, but do we have to buy? Right. You were -- you know our purchase price forever and it's a great thing to announce, it's very exciting but you were at and the pricing right now across the country, for all intents and purposes is there's not a lot of meat left on the bone. So we're scouring, we're looking, we're motivated, but we're disciplined, so we don't have something on the verge of announcement. But we are looking very actively.

[Tal Woolley, Research Analyst]

Okay. And my last question is for Mr. Sweeney. You outlined how much that credit metrics have improved over the last sort of 12-months, I think it's been about 6 months, since I asked the question. How are you ranking your prospects for an upgrade on the credit side, right now?

[Peter E. Sweeney, Chief Financial Officer]

It's interesting, it's a great question, Tal, and thanks for asking. We have not had any further discussions since our Q1 call with DBRS. We will be having a discussion early in September, I believe with them. The reality is, as we've mentioned before, we have to continue to grow our unencumbered pool of assets, and at the same time DBRS has let us know that they expect us to be able to demonstrate growth in EBITDA. So we think crossing our fingers were there. However, the big challenge will be debt to EBITDA and DBRS has let us know that that debt to EBITDA multiple has to be something less than 7.8, which is where we are today, and I think as I mentioned on the last call, we believe by 2020 and going forward, thereafter, that we will be well below 7.8 with the EBITDA being generated from the closing of condominiums and townhouses on a recurring basis. And so it's now, I guess up to DBRS to look at those projections and agree that they are recurring items that will allow us to have that multiple or that metric stay at a lower level on a continuous basis.

[Operator]

And we will go next to Nana Yang with Scotiabank.

[Nana Yang, Associate]

You previously guided to low-end of your 0.5% to 1.5% for 2019 for SP NOI, now that we're another quarter in, how do you feel about that guidance and trajectory for 2020?

[Peter E. Sweeney, Chief Financial Officer]

Nana, it's Peter Sweeney. You're right, we have been guiding that way, we were hoping by this point in the year too, we have been able to announce some acquisitions that would have assisted with that growth level. As Mitch mentioned, we're continuing to look and we're pursuing a couple of opportunities. Unfortunately, however, we have not been able, as you know to close on it to-date, and as a result, the growth that we were hoping that would accrete to the REIT from some potential acquisitions at least so far has not taken place so that 0.5% to 1.5% FFO per unit growth rate that we were anticipating at least so far has not happened.

[Nana Yang, Associate]

So would you have new guidance numbers?

[Peter E. Sweeney, Chief Financial Officer]

I think for now it's, I think I mentioned in my script for now unless something that substantial comes forward between now and the end of Q3, it may be difficult to hit that 1.5% growth rate, Nana. We're certainly going to continue to generate results that are equivalent to last year's and that's because as you know because of the dilution associated with the equity raise-back in January that's diluting us by 3%. If you're modeling, it's probably, maybe a safe assumption for you to model on that basis without any acquisitions at least of consequence for Q3, Mitch?

[Mitchell Goldhar, Executive Chairman]

Well, we're not giving up on being able to acquire something before the end of the year. Whether it kicks in, or how much it kicks in this year, we're not going to acquire anything for the sake of there is a short-term accretion that may come with certain acquisition, so we're just going to apply discipline to our acquisitions, but I wouldn't give up, we're not giving up on closing something or somethings this year. How much impact it will have. It's hard to say at the moment because we could still meet that, but obviously the longer we go, it will be harder and harder to meet that, but I wouldn't completely give up on the possibility, if there is still chance, we can meet the whole thing right now, so be a little bit pre-mature to make a -- to give too much to make a prediction on that.Not much changes in a quarter generally in terms of development. But with acquisitions, things can change pretty quickly. That is one area that it can change a lot in the quarter.

[Operator]

And at this time, I would like to hand the call back over to Mr. Peter Forde for any additional or closing remarks.

[Peter Forde, President, CEO & Trustee]

So I just want to say again, thank you for all being part of our second quarter call, and thank you for your continuing interest in investing in our REIT. Good day.

[Operator]

That does conclude today's conference. We thank you for your participation.