SmartCentres Real Estate Investment Trust

TSX:SRU.UN

Earnings Call Transcript 2021-Q2

[Operator]

Good day ladies and gentlemen. Welcome to the SmartCentres REIT Q2 2021 Conference Call. I would like to introduce Mr. Goldhar. Please go ahead.

[Mitchell Goldhar, Executive Chairman]

Thank you. Good afternoon. Thank you for joining us.I am Mitchell Goldhar, Executive Chairman of SmartCentres, and will be chairing this call. Joining me on the call today are Peter Sweeney, Chief Financial Officer; Katy Gobin, EVP, Portfolio Management and Investments; and Mauro Pambianchi, Chief Development Officer. Peter Forde will not be joining us on the call today. He extends his regrets as he continues his leave.Our commentary will refer mostly to the outlook and mixed-use development initiatives section of our MD&A, which are posted on our website. I refer you specifically to the cautionary language on Pages 3 and 4 of the MD&A materials, which also applies to comments any of the speakers make this afternoon.Our results this quarter speak for themselves and demonstrate, again, what we have been saying since 2015, when we combined the public and private companies strategically to effect these changes. Let me summarize this quarter in the following way.Our intensive mixed-use pipeline is into its second year, contributing to FFO, and we expect this to be permanent for all intents and purposes. Our entrepreneurial mindset and culture and core competencies continue to drive profitability in land development through intensifying and repositioning our assets. Our open format portfolio is an excellent starting point, from which both us and our retailers can easily change, and we are. Tenant interest accelerated through the quarter. This is off of our leased occupancy of 97.3%. Therefore, we expect to see improvement -- continued improvement in cash flows going forward.Pages 21 to 23 of the MD&A highlights an excess of 55 million square feet, the updated net incremental density to be built with our partner share on lands within our owned centres. In our flagship SmartVMC, we closed on 70% of the Transit City 3 condos, 439 units in the quarter, generating $12.9 million in FFO, or $0.07, with the balance to be closed in the third quarter. 2 additional towers, TC 4 and 5, 45 and 50 stories, respectively, 1,026 units combined, are sold out or under construction with 20% deposits in place from the purchasers. The purpose-built residential rental tower, 451 units, which we call The Millway, is under construction, and we are near completion for the launch of the next phase of high-rise condominium in SmartVMC named ArtWalk, with over 600 units.We commenced construction this quarter on our 174-unit rental apartment building along with 228-unit seniors' residences at our Laurentian Place property in Ottawa. And we also commenced construction this quarter on 2 purpose-built residential towers in Mascouche, Quebec, suburb of Montreal, with our JV partner, Cogir, with the trust retaining an 80% ownership interest. We have also commenced the redevelopment of a portion of our 73-acre Cambridge project for residential, condos and rental, and other complementary uses. This project sits on our books with a $92 million IFRS value, based on our retail rents existing in our 700,000 square foot retail center. Whereas with the recent rezoning, we are now approved to develop over 12 million square feet of mixed-use on these lands. Keep in mind, we do all this, while simultaneously maintaining our conservative balance sheet with ample liquidity.We will only move forward with capital-intensive construction initiatives as market conditions warrant, sufficient pre-sales have occurred in the case of condos, and only when financing is fully available and in place. Additionally, on the capital recycling front, we now have nearly $200 million in conditional deals in process so far this year at an average of low 5 cap rates. The assets are non-core and the proceeds will help fund our extensive development pipeline. The last 18 months has been an interesting real-life test on what we have been saying about our portfolio, that is a strong and strategic one with a lot of embedded value.Now, I would like to turn it over to Rudy Gobin.

[Rudy Gobin]

Thank you, Mitch, and good afternoon everyone.Throughout the quarter, we saw tenants preparing to reopen, along with a renewed demand for space from tenants previously waiting on the sidelines, but now are ready to lock-up new locations. The acceleration was both small and large tenants, asking to be co-located with Walmart-anchored sites, having just experienced the alternative, and especially those coming from enclosed malls. Interest ranges from a fast-food resurgence to pet stores, medical offices, and even financial institutions. We have received mid-box requests from dollar stores, outdoor sports and recreation, houseware stores, and a surge in demand for larger spaces as well from likes of TJX, furniture stores, fitness, even home improvements and full-line grocery stores.And while 100% of the REIT's properties include grocers as an anchor or shadow anchor and 60% of the REIT's tenant base is comprised of essential services, our essential services percentage increased to 70% in markets outside the Greater-VECTOM area, where our occupancy rates are at/or near 100%. In these smaller markets, our shopping centers are often the essential service hub of the area and are, in all cases, anchored by a Walmart store. The shopping basket size and frequency in these markets continue to increase as segments of the population relocate from the downtown core. This not only strengthens our shopping centers, but further enhances the opportunities to intensify on our existing lands in these markets.Our tenants continue to work with us to adapt by expanding their e-commerce, product lines, delivery model, pick-up and space utilization, all while striving to maintain customer loyalty and sales. And we are there to support them every step of the way. As we have highlighted previously, Walmart plans to spend $3.5 billion over the next 5 years to make the online and in-store shopping center experience simpler, faster and more convenient. This continued commitment to its retail operations in Canada speaks to the ongoing strength of Walmart and its growing ability to drive traffic to our centres. As you know, virtually all of our revenues from shopping centres are from open air centres, providing a safe and comfortable environment for customers to practice physical distancing, while shopping for their everyday needs.For Q2, we completed nearly 260,000 square feet of new leasing, improving our lease occupancy to 97.3%. With regard to our premium outlets, both are now open and are at full occupancy. While sales were impacted during the period when they were operating only with curbside pickup, since reopening, we are seeing traffic counts that are already approaching the pre-pandemic levels of 2019 and sales have shown great resiliency with higher conversion rates than in the past. With the pent-up demand and accumulated savings being reported and the recent reopening of the U.S.-Canada border, we hope for and expect a strong Fall and Christmas shopping season.By June 30th, we completed nearly 3 million square feet of renewals, nearly 73% of 2021's maturities. And finally, while small independent retailers make up only 6% of our contracted rents, they are an important component of the Canadian economy and our portfolio, deserving of our focus and assistance throughout this period.As Mitch said previously, we are built for heavy weather. Our high-quality portfolio will continue to adapt, intensifying with residential and other real estate asset classes, strengthening with an expanding tenant base, improving customer traffic, and a leading occupancy rate and, of course, reliable and growing cash flows.And now, I will turn it over to Peter Sweeney.

[Peter E. Sweeney, Chief Financial Officer]

Thank you, Rudy, and good afternoon everyone.We have continued to focus on further fortifying the strength of our balance sheet, even during these most uncertain times. In this regard, we note the following highlights for the second quarter of 2021 as compared to the comparable quarter in 2020.Number one, in keeping with our strategy to repay maturing mortgages and to grow our unencumbered pool of assets, unsecured debt in relation to total debt increased to 70% from 65%, and our unencumbered pool of assets continued to grow, increasing by approximately $293 million to $5.9 billion. And as we maintain our strategy to continue to repay these maturing mortgages, we expect these metrics to further improve in the future. Please note that this strategy permits us further agility, when considering opportunities and alternatives for a portfolio of mixed-use developments.Number 2, our BBB(high) credit rating from DBRS permits us to continue to attract debt capital at low interest rates for longer terms. And in keeping with our strategy to take advantage of lower interest rate environments and pursuant to our refinancing activity over the last 12 months, our weighted average interest rate for all debt continued to decrease and at the end of the quarter, was 3.27%. This compared to 3.46% for the prior year. This 19 basis point reduction is expected to yield approximately $8.5 million in savings in annual interest expense, while concurrently we have extended our weighted average term of debt to 5.3 years as compared to 4.8 years in the comparable prior year period.Also, variable rate debt in proportion to our total debt stack was approximately 3.9% at the end of the quarter. This continued focus on both increasing the weighted average term of our debt and fixing interest rates is deliberate and is yet another example of the risk mitigation strategy that we have employed to insulate the trust from interest rate volatility.And then, lastly, number 3, our interest coverage ratio, net of capitalized interest, was maintained at a very strong 3.8x level. This, in spite of the impacts of COVID-19 has had on our operating results over the last 15 months, and further confirms the foundational strength and stability of our core business. Also, our adjusted debt to adjusted EBITDA multiple was 8.2x as compared to 8.8x in the prior comparable period, again, reflecting the business's strong and stable ability to fund its obligations with our continued commitment to our balance sheet.From a liquidity perspective, as we look to the immediate future and continue to manage through these current uncertain capital markets environment in addition to the conservative debt metrics noted previously, please also consider that when factoring in our new $150 million line of credit that was completed subsequent to the end of the quarter, together with the $250 million accordion feature associated with our existing undrawn $500 million operating line, our liquidity position exceeded $1.1 billion at the end of the quarter. This is after reflecting the repayment of $323 million in maturing Series T debentures prior to the end of the quarter. Recall also that the next series of debentures in our portfolio does not mature until May of 2023.And notwithstanding the challenges associated with COVID over the last 18 months, our business has continued to demonstrate its ability to generate sufficient cash flow to fund our operating needs. Accordingly, we anticipate our requirement for additional funding over the next 20 months to be limited to construction financing associated with the projects in our development pipeline. However, we are continuously considering opportunities to early redeem debentures and mortgages when appropriate.And with that, I will turn it back over to Mitch.

[Mitchell Goldhar, Executive Chairman]

Thank you, Peter. Sorry, I was muted. We will now open it up to your questions.

[Operator]

[Operator Instructions]And the first question we currently have in our queue comes from Mario Saric from Scotia Capital. Please go ahead, Mario.

[Mario Saric, Analyst]

Hi, good afternoon and thank you.So one quick question on the development pipeline, which is -- which is clearly very large and very valuable. I think the metrics that you provide on Cambridge, although $92 million, though some largest square foot implied buildable, which is extremely low.So the question is really, when you look at the vast opportunity that lies ahead of you, how do you think about balancing robustness of that opportunity with potentially crystallizing a bit more value in the short term?

[Mitchell Goldhar, Executive Chairman]

[ I'd like to remain on mute again. ]Yes, sure. No, I actually got just disconnected right in the middle of the question. You were asking about Cambridge's embedded value?

[Mario Saric, Analyst]

I guess, the question is, you have a vast kind of development opportunity ahead of you for decades. How do you balance that long-term opportunity with the potential in this environment, given the quality of the assets to monetized some of that long-term upside into now today via dispositions?

[Mitchell Goldhar, Executive Chairman]

Via dispositions?

[Mario Saric, Analyst]

Correct. Yes.

[Mitchell Goldhar, Executive Chairman]

Yes. I mean we look at it. I mean, exactly like you're implying, there are going to probably be situations where, I guess, we're ready to go on. Let's say, Cambridge and Pickering and Westside, you would imagine under Eglinton. And so, given what that may mean to us and our balance sheet, we might sell something if the price is right. So, this is something we will be monitoring. I mean, if everything we're about to start or able to start are all in the same [indiscernible], so to speak, we would probably look to that. So we're keeping all those channels open.It is a good opportunity at the right price to capitalize on some of that embedded value. We are also involved in exploring the idea of bringing in some potential partners on some of those projects as another lever of raising capital at market. So I'll find another way selling a part interest.

[Mario Saric, Analyst]

And the $200 million of conditional deals that you highlighted at a low 5 cap valuation, what were some of the defining characteristics of those transactions that led to a decline with position?

[Mitchell Goldhar, Executive Chairman]

Yes. We don't have -- we don't have the development intensification potential. So one of them has a characteristic that is beyond that, but I don't want to give any of that because it would maybe be in a sense, the fact that we're revealing what it is, and it's still in a conditional period. But, for sure, that is a common characteristic, is that we don't see the most having sort of intensification or redevelopment potential in the reasonable near future.

[Mario Saric, Analyst]

And then, somewhat related in the MD&A or I think in your letter to holders, you mentioned the expectation that we could start seeing some fair value gains from the IPP portfolio. Would that be kind of correlated to the pricing that you're seeing on these types of transactions?

[Mitchell Goldhar, Executive Chairman]

Yes. We do see -- we have more options. We were fine even a year ago. We did not slow this program down. And we also may have even accelerated it a year ago. But now, we do have a tiny bit of may be a -- I don't know -- maybe a little bit of a headwind in respect of our options on the number of these properties. So they weren't available a year ago. So yes, we're increasing leasing interest. Interestingly, that it's not always a non-retail, but also retail, and then development options as well.

[Mario Saric, Analyst]

Okay. My last question, just maybe shifting focus to the operations. Q2 showed a vast improvement in terms of same-property NOI growth, both kind of including and excluding the bad debt expense. Do you have any color or guidance in terms of when you think the same-property NOI growth can turn positive, when we back out the bad debt expense year-over-year?

[Mitchell Goldhar, Executive Chairman]

Rudy, do you want to...

[Rudy Gobin]

Yes, sure. As you know, in the same quarter last year, we had a significant ECL provision and that provision got smaller into quarter 3 and smaller into quarter 4. It's significantly less in this year, as you know. And we've only seen an increase in tenant interest and an increase in the cash flows coming in. So depending on when the tenancies had taken their CCAA and bankruptcy filings in the prior year, Mario, the -- and when it happened in terms of through the trustees, and when that happened, because those tenancies paid rent throughout the bankruptcy period called occupancy rent, as you know. So those rents carried on. But those ones that did not go through it, we ended up taking that provision.So when we see it through the 3 months in June and we could see in September, we expect a discontinued improvement over the next 2 quarters. We know what it is now in terms of the variance, but same property, excluding, was negative. So we see improvements in each of the next 2 quarters. Yes.

[Operator]

Next question comes from Sam Damiani from TD Securities.

[Sam Damiani, Director, Institutional Equity Research]

Yes, Rudy, just back to the leasing side. Can you talk about, I guess, the most challenged categories in the tenancy today? And what your outlook is for those tenants after the rent subsidy ends? And I have a follow-up question as well.

[Rudy Gobin]

Sure. Sure, Sam. It hasn't changed. The ones that are most affected, and again, you don't have a lot of these. The very small independent tenants that are non-essential tenants, who are forced to close -- we have about 6% of that in our portfolio -- they are the most affected in our portfolio. And again, knock on wood, there's been no filings this year in our portfolio in the open format. So it's been great the tenants who are carrying on and some are still struggling to pay their full rents, given that you've seen the 95% recovery.They're paying part of their rents and they're paying as they get theirselves funding from the government. That will carry on. And we are putting in place deals for every one of those tenants to help them, to help us for rent. In some cases, as you saw, with a lower rent, to lower their rents in the short term and have them recover that in the medium and longer term. So, apparel, small tenants, fitness struggled, as you know. Sit-down restaurants will be another category that's troubled, because, again, they did -- they did pick up. They did outdoor when the weather was good. But when the weather isn't good, they can't do that patio. And right now, there's -- with everything reopening, there is a big resurgence of interest. It's amazing what started happening in the middle of the quarter -- of second quarter and then throughout the quarter and even now. So, we see -- we're seeing some very welcoming improvement.

[Sam Damiani, Director, Institutional Equity Research]

Just on the fashion and the fitness side there, not really weather-dependent for their operations. Are they -- how are they doing with the reopening in Ontario?

[Rudy Gobin]

Well, as you know, they're all open. Everybody is open across the country and in Ontario. Limited in Ontario in terms of the re-fitness and outdoor activities. But, as you know, the fitness guys did receive funding and did receive government and bank funding and stayed open. So they're still open. They're operating. They're paying their rents. So they're expecting a resurgence, people coming back with the double vaccinated, whether they implement that as a mandate coming into their premises or not; it's still all up in the air, as you know.But there is a very bullish sentiment of our tenants in the open format space especially, because the traffic has just been very good throughout this period. So if that traffic wasn't there, I wouldn't -- like, again, we're getting the interests from enclosed malls, tenants of similar types of tenants, by the way, even fitness wanting to be now co-located in our Walmart-anchored centers. So, yes, it's been very positive.

[Sam Damiani, Director, Institutional Equity Research]

Just lastly, with the headlines we're all seeing about the Delta variant, is that presenting a bit of an obstacle in terms of closing lease deals these days?

[Rudy Gobin]

In closing lease deals, not really. In Canada, I mean, not maybe initiated in the United States. But, in Canada, we've been carrying on -- we are still exercising our good diligence from a social distancing perspective in our properties, in our premium outlets, in stores, so this hasn't really been an issue here in Canada. The numbers are small, as you know. We monitor it across the country, municipality by municipality. It did heat up a little bit, as you know, in Alberta. It did heat up a little bit in parts of Vancouver. But, generally, people are outside and they're shopping.And our open air format really makes a big difference in that arena, if you will, as opposed to the enclosed mall type. So, not really seeing. And again, things may change, but not really seeing an impact on our portfolio. The interest is just, again, ramping up.

[Operator]

Next question comes from Jenny Ma from BMO Capital Markets.

[Jenny Ma, Analyst]

I just want to revisit the question about your expectation of looking at some more fair value gains over the next few quarters. You had mentioned that some of it is coming from some development costs that you're seeing. But I'm just wondering if you can give us some more color on sort of what's driving that view? Is it a reversal of some of the write-downs you took from last year? Is it changes in cap rates or rent, maybe some more color on what you think is going to drive that over the next few quarters?

[Mitchell Goldhar, Executive Chairman]

Well, okay. Peter, do you want to…

[Peter E. Sweeney, Chief Financial Officer]

Yes, Jenny, it's Peter Sweeney. What we're hearing, Jenny, from the appraisal groups and professionals who assist us in our portfolio valuations every quarter is that there continues to be -- or there has certainly been a return to the marketplace of institutional investors chasing investment-grade properties, including retail properties. And there's, again, a robust level of demand for these types of properties in the marketplace, resulting in further compression in cap rates. So, as we went through the quarter and as we went through the property valuation exercise, all of the appraisal groups with whom we work had the same comments and the same theme, that as we think about the balance of the year, again, all things being equal, that we should expect to see some compression in cap rates and discount rates on our portfolio of properties.

[Jenny Ma, Analyst]

Okay. So is it fair to say that whether the timing would be dependent on it, maybe seeing some more data points in the market to support the valuation?

[Peter E. Sweeney, Chief Financial Officer]

Yes. I think it's fair to say the appraisal firms, Jenny, are there -- they're are seeing it already in some of the activity in the marketplace vis-a-vis cap rates being paid or prices being paid on properties that are available. And when you translate those metrics and experience against our portfolio, again, they're suggesting to us that we should expect to see some compression over the balance of the year.

[Jenny Ma, Analyst]

Okay.

[Mitchell Goldhar, Executive Chairman]

And I would add to that. We're seeing more contact, we're getting more calls from different types to potentially enter the space or invest further in the space in the last, I guess, last quarter. They have been maybe the last year or so.

[Jenny Ma, Analyst]

So, it's the incoming interest in your properties?

[Mitchell Goldhar, Executive Chairman]

Yes. Like just -- yes, institutions and others interested in knowing if we're -- inquiring into whether we would be interested in selling at interesting cap rates. So we just deserve kind of this feeling like there's an increase in capital moving, more of its moving into retail.

[Jenny Ma, Analyst]

Okay. Great. Is it really just cap rate or are we starting to see a little bit more confidence in the NOI numbers? I know last year, that was sort of a question mark. Is it trending up or is it really cap rate driven with still some conservative views on NOI and NOI growth?

[Mitchell Goldhar, Executive Chairman]

No, it's not -- we're not -- it's not like -- they're not -- because of some bottom feeding kind of way -- how good a deal can we make here, they're genuinely feeling like, relative to everything else. All the scary stuff around retail just got tested. It didn't materialize quite as advertised. And there's, I guess, some more -- there's a more confident feeling around retail. Retail is not going away. I'm sorry. I mean the world doesn't work in black and white. Retail is changing, but it's absolutely going to be here for the foreseeable future for a long time. And people are starting to understand that it isn't one or the other.So you kind of get the feeling that this is a great test for everybody to watch and observe. Great experiment in a sense. And now that things are opening up, people see what the parking lots look like and they understand the seamlessness between e-commerce and physical. And so, it doesn't seem to us if there's this scenario -- don't talk to me about retail thing, that was irrational, but was there a year ago or whatever. So there's a certain percentage of that. And also, no, it's not like how low will you grow at all. It's one way or other, though.

[Jenny Ma, Analyst]

Okay. I'm glad we're all on the other side of that test.With regards to the condo development, the new ArtWalk project, are you able to talk to us about what kind of pricing or return expectations you're getting? Like would the return be to a similar level like you saw for the TC 1 to 5, or has it shifted at all?

[Mitchell Goldhar, Executive Chairman]

Yes. Sure. Just to remind you that TC 4 and 5, which was the latest wins that we went to market on, were sold at -- on average, I think, of $885, I think, something plus or minus. And then the property across the road, first of all was sold. They sold out their entire portfolio that they wanted to sell. I think they held back some. I think they averaged over $1,150 a foot. So with TC 4 and 5, you know the numbers on that. The REIT owns 25% of 4 and 5. The REIT will own 50% of park block and you can assume that we're next to the subway, the one I was referring to is across the road. So they -- yes, so, you can sort of assume that we're expecting to do better on a per square foot basis than we did at 4 and 5.

[Jenny Ma, Analyst]

Okay. Now, how does that look...

[Mitchell Goldhar, Executive Chairman]

Yes, hopefully, construction prices have gone up.

[Jenny Ma, Analyst]

Yes, that was like my question.

[Mitchell Goldhar, Executive Chairman]

But it's no -- not nearly a proportion to the pricing difference and the ownership difference because we sold our respective 50% interest or 25% interest to 50% interest to our condo partner there at a pretty good low price. But that was early days and that was also -- yes, I mean, that was early days.

[Jenny Ma, Analyst]

Okay.

[Mitchell Goldhar, Executive Chairman]

And that is -- the reason we're not doing it in partnership there is simply because we want to reap -- to get the benefit of the whole thing. We built the capabilities, but [indiscernible] will and continue to be fantastic progress.

[Jenny Ma, Analyst]

Great to hear. And then, shifting to the balance sheet, you continue to make good headway on getting more of your debt to be on the unsecured side. And it sounds like from the commentary about that number should continue to grow. Do you have a goal for that? Like do you want to -- is there a specific number in place, or is it just going to be more organic over time as you roll over mortgages and just continue to expand that number?

[Rudy Gobin]

Yes. I think, Jenny -- yes, do you want me to take this one, Mitch?

[Mitchell Goldhar, Executive Chairman]

Yes, I was just going to say, we're going to keep doing it until everybody doesn't want that to [indiscernible] property-specific mortgages, of course. But, Rudy, go ahead.

[Rudy Gobin]

Yes. Mitch is right, Jenny. We don't have a specific measurement or metric that we're trying to guide to. However, I think we've said now for a few years that our goal is to, for the most part, replace maturing mortgages with unsecured debt. And I think we've mentioned it. It gives us tremendous flexibility as we think about some of the development needs going down the path or into the future with many of the properties that we're going to be doing mixed-use development on. So we're finding that if a property is unencumbered, it gives us virtual certainty on flexibility of putting any type of development on any part of that property without the need to engage with a financial institution on discussing security. So among other things, that's one of the perhaps hidden advantages.But I think in a perfect ideal world, you would see us having a balance sheet that was principally unencumbered, saving, except for the construction financing initiatives that we're incurring. And to the extent that we've got partners on projects like apartment buildings, as we think about the future, the CMHC is providing very, very attractive low rates, subject to taking security in those apartment buildings. So that might be the exception when we think about the future, Jenny. For many of the apartment buildings that we'll be building, we will likely to be at least seriously thinking about mortgages through the CMHC for those types of buildings.

[Jenny Ma, Analyst]

Okay, great. And then one last quick question on the $200 million of assets conditional, are those unencumbered?

[Rudy Gobin]

For the most part, yes.

[Operator]

Next question we have comes from Tal Woolley from National Bank.

[Tal Woolley, Research Analyst]

Mitch, I just wanted to ask one. I live right downtown of the city, I'm seeing a lot more Penguin Pickup depots over the last little while. I'm wondering is that business starting to get to a scale where it might make sense to be implied in the REIT, or does it not ever really make that inside the REIT?

[Mitchell Goldhar, Executive Chairman]

I mean I don't know if I were -- we never talked about this before. But I believe a few years ago, I mentioned that it's certainly being discussed and it's a possibility. So, yes, I mean, we'll continue to talk about it. There has been interesting inquiries from other entities. And so, yes, I mean I wouldn't dismiss the possibility. It's a growing business. It's growing rapidly, both in terms of location and number of parcels that it processes and handles. And we had recently signed up IKEA and that's been going gangbusters. So, yes, it's a really cool business and we're well on our way to going national. We have some space in Vancouver, we're getting good coverage in Montreal, and slowly but surely, moving across the whole country.

[Tal Woolley, Research Analyst]

And Walmart's online grocery business, they are still running a shift to direct-to-consumer, ship-to-home business too as well. It's kind of harping on the outside to know how serious that is, how serious they're taking that. But one of the questions I wonder is, just given your relationship with them, do you have -- is there a way SmartCentres could participate in sort of if they really go fully commit to a ship-to-home strategy, then SmartCentres could participate in building the building some of the -- building or developing some of the infrastructure for that business?

[Mitchell Goldhar, Executive Chairman]

Yes. I mean, I will tell you that I certainly can't speak out of school here on things that Walmart will be probably an answer. But we are involved on a number of fronts with Walmart, with a number of their initiatives related to fulfillment and distribution. But I'll just say that like a lot of retailers, part of the future network is going to actually be from the actual retail unit itself. So that's going to mean certain changes, potential expansions in certain places for that purpose. And yes, we're involved in some other things with them, which we call these special projects. And that will be something we'll announce sometime in the future.

[Tal Woolley, Research Analyst]

Okay. And then just on leasing activity this quarter, the spreads on renewals were a little more muted. Should we anticipate that, given that there's been some acceleration in leasing interest, that will start to improve? And was there anything specific in this quarter that kind of kept those spreads flattish?

[Mitchell Goldhar, Executive Chairman]

Well, the last year was unique. But, Rudy, do you want to maybe give some additional color?

[Rudy Gobin]

Sure. Hey, Tal. Yes. I mean, as you know, the renewals for tenancies happen 6 months, 3 months, 9 months before the leases actually mature. So, when we're negotiating a renewal in '21, that's actually being negotiated in 2020. And in 2020, we had - we're in the midst of the pandemic. So we did not -- as you -- can -- saw the numbers when we reported last quarter, we hadn't negotiated a lot of the renewals yet, because a lot of tenants were wondering what their future would be and not sure they wanted to renew. And if they were going to renew, they would want to renew at much lower rent. So we are coming out of it.We are negotiating now going forward for the latter part of the year. But the stuff that we had negotiated and we want to lock-up the tenants to keep the cash flows coming in and keep the occupancy fill well and so on. It did reflect that sort of notice period. So all of that is to say, we've got nearly 3 million square feet of the 4 million square feet leased up now. We're about 0.7%; a large part of that, as you know, is Walmart renewals. And if you took the Walmart side of there, it would be closer to 1%, by the way, without that in there.So, yes, it is improving. And we only expect it to continue to improve, as the outlook continues to improve. And this sort of period behind us, the 6 months lag in negotiation continues to look forward 6 months. So, yes, I hope that helps.

[Tal Woolley, Research Analyst]

Yes. And just looking at your numbers, I don't think you guys really disclosed like new leasing spreads. And if I'm just thinking about your commentary, fair to say that you would expect given the surge in interest that new leasing spreads would actually be materially better than renewal spreads in the short run?

[Rudy Gobin]

Yes. When you say new leasing spreads, you mean new leasing spreads in vacant space, for example, as opposed to new leasing spreads in a new build space because we're doing both. So, obviously, in vacant space, the new leasing spreads will be different. And again, coming through this sort of unprecedented time, I would say this is not -- this is only going to improve.A number of tenants -- I'll give you an example. A number of tenants that are looking to come in, as the new leasing spreads coming into the portfolio, that has never been in the portfolio before, which includes things like logistics, or types of tenants like appliance that may be in a quasi-industrial retail or outdoor patio furniture, logistics, last mile, kind of, even dieters. The furniture business, for example, saw -- you have some of the furniture business in designer, depot-type centers, as opposed to fewer retail shopping centers. So we've seen a lot of those tenants move upscale and want to be with the Walmart-anchored sites now.We want to bring them into the portfolio. They add a really good mix in the portfolio when you bring in dieters and medical and logistics. And people are doing the hub and spoke. And you mentioned -- as was mentioned before, Tal, doing the delivery right out of your, the premises. So, as you know, Walmart is doing that and a lot of them are doing their click and collect, best buy, picked up on that now. So, yes, we see a settling of that space with a lot of newer tenants and they're finding their way into the right mix, and now that it sort of come up scale.And grocery stores, by the way, grocery stores coming into the portfolio, ethnic grocery stores. More of the organic grocery stores also calling us up about a lot of our space that wanting -- being very interested in being in the portfolio. So the interest is -- there's resurgence in interest again over the quarter and into this quarter, the third quarter, now starting up has been really good.

[Tal Woolley, Research Analyst]

Okay. And for some of the new asset classes that you guys are getting into via development like self-storage, seniors, is it like --strategically thinking, are you only interested in building out your exposure to those asset classes via development or would SmartCentres ever look at acquiring a portfolio of self-storage operations in partnership with SmartStop or thinking on the seniors housing side because if you're -- it might -- you could scale up those businesses faster, because they have an operating component? I don't know I just -- I wanted to ask that question too

[Mitchell Goldhar, Executive Chairman]

We're not really out to buying a market, the finished thing. So -- but we looked at it, I mean in a couple of cases, where there's some value-add for some reason in the property or whatnot. But we keep [indiscernible] as well as other forms of retail real estate that we're getting into. But we can't really find anything thus far that comes close to the kind of returns that we get doing it in the -- from the ground up on our own properties for the most part, in those partnerships.So I wouldn't look for a lot of that happening. But we always want to know that there might be opportunities. We'll keep our -- we'll keep that option open.

[Operator]

Next question comes from Pammi Bir from RBC Capital Markets.

[Pammi Bir, Analyst]

Maybe just, Mitch, going back to your comments on bringing in partnering on some of your sites, can you maybe just describe the appetite from potential partners, whether it's financial or development partners in markets like Cambridge or other markets outside of some of the major markets? And how that compares to, let's say, VMC or some of your major market assets?

[Mitchell Goldhar, Executive Chairman]

Yes. So we don't know yet because we haven't actually really tested it, but we're about to. I would only say that it feels like there's just on a sort of a preliminary informal basis, there's a lot of interest. And it would be from all of the above because some of our properties are substantially rental; some of them are mixed, condo and rental; some of them are 1 phase, not that many of them, but we do have some that are 1 phase, and we have some that are multi phases. I mean let's say, Cambridge, might be 5 phases. So, does that entity buy into 50% or whatever rent of the first phase, or does that entity buy into the entire center with its 5 phases? So that kind of thing, I don't know yet.But we're open to all of it because we find the right partner and everything. I mean, it's been -- metrics or economics are right. We're okay with bringing someone in for all 5 phases now, if they come to terms, or just doing the first phase. So we're pretty optimistic that because we're that flexible, that we're going to be able to find a few good fits in. You'd be surprised at how many properties there are. We can mention Cambridge, West Ridge, 1,900, but there's 407, there's Caledon, there's Alliston, there's Pointe-Claire, there's Kirkland, there's Mirabel, there's Mascouche, there's Laval, Montreal, all by the way, is pretty hot. There's Saint-Jerome, Saint-Jean. I mean and I could go on and on. There's a lot of them.There's more that I didn't name there that are candidates for this. So with all that and the flexibility, I think we're rightly optimistic that we'll be able to find some entities that would be good partners, good fits for us.

[Pammi Bir, Analyst]

Yes. Appreciate. I feel like the list gets longer every quarter in the press release, in the MD&A, it's definitely been expanding quite a bit. In terms of the -- maybe just coming back to the $200 million of dispositions, I think, that you mentioned were conditional. Can you just again provide some context on the markets that those are in? And are they sort of fully occupied stable assets, or was there some repositioning work required?

[Mitchell Goldhar, Executive Chairman]

Yes. I mean, we're sort of trying to stay away from naming them in fairness to just everybody involved we acquired. And just doesn't -- it's not ideal if they don't go through. We want to go back to the market. But suffice to say that one of them was just not bringing better and it doesn't have -- doesn't have any kind of -- we don't see an angle for any sort of future intensification or related types. So that's one of the criteria for deciding.Also, that asset I'm referring to, we're leaving upside for somebody who wants to work at and if they certainly ran through that. So, yes, I mean if we don't sell it, that's what we were going to do, but we don't mind leaving that for somebody else because it doesn't have the redevelopment potential. So, I don't want to -- maybe if it's okay, I don't want to get into the geography of them yet. But suffice to say they weren't on our list of redevelopment properties.

[Pammi Bir, Analyst]

Got it. Just -- and again, maybe would it be fair to think that it's quite possible for the REIT to kind of look to sell, let's call it, a couple of hundred million of maybe producing assets over the next couple of years, sort of on an annual basis? Or is it really not that much in terms of what you would consider perhaps non-core assets in the portfolio?

[Mitchell Goldhar, Executive Chairman]

Yes. I mean we're going to pull on that bringing in some partners, potential partners on the development properties, as a capital raising exercise, one of the capital raising exercises. So I don't know that you could say we're going to have this predictable annual disposition program, but we're looking to raise the amount of capital that will keep our balance sheet conservative. And so, yes, I mean, we're looking at everything all holistically. So I wouldn't be surprised if we do dispose assets as the years go on, that would help with that.But we won't know to what extent that will be until we finish this other initiative. So, yes, I mean non-core is not necessarily something that -- I mean, core is not necessarily just something that can be redeveloped. And we've got assets in certain markets that are just Walmart, [indiscernible] it's a blue-chip in a smaller market. I mean, that's very good income. So, not easy to replace income.So it's not just whether it's redevelopable or not. But -- so we don't have a lot of non-core assets. But if necessary, we could sell core assets in the future if it was in the service of executing our plan and assuming our plan continue to make sense.

[Pammi Bir, Analyst]

Got it. Maybe just one last one for me. Maybe it's a 2-part question for Peter. Peter, just your comments on potential fair value gains through the back half of the year, would any of that include density value in marketing, any of the land guys up to perhaps the site fits our zoned story to their value per buildable square foot? And then, secondly, if you could just remind us on the development spending over the next, call it, one to 2 years?

[Peter E. Sweeney, Chief Financial Officer]

Yes. Pammi, on the first question, the simple answer is no. The appraisers that we're speaking to are not suggesting that their value bumps are a function of enhanced entitlements and additional density on the site. So really, all we're talking about are opportunities to improve values on properties based on compressing cap rates and discount rates.I'm sorry, Pammi, what was your second question?

[Pammi Bir, Analyst]

Yes. The second part was just if you could remind us what we should expect from a sort of development spend?

[Peter E. Sweeney, Chief Financial Officer]

Oh, development spend? That's right. Yes. I think our expectation, Pammi, is for 2021, were in the $200 million range in development spend. And for 200--- and these are preliminary numbers and they are always changes. As Mitch said earlier, we have every opportunity to pull back as necessary or advance forward as appropriate. But, for 2022, at least for now, we're looking at about $250 million.

[Operator]

Next question comes from Dean Wilkinson from CIBC World Markets.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

I'll just keep it to one question. Peter, with a couple of hundred million dollars of non-core sales and the potential for some mark-to-market gains in the back half of the year, that's going to naturally delever the balance sheet a fair bit. In the context of how cheap debt is, are you comfortable with where the leverage is right now or is there an opportunity to take that up?

[Peter E. Sweeney, Chief Financial Officer]

Well, I think, Mitch earlier mentioned, Dean, that we're always trying to ensure that the balance sheet maintains its level of conservatism in every possible way. And all of us know that we've got this, I would call, robust pipeline of development initiatives ahead of us. And it's fair to say that those development initiatives will require large amounts of capital, some of which will be debt, and as Mitch mentioned, a big part may be additional equity as well.So when you do the modeling on those needs going into the future, Dean, I think it's safe to say we'd rather think about the future from a position of strength rather than jeopardizing or perhaps putting ourselves in a position, where we might have to limit those opportunities and development initiatives down the road. So if we think about raising capital, as Mitch mentioned, selling partial interests to new partners, number one; number two, to the extent that there are value bumps associated with the IFRS increments. And that -- those 2 initiatives result in improved debt metrics. I think that's just an opportunity for us to establish really a new level for the balance sheet.And if we think about the future, all other things being equal, if we don't raise another nickel of capital, and perhaps there is no further compression of cap rates, et cetera, and we have to use that as our anchor point for incurring additional debt in the future to accommodate the development pipeline. I think it's fair to say that we think we'll be in a good position. But -- and again, I'm just -- we've said this now many times over the years, our primary limiter or governor is our overall debt metrics and we'll never jeopardize the balance sheet. We spent a lot of time and committed a lot of resources to ensure its viability long term. And so, we do have the opportunity as we move into the future with these development initiatives to pull back as we see necessary.But what does that mean? It means that 45% or 46% debt to total assets, that we're comfortable with that level. Again, given what we've discussed on this call, we would see those levels declining between now and year-end. And again, that will put us in a, we think, a strong position to move forward with some of the development initiatives that Mitch had mentioned.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Perfect.

[Mitchell Goldhar, Executive Chairman]

I'll just add simple -- I'll add to this and say, we don't have to do anything. We do have a great portfolio. And so as it is, we're not going to do anything. We are simply safe and safe includes low debt levels really the only thing that really could bite us. It has been lots of people, smaller than me and smaller than us in the past because it's very selective. But being only done that and rather be on the ground, we should be in the air than -- we should be on the ground.Operator? Are you there?

[Operator]

Yes, I'm here.

[Mitchell Goldhar, Executive Chairman]

Any other questions?

[Operator]

Not at this point in time.

[Mitchell Goldhar, Executive Chairman]

All right. Okay. And if there are no further questions, we'd like to thank everybody for joining us today and we look forward to being in touch. Thank you.

[Operator]

Ladies and gentlemen, this concludes the SmartCentres REIT Q2 2021 Conference Call. Thank you for your participation and have a nice day.