SmartCentres Real Estate Investment Trust

TSX:SRU.UN

Earnings Call Transcript 2023-Q2

[Operator]

Good day ladies and gentlemen. Welcome to the SmartCentres’ REIT Q2 2023 Conference Call. I would now like to introduce Peter Slan. Please go ahead.

[Peter Slan, Chief Financial Officer]

Thank you and good afternoon, and welcome to our second quarter 2023 results call. I'm Peter Slan, Chief Financial Officer, and I'm joined on today's call by Mitch Goldhar, SmartCentre's Executive Chair and Chief Executive Officer; and by Rudy Gobin, our Executive Vice President of Portfolio Management and Investments.

We will begin today's call with some comments from Mitch. Rudy will then cover some operational items, and I will review our financial results. We will then be pleased to take your questions.

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

Mitch, over to you.

[Mitch Goldhar, Chief Executive Officer]

Thank you, Peter. At SmartCentres, we have three basic pillars. We are an owner and operator of Walmart, Canadian Tire, Costco, Home Depot, Loblaws, and other grocery anchored shopping centers. Strategically located across the country.

Two, we are the owner of multi-res storage, industrial and seniors homes. And three, we are strategic real estate owners with 30-years of development, expertise. Expertise we apply the development of condos, multi-res seniors, office retail storage, and we do all of that on our strategically owned real estate that we already own.

In terms of the first category, existing and new retailers continue to be interested in more space. Building on the momentum of last year and Q1, achieving a strong 98.2% occupancy level across our portfolio.

At the end of the quarter, renewal rates are up 3.4%, Same property NOI for the three-months ended June 30, 2023 increased by 3.2% compared to the same period in 2022. Collections of approximately 98%.

As retailers are back stronger than ever with their improved omnichannel platform and well-capitalized and are well-capitalized for constant change in innovation necessary to succeed in retail.

In fact, we are now seeing renewed interest for new build groceries, grocers and other sub anchor mid box retailers in the 20,000 to 40,000 square foot range, which Rudy will speak to shortly. Toronto and Montreal premium outlets remain fully leased, with 12-months rolling sales continuing to set new records.

Moving 2023 EBITDA to record levels. Well priced luxury brands continue to be in high demand with customers being in from longer distances to take advantage of names. Toronto Premium is becoming one of the top three sales performers in Canada.

With regard to the second and third categories, our non-retail income and our mixed use development portfolios continue to grow and deliver strong results. Currently under construction, we have apartments, condos, industrial Self Storage, town homes, and retirement in the GTA, Ottawa and Montreal areas and all scheduled for completion in the next 18-months or so. As you can see in our MD&A. Here are a few highlights.

Construction of the fourth and fifth transit city towers at SmartVMC comprising 45 and 50 stories, respectively is on track and nearing full completion. 452 units closed in the quarter, generating $10.6 million in profits, which Peter will speak to more in a moment.

Also within the SmartVMC, the Millway, our 36 story apartment building has, is completed and turned over a number of units in the podiums of all three towers. Recall that some of the rental units are in the podiums of Transit City 4 & 5 and almost all of those are already fully leased.

The release of the balance of the units will come over the next two quarters and demand is expected to remain strong given the housing supply and current interest rates. Our apartments in Mascouche suburb of Montreal, which opened in Q3 2022 is 77% leased with high ongoing interest. Laval's first tower was 99% leased at the end of the quarter, and the second tower is scheduled for completion in Q3 of this year with over 70% already pre-leased.

in Q3 of this year with over 70% already pre-leased. Construction of our first industrial new build, a 229,000 square foot, 40-foot clear building on 16 acres of a 38 acres site on highway 407 in Pickering was completed in the quarter with half of the space turned over to the tenant and leasing interest strong on the balance.

Construction of our new seniors residence department, totaling 402 units at Ottawa, Laurentian was temporary delayed due to financial challenges of our JV partner on this project. That being said, during the quarter we were successful in coming to an agreement with our partner. For SmartCentres to take over development and construction management of this profitable project until its completion date which is now expected to be Q1, Q2 2025.

Having completed earthworks and site servicing with our two partners, we commenced construction of our 174 unit bond Northwest townhouse project shortly after the quarter end. With the recent opening of our eighth Self Storage facility, 138,000 square foot project at Brampton Kings Point, just north of Brampton downtown. The trust reached a milestone of 1 million square feet of gross floor area with our partner's Self Storage.

Two storage facilities are under construction in Markham and Whitby and two more will commence construction in the next quarter. We intend to continue executing on this strategy as returns continue to meet exceed our expectations. Additionally, we continue to build on the stable and growing cash generating platform and continue to develop on the significant and buried mixed use permissions already in place.

On land use permission so far this year we achieved residential rezonings in four projects, totally nearly four million additional square feet. Three in Ontario and one in Quebec, we continue to stay focused on getting further permissions while simultaneously getting ready to launch our next phase in the VMC consisting of two condo towers and potentially a small office building based on demand.

Recall that in 2022, we achieved over 6.1 million square feet of new mixed use permissions in urban locations with high demand for housing. So 2023 is up to a great start. Given that development is our long-term vision and strategy, we are committed on unlocking the tremendous value deeply embedded in the lands we already own, which as a reminder sits in the midst of highly populated communities in nearly every major market across Canada.

From a capital recycling and risk management perspective, we are continuing discussions, potential partners and buyers of selected assets within the portfolio, which will assist in funding development, debt reduction, and diversification. While only a small part of the portfolio, we see this as an ongoing capital recycling program, which will not only strengthen our balance sheet, but de-risk future cash flow streams.

On the financial side, Peter will provide a full update in a minute, but let me just emphasize a few of the more pertinent elements. Maintaining our conservative balance sheet remains a significant priority for us. Along with maintaining a significant unencumbered pool of assets, which now sits at $8.8 billion.

Our respectable debt level remains at 43.2%, even with the $300 million unsecured ventures issued in the quarter, demonstrating our significant liquidity and a strong support from our lenders and partners.

As we have said before, at SmartCentres, we take the long view. It is not just what we do, but it is what we don't do. For 30-years, we have been building better, more affordable communities across Canada through enhancing access to convenient, affordable retail options from the beginning.

That meant creating lasting value for the towns and cities in which we operate for our tenants, our neighbors, and for our unit holders. It meant always doing the right thing in each community.

In the coming weeks, we will be issuing our ESG report, and you will get a firsthand look at the great number of initiatives that have been woven into the fabric of our organization, and how we oversee our business. Interact with our tenants, and engage our associates and communities.

Our three-year action plan is now posted on our website, and I invite you to visit it and see ESG principles applied throughout. They help shape our approach to building design, energy utilization, and social interaction with tenants and their customers. These principles apply to our core mission to facilitate cost savings and convenience to communities, all with the goal of helping Canadians live better lives.

On a final note, I would like to once again offer my thanks and appreciation to our great team of associates, partners, and contractors for their commitment and dedication to delivering on our long-term vision. And with that, I will pass the call over to Rudy.

[Rudy Gobin]

Thanks, Mitch, and good afternoon everyone. The second quarter continues to build momentum with strong interest from new entrants and many of our national retailers who shape the open format retail landscape.

TJX, Canadian Tire Banners, Loblaws, Sobeys, Dollarama Banks, liquor pet stores, and a long list of QSRs. All very active in picking up vacant space in our high traffic Walmart anchored centers.

And given the residential all around us, we are also getting the experience discounters, entertainment, gaming, logistics and some light industrial users with showrooms preferring to be in a smart center's location and paying market rent rather than be in an industrial or design center.

As Mitch mentioned, demand for new build retail is on the rise with grocers and mid box retailers are not only in major markets. We have signed deals or near signing deals for places such as Carlton, Alliston, Bracebridge, [indiscernible] Orleans and London. As inflation begins to ease and consumers having significant options in where they live, demand for physical retail, especially open format and value oriented retail, continues to be in demand.

Worth reminding everyone again, is that for SmartCentres, the strategy is clear and the results speak for themselves in Q2. Our occupancy at 98.2, near 99% collections, the 3.2% same property NOI and the renewal spreads of 3.4% that Mitch mentioned earlier.

So while the pandemic gave retailers good reason to pause, rethink, and reshape their strategy, their path is now clearer than ever. Get physically close to your customers, offer great value, make it convenient in proximity and access so that customers have one place to do all of their shopping for their daily needs.

The strongest retailers are continuing to evolve and reinvest with Walmart, Canadian Tire Winners HomeSense, Dollarama, and all major grocers reinvesting heavily in their store network and simultaneously growing their footprint.

For SmartCentres, this means doing what we have always done, adapting to the needs of our tenants and their customers, and maintaining our strong relationships every day. As a reminder, virtually all of the SmartCentres locations across the country includes a full grocery easy and accessible at grade parking and prices that consumers know they can trust and afford.

With that said, here are a few operational highlights. In addition to the larger dominant retailers, a number of smaller size tenants are wanting space across the country for personal care, beauty, supplies, spas, hair salons, and daycares.

When combined with entertainment such as indoor golf, gaming, racket, sports facilities, we see a well-rounded shopping center easily being converted to city centers as part of the utilization of our excess lands for residential and other mixed uses, land we already own within our shopping centers. Our first pre-lease industrial new bill tenant took occupancy in the quarter and given the modern design, location and current discussions, we expect the balance of the space to be leased shortly.

Our premium outlets in Toronto and Montreal continue to exceed our expectations and dominate their markets. Tenant sales in Toronto are above $1,200 per square foot and have exceeded all prior years. All-in-all, the second quarter's operational results clearly delivered on every metric, and we fully expect a continuation of the same for the balance of the year.

With that, I will turn it over to Peter.

[Peter Slan, Chief Financial Officer]

Thank you, Rudy. The financial results for the second quarter reflect strong performance in our core retail business with a solid contribution from our mixed used development portfolio through the continued condo closings at the Transit City 4 project and the initial closings at Transit City 5.

For the three-months into June 30, 2023, FFO per fully diluted unit was $0.55 an increase of 12% from the comparable quarter last year. These results include $10.6 million or $0.06 per unit of profits from the closing of 452 condominium suites at Transit City 4 and 5.

Higher rental income was driven by increases in base rent, primarily due to contractual rental step up plus further lease up and an increase in percentage rents and rents from Self Storage and apartment properties all partially offset by higher interest expense.

Net rental income for the quarter increased by $4.6 million or 3.7% from the same quarter last year. Including our equity accounted investments. However, net rental income increased by $17.1 million or 13.1% largely due to contractual lease step-ups, new leasing activities and continued strong performance at our Montreal and Toronto Premium outlet centers.

Same property NOI including equity accounted investments increased by $4.2 million or 3.2%, compared to the same period in 2022. Leasing activity remains strong during the quarter, which is expected to drive continued modest growth in NOI over the balance of the year.

Our occupancy level, including committed leases was 98.2% at the end of the quarter, an increase of 20 basis points from the prior quarter and 60 basis points from a year earlier. In terms of distributions, we maintained our distributions during the quarter at an annualized rate of a $1.85 per unit.

The payout ratio to AFFO for the three-months ended June 30, 2023 was 93.8% an improvement from 101.2% for the same period a year earlier. Total assets, including our proportionate share of equity accounted investments were $12.2 billion at the end of Q2, a modest increase from the prior quarter.

During the quarter IFRS fair value adjustments in our investment properly portfolio, including equity accounted investments, resulted in modest net gains of approximately $34.2 million, principally reflecting additional leasing activity. We did not make any portfolio-wide changes in our capitalization rate assumptions this quarter.

During the quarter, we closed on the sale of 452 condominium units in our Transit City 4 and Transit City 5 developments for gross proceeds at the REIT’s 25% share of $61.4 million and net profit of $11.3 million. The remaining 380 units at Transit City 4 and 5 are expected to close over the balance of the year primarily in Q3.

Adjusted debt to adjusted EBITDA was 9.9 times in Q2, representing continued modest improvement from 10.3 times at year-end and 10 times at Q1. The improvement was a result of both growth in EBITDA and the repayment of approximately $345 million of debt during the quarter, including repayments under equity accounted investments.

Our debt to aggregate assets ratio was 43.2% at the end of the quarter, unchanged from Q1. We expect to continue to repay debt over the coming quarters, particularly with the profits from condominium closings. However, as construction commences on some of our larger mixed use development projects, short-term borrowings will begin to grow.

Our unencumbered asset pool stood at $8.8 billion at the end of Q2, a modest increase from Q1. Our unsecured debt of $4.2 billion was virtually unchanged from the prior quarter and represented approximately 80% of our total debt of $5.3 billion.

From a liquidity perspective, during the quarter, we issued $300 million of Series Z debentures with a five-year term and a coupon of 5.35%. We also repaid the $200 million of Series I to ventures upon their maturity and extended the term on a $170 million bilateral facility.

We are very comfortable with our current liquidity position with more than $586 million of undrawn liquidity as at June 30, 2023, including our share of equity account investments and cash on hand, but excluding any accordion features.

The weighted average term to maturity of our debt, including debt on equity accounted investments is 4.1-years up from 3.9-years last quarter. Our weighted average interest rate was 4.03%, an increase of 14 basis points from the prior quarter.

Our debt ladder remains conservatively structured where the most significant aggregate maturities occur in 2025 and 2027. Approximately 83% of our debt is at fixed interest rates, which has been a significant benefit to us during this rising rate environment.

Finally, I want to touch briefly on our mixed use development projects that are underway. Beginning in Q4 of last year, we added some new disclosure in our MD&A focusing on those development projects that are currently under construction.

There are currently 10 projects under construction, unchanged from last quarter. The REITs share of the total capital cost of these projects is approximately $548 million with the estimated cost to complete standing at a relatively modest $202 million.

We expect all of them to be completed by the end of 2024, with the exception of the seniors housing project in Ottawa, which Mitch mentioned, which will likely stretch into 2025, as we evaluate various options for a new partner.

In the coming quarters, we expect to see Transit City 4 & 5 as well as the Millway come off this list and we will add other new projects including the lease side, retail project, and the Art Walk condominium project, once construction commences on those developments.

This quarter we also added new disclosure around our Self Storage joint venture. As Mitch mentioned, we were excited to reach the milestone of 1 million square feet of Self Storage properties this quarter.

The eight properties are all performing well. Occupancy is strong at approximately 93% for those facilities that have been open for at least one year with gross rental revenue of approximately $3.2 million year-to-date at our share.

And with that, we would be pleased to take your questions. Operator, can we have the first question on the line, please?

[Operator]

Our first question will come from Gaurav Mathur of iA Capital Markets.

[Gaurav Mathur, iA Capital Markets]

Just back to your prepared remarks about the strength of the national retailers. I'm wondering from a tenant perspective, are there any - is there any part of the tenant base that is not as strong and would require some assistance going forward?

[Mitch Goldhar, Chief Executive Officer]

I guess first of all, I would just say there is always, in retail, even if you take the strongest years of retail. There will always be some retail casualties. So with that in mind, we don't actually have really any visibility on something like that happening within our portfolio at the moment.

I think part of the reason it might be a little bit anomalous at the moment is that some of that type of thing happened during COVID and accelerated some of the weaknesses that might have taken a little longer to show up.

So the whole Darwinian constant process that goes on in retail was somewhat mutated. And I think right at the moment, goes famous last words, but we don't see or anticipate any significant bankruptcy or filing with our retailers in our portfolio.

[Gaurav Mathur, iA Capital Markets]

And I guess that leads me to my next question. I take it then that you are not seeing any material non-renewable coming up either through the rest of the year?

[Mitch Goldhar, Chief Executive Officer]

We will always have a little bit of that. I mean, it is not just like related to anything kind of chronic. But yes, there are always going to be some retailers that are not going to renew in certain locations.

That can just be that they are borderline, they are not doing great or part of a country, certain region of the country, certain retailers, may not be excelling in or there is a lot of reasons why that can happen, but we don't see any like, again, we don't see any pattern there of some wholesale non-renewal by any one retailer that is in our portfolio.

[Gaurav Mathur, iA Capital Markets]

And just switching gears here, on the AFFO payout we have seen the improvement to the 93% level. I'm just wondering if there is a target in mind that you are focusing on or one that you are willing to disclose at this point?

[Mitch Goldhar, Chief Executive Officer]

I'm sorry. What was the question?

[Gaurav Mathur, iA Capital Markets]

Just on your AFFO payout ratio, in improvement. Just wondering if there is a target range that you are thinking about?

[Rudy Gobin]

No, there is not a target that we have communicated publicly.

[Operator]

Our next question comes from Sam Damiani of TD Securities.

[Sam Damiani, TD Securities]

First question is just on the miscellaneous revenue in the quarter, which you took another notable step higher. Just wondering how you think about that line item going forward. Is there an opportunity to convert some of that revenue into base rent more stable revenue streams or do you see meaningful further upside as tenant sales grow? Just how you think about that line item going forward?

[Mitch Goldhar, Chief Executive Officer]

It seems like it is reliable. I mean, it is the parking mostly here at the VMC and percentage rents at our outlet centers and they are both. They are both very strong steady in both in terms of traffic.

[Sam Damiani, TD Securities]

And the next question is on Art Walk. It is mentioned as a potential construction start in the latter half of this year. Just wondering how, I guess, the pre-sale of the overall phase 1 is going. I know you have pre-sold, I think fully pre-sold the first release of units, but just wondering how many units are in the first phase in total and what stage you are going to be at when you start construction?

[Mitch Goldhar, Chief Executive Officer]

Yes, so, we have about 90 units left in that first building that we withheld primarily because we wanted flexibility on design. And we are not anticipating any headwinds for moving those units. The asterisk next to that is there might be some variation in that number, Sam, because, suite mix wise, we might, they are the higher, higher units, the top of the building and the lower floors.

We just did that for flexibility. I'm being told that we have less than 90 to sell, but it is just depends on our final sweet mix and some certain other design decisions. But I mean, you could say based on the original design, we would have - maybe just as few as 60 units left, in that tower.

And then there is the lower tower sort of a mid-rise building actually which we will go-to-market on shortly. And we are not anticipating again, like we were not anticipating any headwinds or challenges in moving those units. And that was the building we were originally going to do as a rental building when we switched it. And then there is the little office building.

So we are going to start construction, but we are going to go cautiously step-by-step, but we do want to get started there. It is been a while since we sold out the release and so that will start imminently. But we will be keeping an eye on all those data points as we get further and further along the construction before we commit each step of the way.

[Sam Damiani, TD Securities]

And just to be clear, are you pre-selling Art Walk and Park Place now at the same time? Is that, do I understand that correctly?

[Mitch Goldhar, Chief Executive Officer]

I mean, yes, there are two different projects, two different types of projects, two different locations. I mean, you know, we have a hundred acres. It is a long, large property. Park Place is quite a bit away from Art Walk, very different features. So we are selling both, yes. At the same time, I mean, better us than our competitor.

[Sam Damiani, TD Securities]

Absolutely. Last question for me, one of the things, we saw several things on the walking tour up at the VMC there a couple months ago, but one thing I recall being mentioned was an office tower potential that could be fully released by a single tenant, if I'm not mistaken. Is there any, I don't know if I got that accurately or is there any update on the prospects for a pre let office tower build?

[Mitch Goldhar, Chief Executive Officer]

Yes, so there is progress. I mean, I would say, if it was a, I don't know what we would have ranked it when we did that investment day, maybe it would have been on the probability scale, maybe it would be a 5.5 or a 6.6 I would say it is, a saw, you know, sort of a 6, 6.5, 7, so it is moving forward.

Not a 100% accurate, what you were saying there. It is not necessarily going to be a 100% pre leased, because we might build a little bit extra, but we also might move into it ourselves. So some of these things are part of the process that we are in right now. But we do have a couple of very real companies interested in being tenants and, it would be around them that the building would, the building would get developed? And then there is, we would be the third prelease space.

[Operator]

At the moment, we have two other questions. The next one comes from Lorne Kalmar of Desjardins Capital Markets.

[Lorne Kalmar, Desjardins Capital Markets]

Maybe just quickly following up on Sam's question about the office tower. Can you give us maybe an idea of what type of tenant would be looking to take the space?

[Mitch Goldhar, Chief Executive Officer]

Absolutely not.

[Lorne Kalmar, Desjardins Capital Markets]

Just maybe going back to the capital recycling. I think last quarter when we spoke, you said sort of targeting 200 million to 400 million this year, but cautiously. You mentioned some momentum. Can you maybe give us an idea of what type of project or what type of sites or properties you would be looking to dispose of?

[Mitch Goldhar, Chief Executive Officer]

I mean, like you would notice that we only talked about one potential development new, we have got 10 under construction, but they are locked and loaded those. But in terms of new, we mentioned Art Walk, but we didn't talk about anything else at the moment, like starting Pickering or starting 1,900 or starting West Side. I mean, we have got a lot of zone property out there that are candidates for capital raising exercises.

So, it would be something like that. I mean, there is a whole bunch of other ones I'm not mentioning that have entitlements that we could sell to a third-party and raise capital. We would obviously leave something on the table by doing that, but that is fine. So we are in discussions on that and obviously those are relatively liquid. I mean, there is always interest in good density, good condo locations with entitlements. So those are the ones.

And we also have this ongoing interest from potential institutional partners who want to be a partner with us on some of our developments. Those are primarily institutions interested in multi-res, so a little bit harder to make work right now from a capital raising point of view and moving the needle point of view.

But still, from a long-term point of view, I would say, you could probably anticipate that we are going to have a couple of like partners in multi res that will probably be there for many, for multiple projects and multiple phases over a long period of time. But a little bit tougher to move the needle with those.

[Lorne Kalmar, Desjardins Capital Markets]

And since we last spoke, has buyer interest changed either for the better or for the worse?

[Mitch Goldhar, Chief Executive Officer]

On the sales side or on the buyer side.

[Lorne Kalmar, Desjardins Capital Markets]

Yes.

[Mitch Goldhar, Chief Executive Officer]

Yes, it is sort of an interesting question. I mean, it is almost like it is every day. It is like you could, give you an answer on Thursday, I could tell you that actually it seems like it is quite strong right now. But tomorrow may have a different feeling. It is a bit of a weird market.

Overall, I think there is this inclination, there is an attitude towards strong steady interest in buying condos, in our locations. But there is this little under the surface sort of maybe tentativeness that comes and goes. But you can induce it by offering certain things. Because the market is really quite deep, it is there.

So it is really just finding kind of the sweet spot between deposit structure and pricing of course amenities and things like that. So I would say the market still quite strong and deep, but there is this little bit of, it is not euphoria, that is for sure. But it is still there. I would say it is steady and somewhat cautiously optimistic there.

[Lorne Kalmar, Desjardins Capital Markets]

And then maybe just last one, you spoken now a couple times about starting to build some new retail, which is something we haven't really seen a lot of. And assuming it would be on already owned land, what do you estimate the cost per square foot would be and what kind of rents would you need to make that work?

[Mitch Goldhar, Chief Executive Officer]

Well, I can tell you that the retailers during the last X number of years, like, kind of through the pandemic and to now have become quite astute or whatnot to pricing and so they are not, a step behind. They can sometimes be a step behind in terms of their rental expectations versus developers' cost realities.

They are definitely pretty up-to-date. And so, whether we bill for 140, 150, 160 a foot plus it depends on where it is, can even be higher depending on how much landlord's work there is. But the tenants we are dealing with in our typical tenant in our portfolio. They are quite strong, the retailers, they are long-term minded and the kind of they are the rents make sense. I mean, we would not be entering into those contracts.

We would not be building those buildings if they didn't. We are not doing a deal at one rent and then going out to the market and finding out the deal doesn't really pencil we are. We are doing it buck step and all the retail we are doing from scratch that we are referring to is really quite interesting economically creative and quite positive economically.

[Operator]

Our next question comes from Tal Woolley of National Bank Financial.

[Tal Woolley, National Bank Financial]

Wanted to start just asking res at the Millway. Can you talk about where you went out initially at and how you are seeing rents progress over time as you are leasing up the building?

[Mitch Goldhar, Chief Executive Officer]

We were sort of thinking originally we would be $3.25. I think I'm going by memory, but it is been a while. But we are seeing $3.60 to $4 I would say, depending on the unit.

[Tal Woolley, National Bank Financial]

And I apologize, I missed the first few minutes of the conference call because I was on another call. Any change in zoning for west side mall announced this quarter?

[Mitch Goldhar, Chief Executive Officer]

Not specifically, but west side is making progress. I mean, applications within the city of Toronto are a little bit slower. When you go just through the process, you don't know, I mean they don't know, whatnot, I mean, and so, we are making good progress there.

I don't get into the nitty-gritty of the land use instruments and technical terms, but it is designated, it is designated for a couple million square feet. And I guess I would say, and maybe even sort of emphasize that even when it takes a little longer, these areas like west side, I mean, those areas are changing without us doing anything.

They keep getting better, by virtue of the things that are happening around us, including, of course, the cross town that never ending eternal mass transit project, that we have all come to live with. And the Go Transit.

If you go by, they just look, so it is not terrible. And that is the when real estate good, real, when real estate works, you have good locations and it gets better with what is going on around us. And that would be true with a lot of our locations.

So yes, the final zoning approval there, is not done, but there are other things along the way between the designation and the zoning that are done, and we are not worried about it at all. It is just a winner that that property that location's an absolute home run for, for the REIT.

[Tal Woolley, National Bank Financial]

Just on the retail tenant side, I think you still have eight, Lowe's and Rona left. Can you just talk about what you are hearing with respect to how the new management team is taking or dealing with their footprint. And do you happen to know how many stores you have in Quebec versus the rest of Canada?

[Mitch Goldhar, Chief Executive Officer]

Well, I will start with the first. For a while, if you had asked this question three-months ago, I think we would say we are not sure exactly, because, and not in a bad way, not implying anything bad, but I think that the two entities are, obviously we are working through lots of things.

So, we have good relations with both. But right now it is sort of becoming more and more clear, or it is becoming a little more clear with respect to how this is going to shape up more probably next quarter, I would say.

But suffice to say that we are fine. Like we are pleased with how things are going to, we, how we think things are going to end up with us as relates to Lowe's and Rona. So I mean, I'm sorry I can't be more specific at this time. With respect to how many do we have in our portfolio in Quebec?

[Rudy Gobin]

I will check that and get.

[Mitch Goldhar, Chief Executive Officer]

I don't know. You might have at least temporarily. I wish, I could probably figure that I think -.

[Rudy Gobin]

I think you have in quarter and about I can recall and I think mostly we would have two, but one for sure.

[Tal Woolley, National Bank Financial]

So most of it would probably be in Ontario though, would be the best.

[Rudy Gobin]

Absolutely. And we have got a couple -.

[Mitch Goldhar, Chief Executive Officer]

We got Regina. So, no, it is mostly Ontario.

[Tal Woolley, National Bank Financial]

The total return swap, it is acted as a pretty big drag on your FFO progression. Is there any thought to unwinding that? Is there like, I believe it was a four year term originally or something like that it has been in place. Like is the intention to keep that going? If maybe you can just talk about what was the original idea going into this with the total return swap and now that we are kind of in this position, how are you looking at it?

[Mitch Goldhar, Chief Executive Officer]

I'm going to turn it to Peter, but I will just say the original was, it is de facto our confidence in our company and investing in a sense in our own company. Obviously, we are sort of alone on that one. And so our unit prices almost unexplainably down and discounted. So of course that is the reason why the return swap looks the way it does. But, Peter, go ahead.

[Peter Slan, Chief Financial Officer]

Tal, it is essentially, it is a synthetic share buyback. There is about 5.1 million units that were notionally purchased under the swap. They were purchased at an average price of about 27.50. And of course, this stock today is trading around $25.

So, there is this mark-to-market adjustment. That is what you are seeing going through the FFO line this quarter. And it is simply a reflection, as Mitch suggests, a reflection of the stock is not where we think it should be and we think it is very cheap. And so that is why we undertook this synthetic buyback in the first place.

And said it does have a maturity date in December of 2024. Our expectation, though, is that we are not going to realize on that mark-to-market. It is a non-cash item, of course that you see in the FFO item. It is unrealized and non-cash.

And should we get to the maturity date and the stock is where it is today, then we will in all likelihood extend that out. And we have had discussions with the counterparty on the swap, and we don't expect that to be an issue at all. So we don't expect to ever realize on that mark-to-market adjustment. And we do think that it is an inexpensive stock.

[Tal Woolley, National Bank Financial]

And I guess my last question is just maybe if you can give a broader sense of the chatter with your retail tenants right now. Like we just had Canadian tire report today, they are pulling their annual targets for the year. The stock's down 5%. They are sort of signaling, times are getting a little bit tighter for the consumer. What sort of the latest kind of chatter you are hearing from some of your larger retailers right now?

[Mitch Goldhar, Chief Executive Officer]

I mean, the only thing better for us than, good times are bad times. So, we are the go-to when people are tightening their belt. So, yes, I mean, there will be lots of analysis on what people are cutting back on and what they are spending on.

But at the end of the day we will probably see increased traffic at our place and how it gets distributed exactly between the retailers may vary, but, I mean where a company populated with the largest value oriented discounters, Canadian Tire part is part of that.

But yes, I mean, they have had an unbelievable run, especially during, some of this COVID, ones that were open and so coming off some pretty big numbers and maybe there is a bit of an over steer on what happened today with Canadian Tire, they are unbelievably sound company in each one of their categories, so it might be a little bit of a, one of those things we see sometimes, I wouldn't pet against Canadian Tire. They are very, very much a part of it.

Yes, there would probably be a little bit of cutting back on some discretionary things and maybe some certain high margin thing items. But we are very poised to be there for the increased traffic and spending conscientiousness.

We don't hear anybody like Canadian Tire with their details today. We don't see Canadian Tire pausing on the number of deals that we are doing with them. They are also very much long-term minded, they see beyond this particular moment in time.

And so, we don't really think like, nobody's out there taking 10 locations or walking in here saying, we want these 10, we want those 10 I mean, we are doing a deal-by-deal, but it is adding up. I don't think that is, I don't think that is going to change.

These deals we are doing have been around for whatever, three to 12-months and they are very thoughtful. They have, everybody's considered the world that we are going into when they have made these decisions.

So I don't think it is going to - if you are asking ultimately how's it going to affect us, I don't think we are going to see any kind of closures or as I said earlier, and I don't think it is going to stop the deals that we have talked about that we are doing. I anticipate, to be honest, that we will continue to do new deals with the likes of Canadian Tire over the next year or two.

[Tal Woolley, National Bank Financial]

Yes. My intention was not to suggest that there was some issue with Canadian Tire. I think it was just more to understand like what you were hearing about consumer sentiment sort of more lately, given that this is kind of thing some of these larger retailers are talking about, and I just didn't know if you would had any good commentary from other tenants that you are working with too, just around what is happening there now -.

[Mitch Goldhar, Chief Executive Officer]

Yes. There is a little bit of concern about consumers cutting back on certain discretionary items. We are not that discretionary, like, you know, so at smart centers, but yes, I don't want to single anything out, but we are 98.2% occupied with very strong and even stronger tenant mix, like as in covenants than ever.

But there is a little bit, yes. I mean, there is some people concerned about higher marks and stuff and some of the vanity shops and so on. But there is, but it is sort of, I don't think it is, I have heard worse in my career there is a little bit of chatter about tweaking merchandising mixes around some changing consumer behavior around some of the recessionary discussion and higher interest rates and stuff like that, which is pretty much common sense.

But these are the retailers. Our retailers are the ones that are, I mean, they are designed for this. I mean, they are made for it, they are the go-tos when people start thinking that way. So, I think we are in pretty good position for it, but I think you are right. I think you will see some cutting back.

We are not going to be the major - our retailers aren't going to be the major ones. I think you are going to see some cutting back in some of the other higher margin type concepts, maybe. Maybe I don't want to single anything. I think you can figure it out.

[Operator]

At the moment, we do have two more questions in the queue. And the next one comes from Mario Saric of Scotia Capital.

[Mario Saric, Scotia Capital]

Mitch, just on the back of your last comment, in terms of merchandising mix, not that SmartCentres has a huge ability to shift things around given your high occupancy. But on the margin, if you were able to kind of add here and maybe deduct there, how would you like to see the merchandising mix shift at SmartCentres over time, if at all?

[Mitch Goldhar, Chief Executive Officer]

Our own portfolio mix, I mean I think we are pretty happy with it. I mean, it is a good question. I guess, it is kind of organic, right. Like we are in the, probably the busy - we are in the most accessible locations in the healthiest markets, And we are at grade we can accommodate almost any interest. Like when we get a call for something, it is pretty hard to imagine that we are not going to figure out how to accommodate you.

So we are kind of the organic expression of the market and pretty quickly because we can build pretty quickly. So we are really just the function of - I mean, the retailers don't create retail concepts, the people do. And so they are just responding to what the people want and we are probably the quickest responders to them.

But if I had a magic wand, I mean, what would we love to add? Yes, I would have to single out some stuff. I would probably - like I'm all about things that people need. So I guess wherever we have got a little bit more discretionary purchases and maybe little bit more less necessities. I would probably love to replace those with necessities.

But we don't have a lot of that, so I don't know. I would say we can never have too many Walmarts. We can never have too many Shoppers and Loblaws and Home Depots and Canadian Tires. And so I guess if we could have more of those.

And kind of remember, we are also getting into the city center sort of thing, so our retail format is changing a little bit. So it is kind of cool, because we are now addressing what does that look like, and who is that compatible with? So that is going to be interesting, but I don't want to take this, make this call any longer, but that is a subject for another day. But otherwise, I think we are pretty, generally pretty pleased with our tenant mix.

[Mario Saric, Scotia Capital]

And then my last one just comes back to capital recycling, and if you were able to execute on some of that 200 million to 400 million in terms of potential partial stake positions and some of the developments that you are referring to.

How would you rank the relative attractiveness of the redeployment of those proceeds today between putting it into your development pipeline paying down debt? I know you have the TRS structure in place, but maybe repurchasing unit tied to that in terms of reducing the unit count and driving the pre growth higher that way? Just curious in terms of on a risk adjusted basis where you see the best place to put your money today?

[Mitch Goldhar, Chief Executive Officer]

Lowering debt is just, everything is lowering debt, because it doesn't matter, it is always debt. So if we bring in 200 million, if you put it towards development in de facto, it is just lowering debt. So we apply it to the highest interest rate debt that we have - that we can pay off. If we had more capital than we needed for lowering debt purposes.

Well, we would love to have that situation. But we might apply it to our units in one way directly in this way, we are doing it now or maybe some other way. But we are not in that situation at the moment. So, I wouldn't factor that into your calculations. But that would be the answer, I think.

[Operator]

And our last question in the queue comes from Jenny Ma of BMO Capital Markets.

[Jenny Ma, BMO Capital Markets]

On the continuation of the topic of debt, you are sitting in the high teens in terms of floating rate debt which you have been carrying for a few quarters. Hopefully we are at the end of this interest rate height cycle, hike cycle. But how do you think about where it is sitting at right now? Are you comfortable leaving it in the high teens to see where things may settle out or is this the number that you want to bring down?

[Peter Slan, Chief Financial Officer]

Jenny, it is Peter. So I think it is appropriate for us to have a mix. And so right now, you are right, we are at 17% floating, 83% is fixed. And so I think there is some value to the optionality of having some floating rate debt.

Also, remember we are a big development business and so we do use floating rate debt for construction financing. And that is just because of the nature of the - that financing it is typically sort of 12 to 36-months terms on it. And so it tends to be floating rate facilities and so we think it is appropriate to be a majority fixed, but maintain some optionality through a floating rate piece.

[Jenny Ma, BMO Capital Markets]

Okay. So you would be fairly comfortable leaving it close to where it is then?

[Peter Slan, Chief Financial Officer]

Yes.

[Jenny Ma, BMO Capital Markets]

With regards to industrial development that seemed to have happened very quickly but we have been hearing a lot about increasing construction costs. What would you be looking for to launch phase 2 of the Pickering development? Would you need to have a tenant pre-leased in place or would you be comfortable building on spec? What would you need to happen for phase 2 to commence?

[Mitch Goldhar, Chief Executive Officer]

I mean, we would have to lease up our, the other half of the building that we just finished, meaning the other half just finished. And thank you very much for stating how fast that building went up. We are quite proud of that.

And we will not start well, I'm not, I will say it less absolutely, but it is unlikely we will start a spec building on the balance of the land. I mean, we do have interest from some companies to build them a custom, building there and that is what we anticipate, will happen with these surplus lands.

But we certainly don't have any plans at the moment or appetite right at the moment to spec a building there. It is great land area's only going to get better. So we hope to land a attendant and build a building for them.

[Jenny Ma, BMO Capital Markets]

Between where rents are now and higher cost, do you think you could build to a similar yield as you got for phase 1?

[Mitch Goldhar, Chief Executive Officer]

No, mainly because just like there is a little bit of an edge coming off rates a little bit. It rates, rental rates a little bit and interest rates. Construction prices may have sort of stopped increasing. I don't even know if I could say that they are decreasing because you would have to go out right now and do it and find out, but they might have stopped increasing.

So no, I don't know. I don't think it would be, but I wouldn't factor that in because I think by the time we do one, it'll probably be a slightly different mark because the market is changing quite rapidly.

So I would anticipate by the time we do a deal, prices are construction will probably come down a little bit and we are not going to do it if it isn't a strong company and they are going to want it and we are not going to do it if the yield isn't decent. But, there is a couple things right at this moment answering your question that would take it down a little bit from the yield we got on this one.

[Jenny Ma, BMO Capital Markets]

And then lastly, the Self Storage assets you have, I know it is a very small part of the portfolio right now, but one of the upsides I guess of it is the ability to raise rents, at a fairly frequent or a high level clip. What have you seen from some of the, the older Self Storage, older meaning by yield, right, self source facilities you have or are we getting ahead of ourselves? It seems like you have been able to lease some up fairly quickly. Have you been able to pass 20 rent increases yet?

[Mitch Goldhar, Chief Executive Officer]

No. First of all, we don't manage them right. So we are not directly quoting rents to tenant to post perspective tenants, but ours are pretty new, Jenny. I mean, we are not necessarily increasing rents appreciatively on the ones that we built, but we did get better rents than we thought than we originally performed on the one that we have done.

So in a sense, I guess we got, our timing was pretty good. The operators are - they are really quite good. They specialize in storage and they have found ways to come up with different types of offerings that in a sense raise the rent, because they give certain other services. They are quite innovative in that respect.

So there are some new offerings that they are offering the market. And the market is responding. So probably getting a little bit of an uptick there. But I think we are pretty happy with the rents we are getting, and maybe in a year or two, we will see if we get any meaningful bumps from our very healthy initial rents that we are experiencing so far.

[Jenny Ma, BMO Capital Markets]

And the revenue that you are getting from Self Storage, is that in the miscellaneous revenue bucket on the income statement?

[Mitch Goldhar, Chief Executive Officer]

No, it is not -.

[Rudy Gobin]

In the net retinal income.

[Mitch Goldhar, Chief Executive Officer]

Not that insignificant. I mean, our miscellaneous income is actually becoming quite significant, but no it is in there. It is part of our main NOI overall.

[Operator]

And that was the last question in the queue.

[Mitch Goldhar, Chief Executive Officer]

Alright. Thank you. Well, thank you for participating in our Q2 analyst call. Please reach out to any of us for further - any further questions and have a great day.

[Operator]

Ladies and gentlemen, this concludes the SmartCentres REIT Q2 2023 conference call. Thank you for your participation and have a nice day.