SmartCentres Real Estate Investment Trust

TSX:SRU.UN

Earnings Call Transcript 2018-Q3

[Operator]

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

[Peter Forde, President & CEO]

Good evening. Welcome to SmartCentres' Q3 2018 conference call. I'm Peter Forde, President and CEO of SmartCentres REIT. Joining me on the call today are Mitch Goldhar, Executive Chairman; Peter Sweeney, Chief Financial Officer; Mauro Pambianchi, Chief Development Officer; Rudy Gobin, EVP Portfolio Management and Investments; and Stephen Champion, EVP Development.Peter Sweeney will first talk about our results for the quarter and our funding activities, followed by me and Mitch speaking about our operations and exciting project developments, and then we will take your questions.Our comments will mostly refer to the first 7 pages and page 22 and 23 of our supplemental information package in the Outlook section of our MD&A, which are posted on our website. I refer you specifically to the cautionary language at the front of the supplemental material, which also applies to any comments any of the speakers make this evening.So let me first turn it over to Peter Sweeney.

[Peter E. Sweeney, Chief Financial Officer]

Thanks very much, Peter, and good evening, everyone. The development initiatives that Mitch and Peter Forde will speak to in a few moments are heavily dependent upon having a strong and stable, cash flow generating operating platform. In this regard, our financial results for the third quarter of 2018 reflect the continued strength, stability and growth of our shopping center portfolio.During the third quarter, this portfolio generated the following improved results -- A, net base rent was $126.3 million, representing a 6.5% increase over the comparable quarter; B, rentals from investment properties was $194.9 million, representing a 9% increase over the comparable quarter; C, net income before fair value and similar adjustments was $89 million, representing a 6.8% increase over the comparable quarter; D, FFO per unit increased by $0.02, to $0.58, representing a 3.6% increase over the comparable quarter; E, a CFO exceeded both distributions declared and distributions paid by $16.4 million and $30.9 million, respectively; and finally, F, our same-property NOI growth rate increased by 0.6% over the comparable quarter and was adversely influenced by net reversals of bad debt amounts taken in the prior year. If adjusted for these reversals, the same property NOI growth rate for the quarter would have been approximately 1%.For the third quarter, our improved results can be attributed to 5 primary factors. #1, the 12 properties that we purchased as part of the OneREIT transaction last year continue to provide tremendous operational and FFO growth, which is consistent with our expectations and further reaffirms the appropriateness of our purchase decision for these assets. #2, our portfolio of maturing mortgages continues to provide refinancing opportunities at lower rates than the outgoing maturity rates.#3, the KPMG tower continues to experience the commencement of new tenancies, which are providing incremental NOI and FFO. #4, our lease renewal program is beginning to reflect some modest improvement, whereby year-to-date lease renewal initiatives, excluding anchor tenants, reflect a 3.5% increase in average net rental rates, which is substantively improved over the prior year. And lastly, #5, 1-time benefits attributed to lease termination fees of $2.7 million, net of anomalous professional fees and public company costs of $1.2 million, have improved our third quarter results.From a financing perspective, our goals with respect to our funding strategy remain, firstly, to ensure that we have ready access to funding for extensive proposed development pipeline. Our approach is to maintain as flexible a balance sheet as is possible well within our relevant debt covenants. Each development project typically carries construction-level debt provided by a syndicate of financial institutions for the construction period.Our experience to date has been that our syndicate members have been both supportive in terms of providing financing and also very competitive in terms of the pricing that we are being provided. Once a project is finalized, we will then term out the funding as appropriate. With the inclusion of multiple well-capitalized joint venture partners in our program, this further mitigates a significant portion of our funding needs.Secondly, to lower the costs of our future funding requirements by achieving a ratings upgrade to BBB high. Our conversations with DBRS have indicated that we need to both, A, balance our secured and unsecured funding portfolios and, B, demonstrate a plan that will result in an increased EBITDA level. We are well on our way to achieving both of these objectives. And based on our funding plan for 2018, we still expect by year-end to have approximately 50% of our debt funded in the unsecured market, which is a significant change from just over 2 years ago.For the year-to-date, we have repaid approximately $400 million in mortgages that carried a weighted average interest rate of 5.1% with substantively lower-cost financing alternatives, despite a raising interest rate environment. Also, as a result, our unencumbered asset pool has now grown to in excess of $4.1 billion, supported by income from many of our high-quality assets.Also, we recently completed the following financing initiatives. #1, we arranged an $80 million 5-year unsecured credit facility at favorable pricing. #2, we arranged a $122 million 25-year term mortgage for the KPMG tower, once again at a very favorable interest rate. #3, we arranged for the early redemption of $36 million in 5.5% convertible debentures that were assumed by SmartCentres as part of the OneREIT transaction last year. And finally, #4, subsequent to the quarter's end, we completed a $95 million first mortgage on an investment property with varying maturity dates ranging from 3 to 7 years, once again at a variable favor -- at a favorable interest rate. Each of these initiatives will contribute positively to FFO growth in the future.For our payout ratio and distributions, we experienced slightly lower maintenance CapEx, tenant improvement allowances and leasing commissions in the first 9 months of 2018, which are expected to normalize over the balance of the year. Annualized for 2018 and 2019, we do expect somewhat higher tenant allowances and related leasing commissions based on the commencement of new tenancies and the need to rework space to maintain occupancy. But our expectations are that our payout ratio will remain in the 75% to 85% range.For the third quarter, our surplus of 8 CFO over distributions declared of $16.4 million shows a continued healthy level of cash generation, reflecting the unique strength and core characteristics of our business model. When factoring in our highly successful DRIP program, the surplus of ACFO over distributions actually paid during the quarter totaled almost $31 million. And so for the fifth consecutive year, we announced a $0.05-per-unit increase, to $1.80 per unit, in our annual unit distribution.Our financial results for the third quarter reflect our strong and stable business model that we believe positions us to continue to provide our unitholders with stable and growing distributions while concurrently supporting our existing business, funding our growing development and pipeline of retail and mixed-use initiatives, and, lastly, permitting us to consider appropriate acquisition opportunities as they become available.And with that, I'll turn the call back over to Peter Forde.

[Peter Forde, President & CEO]

Thanks, Peter. All in all, a strong and stable quarter's performance from our existing retail portfolio as the development pipeline fills and prepares to deliver results in many areas, namely in late 2018 and all of 2018 as the Toronto Premium Outlet expansion opens; in 2019 as the PwC tower is completed and the occupancy of the remaining office space in VMC's KPMG tower, which is now 100% leased; in 2020 and 2021 as the first of many future residential developments are completed. And it is our expectation that there will be a regular annual cash flow from such residential projects. And, also, on a go-forward basis from the variety of new business initiatives and developments, some of which are described this evening and in our quarterly report.Our core retail portfolio remains strong, and with its value-oriented, nationally focused tenant base, it is well-suited to the changes taking place in the retail marketplace. The shopping centers are 98.1% occupied, or 98.2% including executed leases, representing our 53rd consecutive quarter -- that is, into our 14th year -- with occupancy more than 98%, an average during that time of 98.9%.The middle class in Canada continues -- faces continuing financial pressure, and that group is always one to shop for a good value, but does so even more now, and our value-oriented retailers are performing very well in this environment. More and more, there is an acknowledgment that online retail and bricks-and-mortar retail need each other. Those retailers that can do both well will clearly outperform.Bricks-and-mortar retailers that utilize their well-established locations can offer consumers convenient e-commerce options that pure-play online retailers cannot, things like convenient pickup, showcasing projects, shorter home delivery times from stores, convenient returns, et cetera. As an acknowledgment of this, many traditional pure-play online retailers are now turning to brick-and-mortar as well. Examples -- Amazon, Casper and eyeglass retailer Warby Parker.Given the importance to retailers' success of the combining of this bricks-and-mortar with the online, we assessed our retailers and can report that of the top 50 tenants in our shopping centers, excluding restaurants and fitness, all but 8 of them have complementary e-commerce businesses, and I'm sure even for some of those, an e-commerce platform is in the works.Retailers that provide their customers with various alternative means to purchase are often referred to as omnichannel retailers. I like to think of SmartCentres as the only omnichannel landlord. Not only do we facilitate our tenants delivery of sales via drive-throughs and their click-and-collect facilities, but we also offer through an affiliated entity, PenguinPickUp, convenient pickup locations for customers to pick up packages ordered online from any retailer, all types, including fresh and frozen groceries, and currently with 91 locations across the country and growing.Recently, PenguinPickUp has added several downtown locations co-branded with Walmart. These downtown locations offer a convenient way for people to have greater access to Walmart's lower prices for all types of merchandise, including food.Speaking of Walmart, we have 115 Walmart stores in our shopping centers. Walmart store traffic in Canada continues to grow with the value focus I mentioned. With the departure of Target, Sears and Zellers, Walmart has become the only large discount general merchandiser in the country.In addition, Walmart's focus on expanding its food business continues, and its market share in this area continues to grow. In many of the markets which our shopping centers reside, our center is the only significant value-oriented center, and therefore, the center dominates the market. Many other retailers are attracted to our centers because of the increasing traffic that Walmart is bringing. Many of our more value-oriented retailers continue to expand -- dollar stores Dollerama and Dollar Tree; TJX with its Winners, Marshalls and HomeSense banners; Canadian Tire with its main store; Mark's, Sport Chek and other sporting good banners; Indigo, food stores, restaurants, beer and wine, along with a host of other service uses.As part of its ongoing strategic reassessment and part of a normal, healthy pruning of under-performing stores, Lowe's Canada recently announced that it would be closing 27, or 4%, of its 630 Canadian locations. None of the proposed store closings are in our portfolio.Bombay and Bowring Canada recently announced its insolvency filing and will decide on disclaiming stores in January after liquidation sales. We have 12 term leases with Bombay and Bowring in our portfolio, along with 9 temp deals. All locations -- all of those locations are in shopping centers that are either anchored or shadow-anchored by a Walmart Supercenter.Because each of those -- these locations are just over 5,000 square feet in size, they represent units that are highly desirable by prospective tenants. Accordingly, we anticipate that, if necessary, these locations can be quickly backfilled by new tenants within 12 months of their vacancy.And the Toronto Premium Outlet Center expansion of 145,000 square feet is on schedule to open next Thursday and is expected to be virtually fully leased at that time. The new 1,600-car parking garage has been open for most of this year. The expansion will include the addition of several new, exciting luxury brands, including Gucci, Montblanc, Prada, Zadig Et Voltaire, and will allow it to continue being one of the top-performing premium outlet centers in the world. This strong and stable retail portfolio provides a solid base on which we can grow income and NAV through mixed-use intensification.A few general points about our development pipeline and capabilities. Virtually all of the development initiatives we are planning are on land we already own, unlocking value and not requiring us to buy very expensive land to develop the density. We are unique in that we are developing a diverse selection of new real estate types, not just 1 or 2, taking advantage of the opportunities while dispersing the risk and driving customer traffic to the existing shopping centers.We have very strong JV and consultant relationships, but more importantly, a large in-house team of development specialists. This is a team that has executed the development of 200-plus shopping centers, and these transferrable skills are now also delivering results in these new development types.Most of the development team comes from a very disciplined private company and entrepreneurial mindset, watching every dollar like it is our own, with a strong long-term perspective while following any additional governance practices appropriate for a public entity.A few updates in the development area before I turn it over to Mitch. We are often asked about construction cost increases. Most of the increases come from steel cost increase and, specifically, the tariffs, directly for structural steel and reinforcing steel and less directly in other products containing some steel, such as rooftop units or ductwork or seal studs.We are at a good point on existing projects. For example, we have firm prices for 82% of the construction costs of the 3 55-story condo towers at Vaughan Metropolitan Centre, and 100% of the construction costs of the YMCA PwC mixed-use building. All these projects are on schedule and on or ahead of budget. And going forward, we are revising our pro formas for new projects rents and/or sales prices to cover these increases and maintain acceptable yields.Our development teams are also planning for alternate land use permissions on most of our shopping centers, allowing for greater flexibility down the road. And we continue to work with our partner, Simon Properties, on 2 specific sites in Canada for new premium outlet centers.And now a quick update on some of our previously announced new business initiatives -- seniors residences, partnering with Revera, and self-storage, partnering with SmartStop, both relationships where SmartCentres will develop and construct the buildings and our 50/50 partners will operate the facilities once complete. We expect each of these relationships to produce at least 5 new projects per year.For seniors residences, we expect to be announcing 4 specific projects on REIT-owned sites before the end of the year, all in the GTA, with an additional 5 in the early planning stages for 2019 in the GTA and Western Canada. And for self-storage, we are moving forward with projects in Leaside, Brampton, Oshawa and Vaughan. We are in the planning stages for 8 additional REIT-owned sites in Ontario and have toured the greater Montreal area and cities in Western Canada with SmartStop and proposed locations in each of those markets. Decisions on sites in those markets are expected in the next 2 to 4 months.Now I will turn things over to Mitch to tell you more about some of the other development initiatives.

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

Thanks, Peter. We continue to plan and review for intensification in mixed-use on virtually all our sites and centers. Let me first start with our Vaughan metropolitan center project, our downtown. Things are advancing quickly. The subway line extension 45 minutes direct from Union Station opened onsite last December. We added 900 surface parking stalls on our lands close to the subway station to facilitate a smooth commute for new TTC patrons and simultaneously get them accustomed to the VMC being the center of their universe. These 900 stalls are full before 8:00 a.m. each weekday. We could fill more.When you add to that the busy pickup and drop-off area, the bus commuters transferring to and from the subway, and more than 1,300 employees working out of the KPMG building currently, our project is quickly looking and feeling like a metropolitan area. This will only increase in intensity, as we have completed the leasing of the KPMG tower now. Most recently, we leased the 8th floor to Marc Anthony Cosmetics, which will open for business in 2019.We've completed the internal and surrounding road networks and York regional bus terminal, which will open early in the new year. We will complete the mixed-use tower to be occupied by PwC and the YMCA in fall 2019, an additional 500 PwC employees and an estimated 1,200 daily visits to the YMCA. We are in negotiations with a couple of potential tenants for the 1 unleased floor in this building.This will increase when we complete the 3 sold-out 55-story Transit City condo towers in 2020, 716 units. All 3 towers under construction are scheduled -- sorry, are on schedule and have a budget, as in under budget. It is expected that we will top off each of the 3 towers by this time next year.A site plan application was submitted in September for 3 new residential towers, 1,560 units, 45- and 50-story condo towers and a 35-story rental residential tower. We refer to it as our East Block, east of the bus terminal in the northeast corner of our site. An artist's rendering is included on Page 8 of the supplemental information package.Overall, we now see 9 million to 11 million square feet being developed on the approximate 50 acres of VMC lands the REIT owns, with my company, Penguin Investments, as partner.In addition, the REIT owns a retail site -- currently operated as a retail site on 20 acres on the west side of Highway 400, fronting on highway 400, for intensification, with a potential 2.5 million square feet of redevelopment, including residential, office and retail. The site is a primary site under Vaughan's official plan and, hence, contemplated for high density, and it's just east of the 34-story tower sold out and occupied next door at Weston and Highway 7.Currently, the bridge over 400 is being widened to accommodate additional traffic, as well as expand the Viva dedicated bus lane connecting the 905 to the subway station.And then just west of that site, across Weston Road, the REIT owns an interest in another 430,000-square-foot retail center with potential for significant residential intensification over time. This Vaughan retail and intensification/conversion mode is by itself enough to keep most companies busy for a long time. We are reviewing and planning for potential residential, rental, condo and/or townhouses on all our sites.Redevelopment plans for the following shopping centers are well underway -- Pointe-Clair in Quebec, on the island of Montreal; a 385,000-square-foot Walmart- and Home Depot-anchored shopping center we purchased in 2016. We have in the works -- we have been working closely, rather, with the city of Point-Claire on a new master plan and have now obtained zoning for 1.5 million to 2 million square feet of intensity. Detailed planning is underway for the first residential rental tower, expected to be completed in 2021/'22.South Oakville Centre -- this center is in Oakville, and it's anchored -- it was anchored by a Target store. We have now initiated discussions with the municipality, with tenants and with a potential partner. If things go according to plan, this site will become a reconfigured 180,000-square-foot shopping center, down from 330,000, and it will be anchored by a Metro Foods store, Shoppers Drug Mart, LCBO, GoodLife Fitness, and other strong retailers, with a new Revera seniors residence building and a townhouse development. Negotiations are well underway with our residential developer to jointly develop the townhouses on the site with us.Westside Mall in Toronto, our 12-acre property on Eglington West, will benefit from the LRT station being built on our lands and a pedestrian bridge connecting to the new GO train stop. With indicated city and provincial government support, this site is now designated for over 2 million square feet of mixed development uses.Laval Centre -- this 43-acre site is anchored by a 163,000-square-foot Walmart. Construction of an office building, hotel and seniors building on the land we have sold on the site and apartments we will own on the site will soon commence. We expect to develop the remaining 15 acres with primarily residential rental apartments, condominiums and retail -- complementary retail.Weston Road and 401, a 167 -- this is SmartCentres' share, 167,000 square-foot retail center is now under review for a major reconfiguration and a re-tenanting of the retail on the site and, longer term, for residential rentals. This site has great visibility and access to and from the 401, the busiest highway and the busiest intersection on the busiest highway in the country.Chilliwack Mall, a 173,000-square-foot shopping center purchased as a part of last year's OneREIT transaction, is in advanced planning stages of a de-malling of the existing enclosed portion, plus the addition of a seniors home onsite.Other sites for which residential plans are evolving, including Oakville North, a fantastic site at Trafalgar and Dundas; Vaughan Northwest at Mackenzie and Weston Road, nearby the new hospital, which is under construction; Hamilton Stoney Creek; Hamilton Mountain Plaza; Mississauga on Burnhamthorpe, just west of City Centre; Markham, Highway 7 and Woodbine, just west of Markham City Hall and in front of the new Viva bus dedicated bus lane; Mirabel, next to our outlet center; Laval East; Boudreau; Brampton; Kingspoint, another site purchased in the OneREIT, an infill site on Highway 10 just north of downtown Brampton.We have been in discussions with potential partners for many of these sites and may even consider developing a few on our own. In the residential space, to date, we have partnered with CentreCourt for condos in Vaughan; Jadco for apartments in Laval; and Fieldgate for townhomes in Vaughan Northwest.We are careful in the selection of our partners. We look for the right fit, cultural and work ethic. Until recently, we have not had that many partners, but the ones we have evolved into many properties, the largest relationship, of course, being Walmart, with which we developed, as in developed real estate, in over 100 properties with Walmart. We have a great relationship with our existing partners and expect to do more with them as well, along with others.The potential intensification development program continues to grow as we further review our portfolio for opportunities. From this ongoing review, the number of potential projects/towers to commence construction within the next 5 years is up from our estimated last quarter of 67 projects to 76 projects. These projects will have an estimated value of $9.5 billion on completion, with SmartCentres REIT's estimated share being $3.4 billion.In addition, another 82 projects or towers have been identified and which we will commence rezoning, design and site plan approvals and marketing during that same 5 years, with construction commencing after that. All of these projects involve 72 of our centers and sites, as some sites comprise multiple projects, and the review continues. We estimate that 10 years from now, we will be generating recurring NOI from these new rental businesses, seniors homes, apartments, offices and self-storage in excess of -- and I say this as a conservative number -- an estimated 20% of our total rental NOI, plus an additional $20 million to $40 million of profit per year starting in 2020 from the sale of condominiums and townhouses.With that, we will turn it back to the operator to coordinate us addressing your questions. Thank you.

[Operator]

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

[Brendon Abrams, Analyst of Real Estate]

Peter, in your opening remarks, you touched on construction costs and you're seeing some inflation in some areas and that you're revising some pro formas I guess on projects in some instances. To this point, have your yield or return expectations changed for many of your projects or assumptions? And I guess, secondly, has it altered your decision to proceed with any of the projects?

[Peter Forde, President & CEO]

No, Brendon. Really, what we've done with our pro formas, we're, in the case of condos, assuming that -- and by the way, I should say that those increases, even with the steel and the tariffs, probably in terms of total costs, we're talking 6%, 7% overall cost inflation on a project, and so that's something, then, in terms of future condos, not the existing ones we're building, because there we've pretty much tendered all the construction costs. But in terms of future towers, we're building that into our pricing model in the pro forma. And the same would apply in terms of self-storage and apartments and so on, that we're building that into the pro formas. And no, we're not seeing any decline in the profits anticipated or the yields.

[Brendon Abrams, Analyst of Real Estate]

And is this something you're seeing in the GTA or southern Ontario specifically, or across the country more generally?

[Peter Forde, President & CEO]

The construction cost is more a general thing because it's really the steel and the tariffs, the extra tariff, which may go away. It depends on how things work out, but for now, we're not making that assumption that it's going to go away, and so that's more of an across the country thing.

[Brendon Abrams, Analyst of Real Estate]

And then just shifting gears to the retail or the leasing environment, I know you've had no direct impact from the Lowe's or the run of closures, but just from your experience with other big-box retailers, thinking like Target, Sears -- do you see this having any indirect impact or in terms of your ability to release space?

[Peter Forde, President & CEO]

There's probably -- I mean, based on what I've seen of the ones that are in the portfolio that they've closed, I'm not sure that that's going to be a lot of direct competition for what we would put in our shopping centers and do in our shopping centers. There's a number of older stores, standalone stores with a significant amount of lumber yard that goes with them. I'm not sure that it's going to be something.

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

I think we see it, quite honestly, as a good thing. I mean, there was a period of time where there was some irrational expansion, you could say -- maybe not irrational, but maybe a little bit aggressive. So you had 3 home improvement -- do-it-yourself home improvement retailers growing at the same time, competing, and that needed to be corrected or rationalized, so this is overdue, which happened after, of course, the consolidation. We think it will make our centers stronger, concentrate the traffic even more so on fewer sites. And the sites that they do continue to operate their business will be directed to the remaining -- to the sites that remain open, of course.

[Operator]

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

[Tal Woolley, Research Analyst]

I just wanted to speak quickly on the VMC towers, Tower 3 and Tower 4. I was just looking at the pipeline, the cost disclosures. Those last 2 projects do seem to have gone up by about 20%, so just given that this is such an important development for the firm, I was wondering if you can just talk about what triggered those revisions.

[Peter Forde, President & CEO]

You're talking about on towers -- you said 3 and 4?

[Tal Woolley, Research Analyst]

Yes, 3 and 4.

[Peter Forde, President & CEO]

Oh, you're looking at Page 22 of the supplement --

[Tal Woolley, Research Analyst]

Yes, Page 22. Just versus last quarter, those have come up from about 310 to 375 and 175 to 210.

[Peter Forde, President & CEO]

I'm just trying to catch up to where you are.

[Peter E. Sweeney, Chief Financial Officer]

The office towers, Peter.

[Peter Forde, President & CEO]

Oh, we're talking about the office towers, not the condo towers. We just modified our numbers based on what we're seeing, and, again, it's early stages. We have no specific tenants or -- we have preliminary building designs for those towers at this stage. We're talking about the future office towers of VMC.

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

Oh, the square footage?

[Peter Forde, President & CEO]

Yes, just the size of them and the costs.

[Peter E. Sweeney, Chief Financial Officer]

Yield. Yield is down.

[Peter Forde, President & CEO]

At this stage, we're looking to get the yield down to what we're seeing -- what we see...

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

We're just being conservative. We don't actually have a design. We don't know what the materials -- I mean, we don't know whether we're building 2 levels or 3 levels of underground. They're just being -- they're conservative placeholders. When we have an anchor tenant, I mean, obviously we'll be able to put more specific numbers, but I think we wanted, just in the meantime, to be conservative. But, obviously, to build any of those buildings -- before we did anything, obviously, there would be an anchor tenant and the rent would be negotiated based on the then-estimated construction costs of the day.

[Tal Woolley, Research Analyst]

And just to -- you've sort of taken up kind of the value of your overall, big-picture pipeline from about $7.6 billion to $9 billion-and-change. That's being solely driven by number of projects. Is there any sort of cost inflation component to that increase as well?

[Peter Forde, President & CEO]

No, that's really -- that's just numbers of projects.

[Operator]

And we'll take our next question from Michael Smith with RBC Capital Markets.

[Michael Smith, Analyst]

I just wanted to clarify, so if it's $9.5 billion of development, of which $3.4 billion is SmartCentres' share, is that over the next 5 years?

[Peter Forde, President & CEO]

That's construction starting on those projects during the next 5 years.

[Michael Smith, Analyst]

During the next 5 years. Okay. And so I see the photo of the Transit City East Block -- the rendering, I should say. Which one is the -- can you remind me which one is the resi -- the rental tower? Is it the one in the front on the left?

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

Yes. They're all going to be different architecture, though.

[Michael Smith, Analyst]

They're all going to be different design?

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

Well, the 3 towers under construction now are all the same architecturally, obviously intentionally. These 3 will all be slightly different in architecture.

[Michael Smith, Analyst]

And with Walmart doing so well and more traffic at your site -- I realize it is a somewhat, I guess, tougher retail environment. I'm not sure how to phrase it -- or how to characterize it, I should say, but you're getting more traffic at your properties, at the end of the day. More traffic will eventually spill into higher rent, I would think. Any comments on that?

[Peter Forde, President & CEO]

I mean, the traffic, just because of the Sears and the other vacancy in the market and that -- all of that, CRU and those other centers, obviously are looking for places to go, and being in our centers will certainly drive traffic. Right now, with all of the things going on, as you've seen with Lowe's and so on, we'll go through that transition, but we ultimately believe that, yes, that will have a positive impact on our rents and our CRU rents and the occupancy, for that matter, because there isn't that many more places to go where you're going to find large shopping centers with a dominant mass merchant and all of the amenities being food, restaurants, fitness, medical and so on. And when you combine that with our mixed-use in those same centers, or adjacent to it, it makes for a compelling place to be for our retailers that we're talking to every day.

[Michael Smith, Analyst]

And what's the mood of your retail leasing team?

[Peter Forde, President & CEO]

The mood of the retail leasing team? We just had our ICSC in Toronto, as you all may know, and the ICSC in Toronto, which was very well-attended by everyone -- I will tell you that in the last 10 years, I've never seen it -- and other people came and commented to us at our booths from other landlords about how busy we were and the number and the amount of interest that we're just having at our centers. So, the mood is strong. There's lots of calling, as you know. This is a time of year where we're doing lots of deals. People want to get deals done. They're signing up. They're opening up before Christmas, tenanting, so it's -- again, owing to the 98.2%, you can see that it's never been as busy as it is now. And, again, with other anchors and other centers not being there, it only offers us the opportunity to offer a center with significant traffic generation.

[Michael Smith, Analyst]

And just switching gears, so your strategy with the Tesla charging stations, you have 6 open, plans for another 15. So even the Model 3 is a pretty expensive car, so I presume -- could you just give us some color on that strategy in terms of are there a lot of Tesla owners already shopping at your properties or do you see that number growing? What are you thinking?

[Peter Forde, President & CEO]

I mean, look, this is a long-term thing. I mean, we're putting in Tesla charging stations, but we are going to -- I don't think there's any reason not to say or tell you that we are planning to put in charging stations that aren't Tesla specifically as well. I mean, we'll be announcing that shortly, because we believe that it's relevant to offer charging stations to a growing trend of electric cars, and it sends a good message. Whether you drive one or not, when you come into a center and you see charging stations, you know the owner is alive and kicking and their place is relevant. You may applaud it and not drive one. You may eventually buy one and know that's where you can charge it. And I can tell you that on the limited number that we do have, we've been told by a couple of our retailers, the ones that are very nearby the charging stations, that people come into the stores while their cars are charging, so it's actually -- there's no downside. It takes up so little space. There's a certain percentage of people that do drive them, and it keeps providing additional services to our customer. And by the way, we're not going to stop at charging stations. Those charging stations are going to evolve into other things, so you can stay tuned. So it's really very much a starting point that we think is a must for SmartCentres.

[Michael Smith, Analyst]

And just a last question. Do you have a split of the transactional FFO for '19 and '20? You've given some guidance in terms of growth, overall growth.

[Peter E. Sweeney, Chief Financial Officer]

We don't have it available for this call, Mike. We can certainly provide that in the future for '19 and '20.

[Operator]

[Operator Instructions] And we'll take our next question from Pammi Bir with Scotiabank Capital.

[Pammi Bir, Analyst]

Just on the Bombay Bowring situation, the exposure overall does seem pretty small, but what is the overall gross revenue impact? And would you say that there's an opportunity to raise rents on re-leasing, or would you expect that to hold relatively flat?

[Peter Forde, President & CEO]

The overall -- there were only 12 term deals we had with them, and those 12 term deals and the rest were temp deals. It's less than 1.5 pennies in terms of gross revenue. And, again, all of the locations, all of them, are in Walmart Supercenter-anchored shopping centers across the country. All of them are what we call our sweet spot for leasing, in 5,000 square feet, a little bit higher. And yes, the rents were -- because they were done a while ago, the rents were at or below the current market for those spaces. So we don't anticipate there being much difficulty at all in leasing -- re-leasing these spaces, because, as you know, when we're adding services and restaurants and other services, the rents they would pay for a 5,000-square-foot spot is much higher than a Bombay or Bowring would pay for that similar spot given their use at the time when we did these deals. So we expect very positive outcome, again, once the space has turned over, depending on what they turn over. Again, they may come back and keep their strongest sites and do a restructuring on some of them and not all of them, so we don't know yet.

[Pammi Bir, Analyst]

I guess the tone on leasing does overall seem to be positive, I guess, from the recent ICSC event, and I guess particularly as we approach the holiday season, but anything on the radar that might concern you for Q1, which typically is when we do see some of the closures and failures post the holiday season?

[Peter Forde, President & CEO]

No, I think it's the same thing we thought about last year and the year before. We worry a little bit about the fashion, let's say, retailers that are in our shopping centers that are not -- have not evolved as well as the ones that are in enclosed malls and whether or not, as you know, some of them have moved to Smart Set. The Danny Leathers, some of the Reitmans, the Penningtons are moving back into malls. So that we're always keeping an eye on. Again, most of those are in a good size space for us, and because we're in the unenclosed space, the operating costs to operate in those spaces aren't expensive, so re-releasing them has not been significant for us, hence the occupancy being above 98% for as long as Peter mentioned earlier. So we're keeping an eye on those kinds of retailers, and there are a lot that are knocking on our door to bring in other uses, which we're a little bit excited about in terms of whether it's fitness, QSRs, restaurants, daycare, medical. So a number of services that we are finding very attractive in some of our centers that we typically didn't have before are now finding its way to us, which we're a little bit excited about, so we're going to keep our eyes open for that.

[Mitchell Goldhar, Executive Chairman of Board of Trustees]

As well as cannabis stores, which are all net new square footage as well.

[Pammi Bir, Analyst]

And then just a last question, on the 2019 guidance of the 4% to 5% FFO growth. Is there any real difference in the overall same-property NOI growth that your guidance reflects, meaning is it kind of in that 1% range, or has anything changed in your outlook there?

[Peter E. Sweeney, Chief Financial Officer]

Pammi, it's Peter. So we would not expect our same-property guidance to change. So typically, or historically at least, we've always said that our same-property growth levels range from 0.5% to 1.5%, and we would expect that historical range to continue into 2019. Just maybe backing up for 1 second, Mike Smith is still on the line. He had asked a question earlier about transactional FFO for 2019 and '20. We were able to pull up this information, if Mike is still on the line. So we see transactional FFO for 2019 as basically being flat. It'll be approximately $0.01, so virtually nothing. And then in 2020, we see it being approximately $0.04. However -- and maybe this is something that we should make sure the group understands -- when we think about the proceeds that we're going to realize from the sale of condos and townhouses, upon their completion, those completions for us begin in 2020, and so we do see, with the initial completions of the condos and the townhouses in Vaughan Northwest, that for 2020 the incremental FFO from those closings will be in excess of $0.30 a unit, so it's a substantive increase. And I think we've said historically that in 2020, we expect the FFO per unit growth rates to exceed 10%, so clearly that growth rate is being super-charged, if you will, by the commencement of closings of some of these development initiatives that we've now had underway for approximately a year and a half.

[Operator]

And we'll take our next question from Sam Damiani with TD Securities.

[Sam Damiani, Analyst]

I just wanted to pick up on the comments you made, Peter Sweeney, at the beginning about potential upgrade to your credit rating. I'm just wondering what the threshold is there. I think you mentioned there's a size threshold you have to get to. I'm not sure if you mentioned that.

[Peter E. Sweeney, Chief Financial Officer]

I think it's public knowledge. DBRS's current report on the REIT, Sam, has suggested that they'd like to see us find a way to reduce our debt-to-EBITDA levels from where they are currently at about 8.4x to something in the 7.5x range. And so, aspirationally, that's what they're at least proposing. So to get there, clearly we're going to have to find ways to reduce overall debt levels while concurrently finding ways to increase EBITDA.

[Sam Damiani, Analyst]

And as far as increasing EBITDA, do you see increasing the size of the company as a priority way of achieving that, or how are you thinking about that?

[Peter E. Sweeney, Chief Financial Officer]

I wouldn't consider it, and I don't think my colleagues around the table would consider it to be a priority. It's certainly always an option, Sam, to consider that, but we're more than comfortable with the current credit rating. We're going to take our time to find ways to organically, if you will, given the portfolio that we have and the development initiatives that are currently underway and in the planning stages -- we're going to take our time to find ways to grow EBITDA on a moderated and conservative basis without, perhaps, undue risk. It's also fair to say that the additional FFO and earnings that we expect to commence in 2020 from the condo and townhouse initiatives, those earnings will contribute substantively to EBITDA, and we don't consider them, nor should they construed by anyone, to be either anomalous or 1-time. So they -- once they begin in 2020, we expect moving forward, year-after-year, an enormous contribution from the condominium sales, townhouse sales and other similar initiatives. It will be perhaps difficult to repeatedly demonstrate levels of growth of that consequence year-over-year, but, as we've said many times and, again, just to emphasize the point, this -- these types of initiatives have now become part of our day-to-day business, so we are, as an organization, fundamentally committed to doing condominium and townhouse development. And so when we think about EBITDA, ensure that when you're doing your models that the proceeds that you're modeling from condominium and townhouse and similar developments, that those proceeds are included in your models. And so when we think about our debt rating and improving that debt rating, certainly I think it's fair to say that DBRS expects to be in a position to include the proceeds from townhouse and condo developments in those EBITDA levels.

[Sam Damiani, Analyst]

And I didn't catch if you mentioned it, but who paid the lease surrender fee in the quarter?

[Peter E. Sweeney, Chief Financial Officer]

There were 2 tenants that paid the amounts. One was Rexall Drugs, who closed a location in British Columbia in one of our shopping centers, and Baron Sports, which is a subsidiary company to Sail, closed their location in Point-Claire, Quebec.

[Operator]

At this time, I'd like to turn the call back to Peter Forde for any additional, closing remarks.

[Peter Forde, President & CEO]

Again, thank you all for being part of our third quarter call, and thank you for your interest in investing in our REIT. Goodnight.

[Operator]

And that concludes today's presentation. We thank you for your participation. You may now disconnect.