SmartCentres Real Estate Investment Trust

TSX:SRU.UN

Earnings Call Transcript 2021-Q3

[Operator]

Good day, ladies and gentlemen. Welcome to the SmartCentres REIT Q3 2021 Conference Call.I would like to introduce Mitchell Goldhar. Please go ahead.

[Mitchell Goldhar, CEO & Executive Chairman]

Thank you. Good afternoon, and thank you for joining us. I am Mitchell Goldhar, Executive Chairman and CEO, and I am joined by Peter Sweeney, Chief Financial Officer; and Rudy Gobin, EVP, Portfolio Management and Investments.This is the first analyst call since the passing of Peter Forde. Peter was a true gentleman and a wonderful partner in the running of the SmartCentres business. We were not just colleagues, but good friends. We spoke to each other many times a day over the past 23 years. I think of Peter daily, and we all miss him dearly.Today's commentary will refer mostly to the outlook and the mixed-use development initiatives section of our MD&A, which are posted on our website. I refer you specifically to the cautionary language on Pages 3 and 4 of the MD&A materials, which also applies to the comments any of the speakers make this afternoon.Our results this quarter are a combination of improving conditions in every aspect of the business and continues to reflect the strength and resilience of our tenants and of our strategic real estate here in Canada.Our strategy to grow through mixed-use intensification continues to gain momentum and bear fruit. This strategy unlocks deeply embedded NAV value to our unitholders on lands they already own.Here are a few highlights of the quarter. Operationally, with 75% of our open-air format shopping centers are anchored by a Walmart Supercentre and virtually all anchored by a full grocer, consumer traffic has begun to return in a significant way. This is driving new tenant interest. It is also improving occupancy to 97.6% and cash flow to above 97% already. Both metrics are expected to improve throughout the holiday shopping season, with the death of retail greatly exaggerated.This year alone, we have advanced the zoning application through nearly 22 million square feet of additional density. For those of you not as conversant, that's not a small amount. This is in addition to our current permissions in place, such as SmartVMC. What is it worth? I will not get into the details of that right now, but I will say it is more than 0.We currently have over 3 million square feet under construction, which includes 6 rental apartment buildings: 2 in Mascouche, 1 in Laval, 2 in Ottawa and 1 in our flagship SmartVMC. I expect volume of construction activity to continue to grow in the coming months and years.Also in SmartVMC, we completed the remaining 192 condo unit closings in the Transit City 3 tower this quarter. This brings the total to 1,741 units closed in the first 3 Transit City towers, delivering over CAD 60 million in FFO to the REIT. With 5 sold-out condominium towers, 55, 55, 55, 50 and 45 stories, SmartVMC has become one of the fastest growing communities in Canada, which says something since there are a lot of communities in Canada that are growing.The next phase of SmartVMC, called ArtWalk, will be launched imminently under our wholly owned residential banner, SmartLiving. ArtWalk is a 12-acre mixed-use district in the heart of SmartVMC. It's located on the former Walmart parcel. When fully completed, ArtWalk will consist of approximately 5 million square feet of density, including 5,000 residential units and up to 150,000 square feet of nonresidential buildings. Phase 1 of ArtWalk includes over 370 condo units, 190 rental apartments, tech office and event space. It is worthy of noting that SmartCentres REIT owns 50% of the ArtWalk condos, twice as much as the 25% it owned of the Transit City condos.While SmartVMC represents our vision of the future, it is only 1 of 94 REIT properties currently slated for intensification. We are literally growing a new portfolio out of our existing one. Pages 21 to 23 of the MD&A highlights over 20 mixed-use projects, totaling in excess of 55 million square feet of net incremental density to be built, some with our partners and mostly on undeveloped lands within our existing portfolio, upon approval of all.Keeping in mind we do this while simultaneously maintaining our conservative balance sheet, with an unencumbered pool of assets in excess of CAD 6 billion and significant liquidity, which Peter will speak to shortly.We only move forward with capital-intensive construction initiatives as market conditions warrant, sufficient presales occur in the case of condos and only when financing is fully available and in place on terms that we are happy.Reshaping and intensifying our lands takes us back to our roots, our mindset of embracing change through forward-looking strategic land use amendments and timely real estate developments. Our third quarter results are a clear indication of strong growth to come.I will now turn it over to Rudy Gobin for some operational review.

[Rudy Gobin]

Thank you, Mitch, and good afternoon, everyone.Throughout the quarter, we saw the reopening of the balance of our retailers, coupled with the improving [ leading ] interest from the likes of dollar store expansions, medical uses, personal services, home decor, grocery, all of the TJX banners, QSRs, fast foods, pet stores, financial institutions and a host of services, all driving more traffic and improving our tenant mix and occupancy throughout the quarter.And while nearly 100% of the REIT's properties include a full-line grocery store as an anchor or a shadow anchor and 60% of the REIT's tenant base is comprised of essential services, our essential service tenants percentages increases to 70% in markets outside the greater [ investment ] area, where our occupancy rates are very near to 100%.Our tenants continue to work with us to adapt by expanding their ecommerce, their product lines, their product delivery models, pickup and space utilization, all while striving to maintain customer loyalty and sales. And we are there to support them every step of the way.Recently, we've had some larger tenants approach us wanting to expand their stores to allow for development of an ecommerce platform and distribution network. This demonstrates that the demand for physical space continues as retail continues to adapt to changing customer preferences.As we have highlighted previously, Walmart Canada plans to spend CAD 3.5 billion to make their online and in-store shopping center experience simpler, faster and more convenient. This continued commitment to its retail operations in Canada speaks to the ongoing strength of Walmart and its growing ability to drive traffic to our centers.For Q3, we completed nearly 270,000 square feet of new leasing and, therefore, improving our leased occupancy to 97.6%.Now regarding our Premium Outlets in Toronto and Montreal, both are now open and are at near-full occupancy. While sales were severely impacted during the prior quarters, traffic counts are now approaching the prepandemic levels and sales have shown great resiliency, with higher conversion rates. And with the pent-up demand, accumulated savings and the reopening of the Canada-U.S. border, we expect a strong fourth quarter into the Christmas season and an even better performance in 2022.By the end of the third quarter, we had completed nearly 3.5 million, or 83%, square feet of our 2021 lease maturities.COVID-19 was a real life test of our portfolio's resilience. Our high-quality tenants and portfolio continue to adapt, intensifying with residential and other real estate asset classes, strengthening with the expanding tenant base, improving customer traffic and with a leading occupancy rate and, of course, reliable and growing cash flows.And with that, I will now turn it over to Peter.

[Peter E. Sweeney, Chief Financial Officer]

Thanks very much, Rudy, and good afternoon, everyone.The financial results for the third quarter reflect a substantive improvement in our core business that Mitch and Rudy have mentioned earlier. For the 3 months ended September 30, 2021, FFO per unit with adjustments, after removing the influence of ECL provisions and condominium profits, grew by 4.4%, or CAD 0.02 per unit, over the comparable quarter last year. This 4.4% increase is principally a reflection of incremental new tenancies and interest cost savings.In addition, our third quarter results include CAD 0.03 of FFO from the closings of the remaining 192 units at Transit City 3. ECL provisions were CAD 700,000 in the third quarter, as compared to CAD 9.7 million in the comparable quarter, and this is consistent with the theme that we have experienced year-to-date on continuously improving tenant collection levels.In addition, the IFRS fair value of our investment portfolio improved by CAD 79 million, or 0.9%, to CAD 8.98 billion at the end of the quarter.And lastly, note that our annual distribution level continues to be maintained at CAD 1.85 per unit, resulting in an 87.8% ACFO payout ratio, after adjusting, for the 9 months ending September 30, as compared to 88.7% for the comparable prior year period.All of these financial metrics represent a common theme of continuous improvement to our core business.We have also continued our focus on further fortifying the strength of our balance sheet. And in this regard, we note the following strong debt metrics for the third quarter of 2021 as compared to the comparable quarter in 2020.Number one, in keeping with our strategy to repay maturing mortgages and to grow our unencumbered pool of assets, our unsecured debt in relation to total debt increased to 70%, from 67%, and our unencumbered pool of assets continues to grow, increasing by approximately CAD 239 million to CAD 6 billion. We continue to employ this strategy to repay most maturing mortgages. Accordingly, we expect these metrics to improve further in the future. Please note that this strategy permits us further agility when considering opportunities and alternatives for our portfolio of mixed-use developments.Number two, our current BBB high credit rating from DBRS permits us to continue to attract debt capital at lower interest rates for longer terms. And in keeping with our strategy to take advantage of lower interest rate environments, pursuant to our refinancing activity over the last 12 months, our weighted-average interest rate for all debt continued to decrease and at the end of the quarter was 3.25%, as compared to 3.37% for the prior year, while concurrently we have extended our weighted-average term of debt to 5 years. Excluding construction financing, substantively all of the trust's current outstanding debt is fixed-rate debt.This continued focus on both increasing the weighted-average term of our debt and fixing interest rates is deliberate and is yet another example of the risk mitigation strategies that we have employed to insulate the trust from interest rate volatility.And then lastly, number three, our interest coverage ratio, net of capitalized interest, was maintained at a very strong 3.7x level, this in spite of the impact that COVID-19 has had on our operating results over the last 18 months, and further confirms the foundational strength and stability of our core business.From a liquidity perspective, as we look to the immediate future and continue to manage through the current uncertain capital markets environment, in addition to the conservative debt metrics that have been noted previously, consider also that when factoring in our cash on hand, together with our new CAD 150 million operating line that was completed during the third quarter, and the CAD 250 million accordion feature associated with our existing undrawn CAD 500 million operating line, our liquidity position approximated CAD 1 billion at the end of the quarter.Recall also that the next series of debentures in our debt ladder does not mature until May of 2023. However, as we have previously noted, we are continuously considering opportunities to early-redeem debentures and mortgages when appropriate.Notwithstanding the challenges associated with COVID over the last 18 months, our business has continued to demonstrate its ability to generate sufficient cash flow to fund our operating needs. Accordingly, we anticipate our requirement for additional funding over the next 20 months to be limited to construction financing and any potential acquisition financing requirements that may arise.And with that, I'll now turn it back over to Mitch.

[Mitchell Goldhar, CEO & Executive Chairman]

Thanks, Peter.As you can see, it has been an encouraging quarter, but with much work to do.With that, I will now turn it back to the Operator to coordinate us in addressing your questions. Thanks.

[Operator]

[Operator Instructions] The first question is from Jenny Ma from BMO Capital Markets.

[Jenny Ma, Analyst]

Peter, I'm just picking up on the comment you just made about your funding needs and the reference to acquisitions. I'm wondering if that is just part and parcel with the general strategy and there's not much to read into that? Or are you starting to look at possibly buying some properties at this point?

[Mitchell Goldhar, CEO & Executive Chairman]

Are you asking about Peter's comment about, in the last part of his presentation, on potential acquisitions that may arise Is that what you were referring to?

[Jenny Ma, Analyst]

I'm just wondering if that statement was just potentially acquisitions in the normal course? Or is that something that you're turning increased focus to now that we've put COVID mostly behind us? And whether or not you're seeing any opportunities in the market.

[Mitchell Goldhar, CEO & Executive Chairman]

I mean, we're going to be pretty strategic with any purchase. But yes, we will of course and have always been, have our eyes peeled, but for strategic acquisitions. So yes, I mean, I guess, with improvements to the general environment climate, we might be more likely, acquisitions might be a little bit more likely than just, say, a year ago.

[Jenny Ma, Analyst]

I guess, on balance, just given some of the firming prices for essential anchored assets, like, how should we think about balancing the net investment between acquisitions and dispositions? Because I know you've been selling some assets here and there. Is it, on balance, do they kind of net each other out? Or are you seeing more opportunities on the buy side?

[Mitchell Goldhar, CEO & Executive Chairman]

It's a difficult question to answer. I mean, obviously, we're not -- both are strategic. If we have an opportunity to sell something that is not strategic, and not to overuse the term, but I mean where we don't see any long-term potential for intensification, it doesn't mean it isn't an outstanding asset. And if the price is right, et cetera, et cetera, it might be something that we would consider selling.I mean, the ones that we have sold recently, clearly, the margins are not strategic, the outside margins. So they're very specific. There's a very specific agenda with those.Acquisitions, again, they're going to be strategic. And I don't know that I would sort of describe them as canceling each other out, because acquisitions are going to be, I mean, they're not going to be the same type of assets that we'll be acquiring if we buy and then the one we would be disposing of.But in terms of volume, no, I don't think -- there will be an overall strategy in terms of structure and financing their balance sheet, but there's not going to be an absolute symmetry between the type of assets and the cap rates we sell at and the assets that we buy. But they'll both be going on, I think maybe even with greater -- there will be greater activity in probably both areas over the next couple of years.

[Jenny Ma, Analyst]

Okay. That's helpful. I should have been more clear. I meant canceling each other only in terms of dollars, but definitely not cap rates or asset type.My second question is, you talk about an office component in ArtWalk. And when we think about the strategy for mixed use, and I understand office is a very small part of what you guys do, but coming out of COVID are you thinking about an office component in mixed-use projects any differently? Do you see them as being a core part of it? Or is it specific to ArtWalk, given the transit orientation of that site, specifically?

[Mitchell Goldhar, CEO & Executive Chairman]

It's a great -- I love that question. A very thoughtful question. We -- first of all, the mentioning of office in ArtWalk is not to be interpreted as taking some position on the future of and the changing use of office, but more that it is a really cool, it's a super cool office building that's quite small but will -- as it is small in square footage, it will add a lot to ArtWalk Phase 1. You'll see that in the plan maybe some other time. I'd be happy to show you that.But it's a large floor plate office building, low-no rise, and it's being spec'd, but it's just animating that first phase. But it is -- also you can, yes, read into that, that we will be wanting and looking for mixed use, including office, at VMC. And I should say that we have other interests in office at VMC in a significant, like significant square footage interest. I would say if 10 was an executed deal, it's probably a 3 or a 4; but it was 1 and now it's a 3 or a 4 and there's a lot of -- they qualify, for sure.So there's activity. We wouldn't spec a large office, that's for sure, nor would we have 5 years ago, for that matter. We will never spec an office building, most likely, of any size. But we definitely want office and other nonresidential uses to complete the full vision of VMC.

[Jenny Ma, Analyst]

Okay. That's also helpful. It probably is a little bit too early to get into the details, but would there be any significant changes in how you approach office development in a post-COVID world? Or is it really more so like internal configurations that are part of that end design process that doesn't necessarily affect development or construction?

[Mitchell Goldhar, CEO & Executive Chairman]

I mean, we're going to build office for a tenant when we build an office, other than that little building in the ArtWalk Phase 1. So we are obviously -- we're all in, like yourself, all in the trenches on all these different real estate, all the different forms of real estate. So we are pretty, I think, tuned into what's going on with office. But obviously, we're learning all the time from the tenants that we're talking to, potential tenants. So we'll be building to what they think, what they want and what they need. And the architects that we use are kind of cutting-edge in terms of office architects. So they're hearing what everybody is thinking and saying with respect to the offices of the future. Of course, we're not going to get into all those details now, but it's really interesting.And as I say, we're not going to go ahead and spec office. VMC is probably one of the only places we'll be building very much office across the country of our intensification program. But it is definitely -- and by the way, Jenny, it's also -- part of the momentum is from the movement, not suggesting that there's necessarily not a, there's a lack of activity downtown, because there's not, but there is increased interest outside the core for all kinds of lifestyle reasons. So we're seeing inquiries we think are kind of driven by that, too.

[Operator]

[Operator Instructions] The next question is from Tal Woolley from National Bank Financial.

[Tal Woolley, Research Analyst]

Let's start with the new condo announcements at VMC. Mitch, I'm wondering if you could put, like, sort of the pricing in context with respect to the prior projects that have been completed now so we have an idea of what you think the appreciation ultimately has been over time in that market.

[Mitchell Goldhar, CEO & Executive Chairman]

You're taking away the drama around the price list. I mean, let's just say it's gone up from our last release at TC 5, which averaged, I think, CAD 868 or something a foot. So I mean, obviously, I can't say what the pricing is going to be because we're about to kind of launch it and we're just fine-tuning it. Across the road, and again don't take this as an absolute accurate number, but I understand that they sold across the road from us at, I don't know, CAD 1,050, maybe CAD 1,075 average. And I don't think they released everything. They sold everything that they released, and I think they held back some. And so we'll see, but definitely stronger indications from our last launch.And keep in mind, Tal, we're not releasing that many units in this particular phase for condo. You can see relatively small, so we're -- I mean, it's very deliberate, obviously, and the rental unit is also very manageable. So this pricing should be okay considering there's a lot of market demand and we're not releasing that many units at the moment.

[Tal Woolley, Research Analyst]

And are you finding -- and you think that, like, the margin profile, given everything that's gone on in the world, is still manageable?

[Mitchell Goldhar, CEO & Executive Chairman]

We have a bit of an advantage in that we have such -- we have an ongoing program at VMC. So in terms of construction prices, that's not to say that we're not effective and that we're immune to the increases, but we're able to, I think, leverage the fact that we have an ongoing program at VMC, one owner who knows they're going to be building at least 1, if not 2 or 3, buildings continuously for the next 10 years, I think is -- it helps us in negotiating some of the larger items or longer-term items. But that's one of the reasons we're just fine-tuning our pricing right now, is because we're just getting -- we're just buttoning down as much as possible some of the larger items that have increased.That's a big issue. It's a concern. In some cases, in the future, Tal, we're going to potentially even tender the project before we go to market to kind of try to mitigate the risk. In this case, the buildings are not -- we don't think it's warranted here.I should have mentioned on the previous answer to you as well that we may -- we're going to release this building, but if things go well we hope to release another building on the coattails of this ArtWalk Phase 1. So it's not that we're going to release this and that will be it for a bit. I anticipate that if it goes well, we may on the coattails have another building ready to go.

[Tal Woolley, Research Analyst]

And can you just talk to me a bit about the decision on something like ArtWalk, the choice to go for-sale versus rental? I would have thought maybe with the one building going up and progressing well that you might have aimed to add more rental into the vicinity.

[Mitchell Goldhar, CEO & Executive Chairman]

We have so much square footage, so much density at SmartVMC that, I mean, we're not going to be lacking in rental up there. We just want to go carefully, be cautious, obviously. I mean, when it comes to condo, we presell and we have deposits and et cetera, et cetera, whereas with rental we don't really generally stabilize until a few years after construction is complete. Of course, it requires borrowings and term financing.So it really is just an exercise in managing the overall balance sheet conservatively. There will be some years where it will look overly conservative. There will be other years where we'll be very happy that we played it that conservatively.So yes, we could do more rental, but it's really a case of the belt and suspenders.

[Tal Woolley, Research Analyst]

Okay. And then some of your other uses that you've been building up, self-storage, the retirement homes, can you just talk a bit about how those have been performing? Like, self-storage, the publicly traded guys across North America have just been on fire. And so I'm just wondering how you're thinking about the progression of that business, going forward, too.

[Mitchell Goldhar, CEO & Executive Chairman]

I'll start the answer, and I'll turn it over to Rudy, but we have been very lucky to have teamed up with who we teamed up with. We're free to team up with anybody. But just the SmartStop relationship has been going really well. They're pros. There's just a good sympatico in terms of the real estate. The real estate minds over there, together with their operational expertise, has just been a really good fit. And so we've got a number of those going. It's going -- the momentum is strong. We've got a bunch more in the pipeline, and they've been leasing up very well, and I'll let Rudy talk to that.And I want to just acknowledge Allan Scully, who's done a great job with SmartStop right from the beginning. And of course, Peter Forde was very involved and instrumental in the relationship with SmartStop. But it's a relationship that has long legs.Rudy, do you want to maybe chime in?

[Rudy Gobin]

Sure. The relationship Mitch talked about with these guys is something that we can't say enough of. They are great partners. We share information with each other openly freely. We talk about how to market. These guys know how to market the properties. They know how to bring it to market after it's open. They know how to compete in each market. There's a lot of diligence that's done in advance, market studies done in advance.And that advantage made us great partners with the lands that we have in the locations we have. As you know, we've got 5 locations opened, 4 developed out of our lands and doing well. I will tell you that we expect them to do better than pro forma once they're up and running. They're not all stabilized yet, but there's time for it to stabilize, but they're performing better than we had thought. These are large multistory units. And there are, I think, 3 or 4 more under construction as we speak.So we can't say enough about this, and there will be more to come in this area.

[Tal Woolley, Research Analyst]

Okay. And then Mitch, just lastly, like your closest peers in the public markets, their development efforts have been, I guess I would characterize it as predominantly focused on urban mixed use. And your strategy has been somewhat different. You're including these other types of asset classes and making a real push on them. In your head, is there like a perfect mix of these asset classes that you want to be at, like, in 10 years' time? Or is it just, "hey, this is what I think I can get out of this particular piece of land that I bought and I'm focused on what I can do best for that one site."

[Mitchell Goldhar, CEO & Executive Chairman]

I mean -- okay. So no, there isn't like a number that we're seeking, per se, and then that sort of then dictates it. I think if we were to sit down and look at any one of our properties that are sort of on the list of intensification and redevelopment and we went there and we drove around and we looked at the site plan and all the options and so on and so forth, we'd probably come to, like, after going back and forth and thinking it through, we probably would come up with logically a lot of the same uses and densities.So that is to say that in each site, if you think in the future, if you can extend the trajectory of what's going on in any one of these communities and what's going on in terms of family structure and household incomes and so on, and you layer it all in, you can pretty much -- you should be able to predict what's going to be needed there in 2 to 10 years. And that's organic.Now what that ends up totaling at the end of analyzing every site, I would say that in 10 years from now it's going to be hard to get to 50/50, but it's quite possible that we will be 50% or more nonretail income. And it goes back to something you had asked earlier, partly, and that is it depends on how much condo versus rental we do. I mean, in terms of sheer square footage, it will be substantially more than that. But I would say that a benchmark, a thumbnail would be that in 10 years from now we'll be 50%, maybe more than 50%, nonretail income.

[Operator]

The next question is from Michael Markidis from Desjardins Capital Markets.

[Michael Markidis, Real Estate Analyst]

My first question is just with respect to the establishment of SmartLiving. And I know at VMC you've now made a point of taking down a greater proportion, increasing to 50% on the ArtWalk residential component. Going forward on future projects where the REIT owns 100% of the land with SmartLiving, will the residential be fully 100% at Smart's interest? Or will you look to be bringing passive partners for a source of capital?

[Mitchell Goldhar, CEO & Executive Chairman]

I mean, for sure, we're going to be bringing in partners in lots of deals when we find the right fit. So yes, we're not trying to be heroes, to do everything ourselves. I mean, it's a great way to raise equity after we make some land use -- get land use amendment approvals. But we do want as much as possible to be at the forefront of the development to build our brand. So I think that that's probably something we will probably more often than not be the lead kind of in terms of the development manager and brand. But it might happen that we will even sell a parcel of land to a third-party developer who has their own brand equity, or there might be cases where we've just got too much on our plate and we want to hand off some of that horsepower to somebody else. But I think more often than not, we will be the lead developer when we bring in a partner.

[Michael Markidis, Real Estate Analyst]

Okay. That's helpful. Just on Cambridge, I know you guys are progressing with the first phase of that. Maybe if you could just give us a little bit of color on what that entails, what parcel of the site would be the first part of that question. And then secondly, I don't think it's a new disclosure necessarily, but I think you guys made a point of pointing out that it's actually subject to a leasehold. I'm just wondering if you could also explain if that at all will impact Smart's economics on the site, going forward.

[Mitchell Goldhar, CEO & Executive Chairman]

I mean, first of all, Cambridge, as you know, is now zoned for close to 12 million square feet. We have 700,000 on there right now. So we've got a long -- it's a significant up-zoning. The Phase 1 is looking really good. It's really a lot of towns. Towns, by the way, is the lingo for townhomes in the residential world. So a lot of towns, and some midrise, and then 1 initial high-rise and in a part of the project that is kind of the most affected by, maybe in all of our centers even, one of the most affected by just the amount of retail in that market supply/demand. So it's a good place to start.So we're excited to do that. I don't know how well you know Cambridge and the whole choice of area there, but it's definitely a whole world unto itself. And we think our timing is good there when it comes to demand for housing just outside, on the edge of the city.In terms of the leasehold, yes, there is a leasehold. It's a land lease. It goes back to one of the early projects that I had sold into the REIT on different terms. Most were straight-up sales, but there were some leasehold sales, which at the time was quite common, or not uncommon, that's for sure, if you looked at some of the other REITs.And so as it relates to the development or redevelopment of Cambridge, it does require us to work out some tweaking of the structure there. I don't want to say too much about it. I mean, you'll obviously know if we don't work something out. But I'm kind of assuming, like everything else over the last whatever number of years, that will work itself out.

[Michael Markidis, Real Estate Analyst]

Okay. And then just the last question for me before I turn it back. With respect to the JVs, that's where a lot of the active development is going on right now and some of it is completed and construct, such as the KPMG Tower. But if we look at that NOI coming from the equity-counted investments and just given that there are now properties that have been completed in the lease-up, is there any way you could just give us some help in terms of how you expect the amount that's there in 3Q will progress over the next, call it, 12 to 24 months?

[Mitchell Goldhar, CEO & Executive Chairman]

The amount of which?

[Michael Markidis, Real Estate Analyst]

NOI coming from the JV. So think about a lot of the stuff that's active or recently completed is in the number, and I just suspect that there's good growth in that component. So just trying to get some way to triangulate.

[Mitchell Goldhar, CEO & Executive Chairman]

You mean in that particular JV? You mean in the…

[Michael Markidis, Real Estate Analyst]

No, no. Sorry. Just within all of the JVs. I guess, storage, there's Jadco. There's a lot of stuff that's not stabilized yet. I'm just trying to get a sense of completed and…

[Mitchell Goldhar, CEO & Executive Chairman]

I would just say -- I'm going to turn that over to Peter, but Peter, I'll give you a second to get ready.But I think Rudy was happy that Rudy was conservative in his description of the lease-up with our SmartStop actually, because they are going better than planned, and plan was kind of conservative. So it's good to see that they are outperforming our plan and we base things based on our conservative plans. So we're pleasantly surprised.I also wanted to add to that whole SmartStop thing, I don't know whether everybody appreciates how great it is to be able to wedge a storage facility on lands that you wouldn't necessarily be able to build anything else. So it's a great actually vehicle for us to create additional income where we probably wouldn't be able to -- and because they use so much in parking and the buildings are somewhat flexible.So with that, Peter Sweeney, do you want to illuminate a little bit on it?

[Peter E. Sweeney, Chief Financial Officer]

Sure. Mike, I mean, we tried on Pages 31 and 32 of the MD&A to give you at least at a high level the NOI and income generating results for anything that's equity accounted. Maybe what we can do just to provide some additional information, going forward, we can have a chat after this call and you can give us sort of a broader perspective on expectations. And what we'll try to do going forward, therefore, is augment this information to accommodate your needs and those of your counterparts.

[Operator]

[Operator Instructions] The next question is from Sam Damiani from TD Securities.

[Sam Damiani, Director, Institutional Equity Research]

Just on the VMC, there's been a lot of units that SmartREIT has completed and others as well absorbed in the market. Do you have a sense now with many of those units closed, are they physically occupied, are they offered to rent? What's the actual market like for occupied units in that [ building at the moment ]?

[Mitchell Goldhar, CEO & Executive Chairman]

You mean renting up? You mean the actual rental rates for some of the rented condos?

[Sam Damiani, Director, Institutional Equity Research]

Not the rate. Just wondering if -- I assume a good portion of the buyers were investors, and I just wanted to know if those rental units have been successfully, I guess, leased.

[Mitchell Goldhar, CEO & Executive Chairman]

I mean, I don't think we know exactly the numbers. So again, don't go by this. But Sam, this is very disappointing because I can see that you haven't been up to VMC lately. So we're going to have to do something about that.

[Sam Damiani, Director, Institutional Equity Research]

I'm actually trying to find an apartment up there right now.

[Mitchell Goldhar, CEO & Executive Chairman]

Well, you've come to the right place.It's busy. I mean, it just feels like it's not -- it's funny because, obviously, they got occupied sort of throughout COVID. There's just people everywhere at VMC now. I don't know the percentage, but I would say that the vast majority from what -- when I spoke to Andrew Hoffman, I don't know, a number of months ago, we were talking about the rental component on the Transit City projects. We were talking about the rental rates and so on. And I mean, he was talking, from what they could tell, that everything that was to be rented is rented. And if you go up there, you sort of get the sense. And if you're there at nights, you see the lights on up and down the 3 towers.So I don't know the answer, but it's got to be substantial, Sam. I mean, I don't think there's anything peculiar going on there, like a whole bunch of investors who are unable to lease. I mean, it's on the subway. The buses are rocking, they're rolling. I mean, you've got to go up there. It's just -- if there's any, it's got to be a very small percentage. A lot, a lot of people up there now. Obviously, you've got 1,700 units, you got anywhere between 2,000 and 3,000 people coming and going out of those buildings every day.

[Sam Damiani, Director, Institutional Equity Research]

That's good to hear. The other question I had was just on the inclusionary zoning, which I guess is the reality in the City of Toronto. How does that affect the entitlement applications that you're processing at the moment?

[Mitchell Goldhar, CEO & Executive Chairman]

It will, but it's not -- well, first of all, getting into the whole politics of it, but it's not going forward as imminently as originally thought. But if and when it does, yes, it will be part of our pro forma, and it will be part of our decision to proceed.But for the most part, I mean, we were baking it in. Like, in the last number of months we were baking it in. And it's not going to -- most overwhelmingly, it will not alter our decision to go or no go. But luckily, we don't have to go anywhere. We don't have to do any of this, actually. So now we'll be baking in some of those requirements if, in fact, they get legislated.

[Operator]

The next question is from Pammi Bir from RBC Capital Markets.

[Pammi Bir, Analyst]

Just looking at the in-place occupancy, it is ticking up nicely here. Based on what you're seeing in the pipeline, what's your sense of how long it may take to get back to the prepandemic levels? I think if I go back to 2019 you were running at just over 98%. So just curious any thoughts you can share there.

[Mitchell Goldhar, CEO & Executive Chairman]

Rudy, do you want to take a shot at that?

[Rudy Gobin]

Sure. I would have thought given that the lockdown hasn't completely lifted, as you know, they've delayed it a little bit again now for restaurants and so on and clubs and so on, but for the restaurant part of our business, it's a little bit slower for sit-down restaurants. What we're seeing is so much other interest coming in. And you know from last quarter to this quarter, it was 0.3, taking us up to 97.3% and 97.6%, by the way, with executed deals. So I think it will still take a couple of more quarters to get there. But again, assuming the market stays as it's doing now and remains vibrant and the interest continues to hold, it's moving up faster than we had thought and very pleasantly surprised about what's happening and who's coming. So I don't think it's going to be long before we get back to that 98%.

[Pammi Bir, Analyst]

Good to hear. And just maybe coming back to the leasing spreads. We've talked about it on past calls. And frankly, I guess, look, the flat spreads you've telegraphed and were pretty much expected. But on the deals that you are doing today, do you feel that you'll be getting back to some stronger growth in 2022? Or is that more of a 2023 scenario in terms of the renewal leasing spreads?

[Mitchell Goldhar, CEO & Executive Chairman]

Go ahead, Rudy.

[Rudy Gobin]

I was just going to say, Mitch and I talk a lot, obviously, about leasing, the tenants, the rates, the spreads. And obviously, we want to keep the lights on, the space rented, collecting the rents and driving the NOI growth in these properties. Tenants are still feeling their way, that we're not out of the woods yet with this pandemic. And I think until we are out of the woods, we're not going to see that complete return to what I'm going to call full, full market rent.So right now, we're probably being a little bit conservative and being careful, and tenants who are opening stores are being a little bit more careful. And we will also probably find that we will have a little bit more growth rate in the rents, as opposed to doing these 10-year deals where you have bumps every 5 years, and we'll have greater bumps every year or 2, as you see in the Toronto Premium Outlets.So it's getting there, but it's not back to that norm yet.

[Pammi Bir, Analyst]

Maybe just one last one for me. I think last quarter there was indications of, call it, roughly CAD 200 million of potential dispositions in the pipeline. I think you've got CAD 90 million held for sale. Some of that did transact, I guess, after the quarter. Can you just comment on whether there's more to come from a disposition standpoint, closer to that CAD 200 million figure? And then secondly, just on the income-producing assets that are in that, call it, CAD 90 million, where is pricing coming in from a cap rate standpoint?

[Rudy Gobin]

Mitch, do you want me to go ahead with that?

[Mitchell Goldhar, CEO & Executive Chairman]

Yes, go ahead.

[Rudy Gobin]

Pammi, so 2 parts to that. So the first part of that is we're obviously not selling assets where we have intensification potential. These are noncore assets. We don't have a list of assets listed for sale or held for disposition, by the way. A lot of our smaller markets, as you know, and even our noncore are 100% leased and Walmart-anchored. So generating pretty decent cash flow.So with that said, there are those who are knocking on our doors and looking for that great cash flow and that Walmart-anchored income and not as much concerned with intensification from their organization's perspective. So we've looked at that.So in our portfolio where we have some of that noncore, maybe smaller, weaker markets, we have been looking at that. But again, the pricing is coming in better than our current IFRS, which has been amazing for what we are experiencing. So we expect that to continue in that way.And we don't have a target number that we're trying to achieve. So we will continue just collecting the rents, managing the properties as well as we can. And to the extent that those opportunities come up, we will take advantage of them. And again, only where we can have some NAV appreciation in those transactions.

[Mitchell Goldhar, CEO & Executive Chairman]

I wanted to just add something here. We've received offers for some centers in our mid-markets, and they're interesting. There are some sub-6, and I'm not talking 5.99. I mean, a good solid sub-6. But we do have very strong market share and dominate, and we really have great tenants, very strong tenants. I mean, think about it. Like, the weaker tenants, generally speaking, don't go to some of those markets because that's not where fashion goes, for example. But it is where LCBO goes and The Beer Store goes and of course all the banks. So if you look at our profile in those markets, it's very good.I don't really know that there's too many weak markets in Canada. I don't know where that notion comes up. First of all, we're not in any weak markets. I mean, Walmart and yourselves, your own institutions, look for the healthiest markets, and that's where Walmart thrives. That's where we are. We may be smaller in population, but our relative market share is exponential and higher; and hence, our occupancy.So to let go of those -- and ecommerce is not as big a factor, and there's much less retail per capita. I mean, it's not -- if you think about it and you're really understanding what's going on there, you're not looking to bail there. There are some centers that you'd want to bail in some of those smaller markets, I don't want to get into them, but not the ones we have.But we do want to manage our balance sheet. We do want to manage our energy allocation. And so there may be a price and a time when disposing of those assets might make sense given everything else that's going on, but not because those centers are, by any means, problematic.

[Operator]

We have one more question. Do we have time for that?

[Mitchell Goldhar, CEO & Executive Chairman]

Sure. One more question.

[Operator]

This question is from Dean Wilkinson from CIBC World Markets.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

1 question, 2 parts. Just given the spend that you've got ahead of you with all of the development over the next couple of years, how comfortable are you taking the balance sheet up in terms of leverage? Like, to what point? And the second part of the question is, given that the units are trading to now at above a book value, a consensus NAV view, what was the thought to be equitizing some of that spend as you look out over the next 6, 12 months?

[Mitchell Goldhar, CEO & Executive Chairman]

It's very much one of the levers. You mean selling the land versus developing it out, you mean, to raise equity?

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Either that or just going out to the market to raise equity, given that it's probably back to prepandemic levels.

[Mitchell Goldhar, CEO & Executive Chairman]

Well, look, in terms of selling, the units don't reflect the value of the lands that we own. So raising equity by issuing units may not be the right way to raise equity, compared to selling off some of the lands.We are exploring raising equity by bringing in partners to some of the lands at market. That would be obviously much more likely to be more accretive, more effective than issuing units.But yes, at some point when our units get to what we think is our appropriate NAV, which is up for discussion or up for debate, it certainly isn't where we are now, however better we are now than we were 6 months ago, we will, I mean, look at that as an option.We've got lots of levers. I mean, we don't have to do anything, which is the good news. But it's going to be the safe thing. We're going to play it safe all along the way, and we're not going to stress our balance sheet just to say we're building another building. It's just not going to happen. But we have so many levers, I don't see any limits to us executing what we've got approval for at the moment.

[Operator]

We do have one more. Is there time for one more?

[Mitchell Goldhar, CEO & Executive Chairman]

Sure.

[Operator]

This question is from Mario Saric from Scotia Capital.

[Mario Saric, Analyst]

Just maybe a question for Rudy on the operational side. If we sit back and really advancing through your strategic reviewing and budgeting and whatnot at this point. If we sit back and think about 2022 and if you had to identify one or maybe two, like, primary objectives operationally in 2022 for the organization, what would those be?

[Rudy Gobin]

The operational objectives for 2022? Well, I know that with my boss on the line, I will get to 100% leased.We have a strong tenant base, Mario. And obviously, we want to bring a lot of discipline to keeping our tenants not just happy about being in the center, but keeping our centers operating at full efficiency and capacity and also ensuring that it is primed, ready for intensification, given that's our growth mode. So everything we do with every tenant we do it with, whether it's in renewals or new tenants, it's always with a view of how do we keep the NAV growth in the property from an overall perspective growing. So it is balancing the growth in the occupancy, in the rents, in the NOI and managing that with keeping space and land use available for future growth.

[Mario Saric, Analyst]

Do you think there's been any impact to the recent spreads as a result of wanting to maintain that flexibility for intensification, going forward?

[Mitchell Goldhar, CEO & Executive Chairman]

I'll jump in, Rudy. No. Because where we're leasing, we're leasing, for the most part. We did get a lot of -- we do insist, pretty much insist on getting rights to redevelop when we do a new deal, but most of the major sophisticated tenants understand that, even if we have to give some relocation provisions or on-site relocation provisions. I wouldn't say it's affecting our rental rates. There are going to be anomalous situations where maybe the speed at which we lease up might be affected as we sort through those things, but most tenants don't decide to come because they're getting a little bit lower rent but they don't like that provision. I would say it's not really a rental rate issue.Rudy, do you have any comments?

[Rudy Gobin]

I was going to say our land use for doing what we're doing in terms of condo development, apartments, storage is not a significant amount of land, which is why the density is going to be as significant as it is. And as you know, there are lots of our projects where we have capacity to build within a built-out shopping center without impacting our tenants. And in fact, it's complementing our tenants to have this residential and other uses sitting right beside them.So it's exactly what we said. It's not in our mind, in my mind, anyway, affecting the rental rate other than -- because the people who choose to come want to come because it's the right place to be. It's the right center to be in. Walmart is there. They're coming. Now it's a question of negotiating a market rent for them being in that space and making sure we can accommodate the future use that we're going to do.And these things don't develop, Mitch talks about it all the time, the length of time it takes to get everything rezoned and built and occupied, it doesn't happen very, very quickly and it gives tenants the chance to develop their business and develop their brand and develop their own customer allegiances within that center.So we're going to just keep building it out for them as we go.

[Mario Saric, Analyst]

Got it. And maybe just one follow-up on the operational side. In some of the other asset classes, like residential, some of the [indiscernible] asset classes, there's a positive correlation between lease spreads and occupancy, perhaps a little less so between retail. But do you foresee on your march to the 100% occupancy that you mentioned, is that something that could be a catalyst in terms of improving your leases, going forward?

[Mitchell Goldhar, CEO & Executive Chairman]

Do you mean taking space off the market because we're redeveloping improving leasing spreads?

[Mario Saric, Analyst]

No, I mean as the occupancy in the portfolio inches up back to pre-pandemic levels and you just have more space to lease, does that conviction and that confidence into having more left space leased resulting in perhaps maybe being more aggressive in terms of the rent that you charge without the [indiscernible]?

[Mitchell Goldhar, CEO & Executive Chairman]

Yes, naturally. Naturally, it will. We've just come out of COVID. I mean, we're happy leasing at the rate we're leasing at. We're not being greedy, and tenants are being fair. I mean, I think it's been, I don't know, it's brought retailers and retail landlords closer together, by the way, this whole exercise. I feel like everyone is treating each other really fairly. And then I guess as things tighten up a little bit and things get back to the normal rhythm, I think there will be a lot less, meaning total square footage, but a little bit less square feet per capita, and it will result in improved rents.I have no doubt new space and redeveloped centers that have retail in them will generate higher rents than the pure sort of larger retail centers without any mixed use over the next number of years. I think you'll see some of the higher rents in those mixed-use projects as people are living on the site and shopping, living on the site and shopping on-site.

[Mario Saric, Analyst]

Okay. Maybe 2 more quick ones from me just on capital allocation. When you look out over the next 2 to 4 years, can you give us a sense of some of the ballpark estimate development spend per year and with all the completions? I know you've provided great detail in terms of the individual properties, but if we think about it holistically even over the next 5 years, how should we think about the spend and completion rate?

[Mitchell Goldhar, CEO & Executive Chairman]

Peter Sweeney, do you want to take a shot at that?

[Peter E. Sweeney, Chief Financial Officer]

I'm sorry, Mario. Just so we understand the question, are you asking for our capital spend expectations for the next few years? Is that the question?

[Mario Saric, Analyst]

Yes. So if we look out over the next 5 years in terms of your expected development spend per year and then the amount of development completion that you're looking for, high level, how should we think about that, going forward?

[Peter E. Sweeney, Chief Financial Officer]

Again, I think that the caveat here, the key items to always remember, and Mitch mentioned this earlier, is that we don't have to do any of this. We do have the opportunity to put the brakes on, on any project before it begins.But notwithstanding that, I think it's fair to say, given our current thinking, capital spending for next year at least is somewhere between CAD 100 million to CAD 150 million net. And in the year thereafter, so 2023, we would be, again based on current projections, up around the CAD 300 million level. Again, those could change, but at least for now that's our preliminary thinking for the next few years.Once we go out beyond 2023, you have to keep in mind Transit City 4 and 5 will have closed, or we expect them to have closed, number one. Number 2, the townhouse project in Vaughan. Again, units would have closed. So with the recovery of all of that initial capital and the expected profits from those various phases, the actual cash spend or cash capital requirements for these projects for 2024 and going forward may rise. So it may increase from the CAD 300 million level that we expect for 2023.But it does -- again, it will only rise in the event that our balance sheet and the metrics associated with our balance sheet tell us that we're not putting the balance sheet at risk. Otherwise, as Mitch said, we have the opportunity to hold back on things.So for now, it's still the conservative approach to spending on these projects. And we can say with some level of expectation that next year will be in the sort of CAD 150 million range and perhaps, all other things being equal, in the 2023 year doubling up on that.

[Operator]

That brings an end to our Q&A. I will pass it back to Mitchell Goldhar for final remarks.

[Mitchell Goldhar, CEO & Executive Chairman]

Thank you. And again, thank you all for taking the time to participate in our third quarter call. And of course, please reach out to any of us for any further questions. Continue to be safe, and have a good evening. Thank you.

[Operator]

Ladies and gentlemen, this concludes the SmartCentres REIT Q3 2021 conference call. Thank you for your participation. Have a nice day.