SmartCentres Real Estate Investment Trust

TSX:SRU.UN

Earnings Call Analysis

SmartCentres' Retail Growth and Leasing Success

SmartCentres REIT witnessed robust growth and strong demand from retailers, driving an increase in occupancy rates to 98.5%, and leasing success led to a 12% year-over-year increase in FFO to $0.55 per fully diluted unit. The REIT's unencumbered asset pool grew to $9.1 billion, and strong tenant relationships contributed to stable and expanding cash flows. The quarter saw improvements in rental incomes, net profits from condominium sales, and NOI growth of 2.3%, which includes a 9.8% rise from equity-accounted investments. Additionally, the company's liquidity remained solid with over $550 million in undrawn liquidity and unsecured debt stable at $4.2 billion.

SmartCentres REIT Q3 2023: Robust Portfolio and Continued Growth Amid Market Headwinds

In the third quarter of 2023, SmartCentres REIT showcased stable performance with indications of growth that are particularly noteworthy given the economic challenges of the times. The company reported an impressive 98.5% occupancy rate, reflecting a robust demand for retail spaces within their portfolio. Same-property Net Operating Income (NOI) rose nearly 2% compared to the same period in 2022, and collections remained strong at above 99%. The REIT's development ventures continued, yielding groundbreakings and construction progress across various projects including condos, apartments, industrial, and self-storage units. Of particular note, Phase 1 of the ArtWalk project commenced, alongside substantial growth in residential rezonings. CEO Mitch Goldhar reaffirmed the long-term strategy focusing on the value embedded in the company's well-located properties. Financially, the conservative balance sheet was a highlight, with debt levels slightly reduced to 43% and liquidity reported in excess of $800 million.

Expansion Through Development: Creating Value from Existing Assets

SmartCentres' development pipeline is robust, with numerous projects across diverse real estate segments actively contributing to revenue. Noteworthy among these are the nearly completed Transit City condo towers and The Millway apartment building, which is observing strong leasing activity. The company also reveled in the strengthening of their retail offerings, exemplified by Toronto Premium Outlets' top-tier performance in Canada. The REIT's approach remains judicious—only launching new phases or pursuing developments with complete funding secured. This calibrated growth, paired with consistent efforts to maximize the potential of their existing lands, ensures risk mitigation against the backdrop of an unpredictable economic landscape.

Financial Fortitude and Profitability: A Delicate Balance Amid High Interest Rates

CFO Peter Slan detailed the financial tenacity of the REIT, reporting a Funds From Operations (FFO) increase of 12% and an improvement in the payout ratio. The third quarter saw meaningful profit from the closing of condominium units within the Transit City developments and a stable increase in NOIs across the board, despite headwinds such as rising interest rates. Notably, the REIT prides itself on a substantial unencumbered asset pool valued at $9.1 billion. Debt management displayed discipline, with targeted repayments and a prudent debt capital structure that sustains their growth initiatives while maintaining flexibility.

Market Resilience: Retail Demand Surges and Tenant Confidence

SmartCentres REIT has encountered a surge in tenant demand with increased leasing activity which is driving rental income. The REIT reported over 300,000 square feet of new construction for retail in addition to other leases. Tenant mix remains robust, with strong covenants contributing to the REIT's resilience. However, executives acknowledged the reality of the retail leasing boom slowing down eventually due to market saturation and other economic factors, while stressing their plans to maintain long-term growth.

Development Strategy: Mindful Pausing and Risk Mitigation

In light of the current economic environment marked by high interest rates and construction costs, SmartCentres has adopted a cautious approach to development. While the groundwork has been laid for several projects, including obtaining necessary zoning and site plan approvals, the REIT has elected to delay certain projects to avoid starting construction during less-than-optimal market conditions. This strategic pausing is an exercise in risk management, aiming to avoid the pitfalls that some developers might face due to overleveraging during uncertain times.

Looking Ahead: Evaluating Retail Growth and Development Prospects

As SmartCentres REIT evaluates the future, the question of maintaining recent superior rent growth becomes central. While the company has benefited from a shift in tenant preference post-pandemic—a movement out of enclosed malls and into open-format centers—this level of growth might not be sustainable in the long run. Nonetheless, the REIT remains optimistic about its ability to continue driving traffic and sales through its retail centers, thereby laying a strong foundation for future growth opportunities. Anticipated challenges include the high costs of construction and interest rates, which will require SmartCentres to remain adaptable and innovative in managing their development projects and financial strategy.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, ladies and gentlemen. Welcome to the SmartCentres REIT Q3 2023 Conference Call. [Operator Instructions] I would like to introduce Mr. Peter Slan. Please go ahead, sir.

[Peter Slan, executive]

Thank you, operator, and good morning, everyone, and welcome to our third quarter 2023 results call. I'm Peter Slan, Chief Financial Officer. I'm joined on today's call by Mitch Goldhar, SmartCentre's Executive Chair and CEO; and by Rudy Gobin, our Executive Vice President of Portfolio Management and Investments. We will begin today's call with some comments from Mitch.Rudy will then cover some operational items, and I will review our financial results. We will then be pleased to take your questions. Just before I turn the call over to Mitch, I would like to refer you specifically to the cautionary language about forward-looking information, which can be found at the front of our MD&A materials. This also applies to comments any of the speakers make today.Mitch, over to you.

[Mitchell Goldhar, executive]

Thanks Peter. Good morning, and welcome, everyone. Apologies for the time. I thought we might want to get an early start to our and your days today. As they say, time waits for no one and 2023 continues to move full steam ahead and in a challenging market with economic headwinds. That being said, one thing you can continue counting on is the stability and cash generation of a portfolio that was built for headwinds and heavy weather. At 100 Walmart strong, SmartCentres value-oriented portfolio continues to demonstrate why there is no substitute for well-located dominant centers built in the midst of residential communities.Existing and new retailers continue to demand more space, building on the momentum the first half -- of the first half of this year, with the portfolio achieving 98.5% occupancy by the end of the quarter. Extension rates are up 2.3%. Same-property NOI for the three months ended the quarter higher at near 2% compared to the same period in 2022. Collections remain above 99% as demand from retailers for SmartCentres is strong with their improved in-store offerings, experience as well as their omni-channel platforms. And our retailers are well capitalized for modernization and expansion. In fact, we are signing deals for new-build retailers which Ray will speak to shortly.Toronto and Montreal Premium Outlets remains fully leased with 12-month rolling sales continuing to set records moving 2023 EBITDA to record levels. Well-priced luxury brands continue to be in high demand and in fashion, if you will, with consumers being busting from longer distances, take advantage of the great mix of designer brands. Toronto Premium Outlets is now in the top 3 best sales performers in Canada, and traffic continues to grow. Built on this stable and growing cash-generating platform, we continue to develop on the significant and very mixed use permissions already in place.Currently under construction, we have condos, apartments, industrial, self-storage, townhouses and retirement in the GTA, Ottawa and Montreal areas. In the quarter, groundbreaking commenced on Phase 1 of our ArtWalk project, comprising 320 sold-out units right here in the VMC. We also commenced construction of over 300,000 square feet of self-storage and 200,000 square feet of retail with details listed in our MD&A. On land use permissions this quarter alone, we successfully achieved residential rezonings for 4.5 million square feet in Ontario and Quebec combined, bringing our year-to-date total to over 7.7 million square feet.We will continue to stay focused on obtaining these permissions, which is no small task, while simultaneously getting ready to launch future residential phases when appropriate in the appropriate markets and only with full funding in place. Recall that in 2022, we achieved over 6.1 million square feet of new mixed-use permissions in urban locations with high demand for housing. So 2023 is already exceeding our 2022 permissions, and we have no indication of slowing down. Given that development is our long-term vision and strategy, we are committed on unlocking the tremendous value embedded in the land we already own, which, as a reminder, sits in the midst of highly populated communities in nearly every major market in Canada.While you can read the details of many of our developments planned for the portfolio on our MD&A here are a few quick highlights which are currently underway. Construction of the fourth and five Transit City condo towers at SmartVMC comprised 45 to 50 stores, respectively, is wrapping up the 274 units closing in the quarter, generating $6.9 million in profits, which Peter will speak to more in a moment. Two, also within SmartVMC, The Millway, our 36-story apartment building is nearing completion with 67% of available finished units already leased.And we expect the last remaining batch, 127 of unfinished units to be completed by year-end and demand remains strong given the housing supply and current interest rate environment. Three, our apartments in Mascouche, suburb of Montreal, which opened in Q3 2022 continues to show improved leasing and stands at 83% leased. Four, our second tower is in the center of [indiscernible] was completed in Q3 of this year, opened July 1 and is already 82% occupied with the first tower at 99% occupancy.Five, construction of our first industrial new-build, a 229,000 square foot 40-foot clear building on 16 acres of a 38-acre site on Highway 7 in Pickering was completed in the quarter, with half of the space having been turned over to a tenant and the leasing interest on the remaining space remains strong. Six, construction of a new senior residential and apartment building totaling 402 units in Ottawa, Laurentian, which was temporarily delayed has now resumed with a revised completion expected in early 2025.Seven, having completed earthworks and site servicing last quarter and with our two partners, construction is moving along quickly on our 174-unit Vaughan Northwest townhouse project with closings planned for the second half of 2024. Eight, for our self-storage portfolio, we announced last quarter that we achieved a milestone of 1 million square feet built space with our partner, SmartStop. During this quarter, we commenced construction of two additional facilities in Toronto and Stoney Creek for a combined 300,000 square feet.Nine, lastly, we are continuing discussions with potential buyers and new partners and selected assets within the portfolio, which will assist in funding development, debt reduction and diversification. But only a small part of the portfolio, we see this as an ongoing capital recycling program, which will not only strengthen our balance sheet but derisk future cash flow streams. You can see this current construction activity is in our expanded disclosure in the MD&A as well as the list of the additional projects scheduled to commence construction in the next two years.While we only just resumed a limited number of projects and delayed a few others, owing to current market conditions our efforts in obtaining additional residential land use permissions continues in a normal course, which enhances value in our lands. We will, as always, remain diligent in clearing any risk hurdles before moving forward with any project, which I will remind you lies within the underutilized lands we already own. On the financial side, Peter will provide a full update in a minute, but let me emphasize a couple of pertinent items.Maintaining our conservative balance sheet remains a significant priority for us, along with maintaining a significant unencumbered pool of assets, which now stands at over $8 billion. Our debt level has reduced slightly to 43%. Liquidity remains in excess of $800 million, and we will continue to enhance this portfolio with the same degree of care and attention to detail, as always, and with the tremendous support we continue to receive from our lenders and partners who we greatly appreciate. On a final note, many thanks and appreciation to our great team of associates, partners, contractors and of course, our tenants for your commitment and dedication in helping us deliver on this long-term vision.And with that, I will turn the call over to Rudy.

[Rudy Gobin, executive]

Thanks, Mitch, and good morning, everyone. The third quarter continues to build momentum with strong interest from some new entrants as well as from our existing family of retailers, TJX, Canadian Tire banners, pharmacies, pet stores, banks, dollar stores, liquor, QSR, and full line grocery, all remaining very active wanting to secure vacant space in our high-traffic Walmart-anchored centers. And given our proximity to residential communities, we're getting a number of new discounters, entertainment, gaming, logistics and light industrial users willing to join in our mix of tenants at full market rents, and I might add with solid security in place.Demand for new-build retail is on the rise again with some significant grocers, TJX brands, Michaels, Golf Town and banks and not only in major markets. We have signed when we were signing deals in Alliston, Bracebridge, Carleton, Lachine, London and Orleans. And these all collectively will add in excess of 300,000 square feet of new-build retail. In addition, as inflation begins to subside, consumers have come to learn that they can continue to depend on the quality and pricing of the value-oriented retailers that make up the SmartCentres families of stores.For SmartCentres, the strategy is clear and our portfolio continues to deliver on plan, with a sector-leading 98.5% occupancy over 99% collections as Mitch mentioned, 86% of 2023 renewals already completed by the end of the quarter, near 2% same property NOI growth and over, as I mentioned, 300,000 square feet of new leasing. With the pandemic hopefully behind us for the most part, retailers have learned some great lessons in selecting high-traffic locations for adding stores, considering their sizes of stores, remerchandising their mix, proximity to complementary retailers and convenience for their customers, all of which we've been building and saying about SmartCentres for 30 years.The strongest retailers continue to evolve and reinvest Walmart, Canadian Tire, Winners, HomeSense, Dollarama and major grocers are all reinvesting heavily in their store network and simultaneously growing their footprint. For SmartCentres, our tenant relationships are vital to us, and so we adapt and serve the changing real estate needs of our retailers. And as a reminder, virtually all of the SmartCentres locations across the country includes a full grocery, easy and accessible at-grade parking and prices that consumers know they can afford. With that said a few highlights and emerging trends.Increased demand from services type retailers are becoming difficult to accommodate when we are 100% leased in so many markets. So we love to add parcels for day care, pet stores, personal care, beauty supplies, spas and hair salons. Combined with entertainment such as indoor golf, gaming, Rocket Sport facilities, you can see a one-stop shop for families who value their time. Our Premium in Toronto and Montreal outlets, which are 100% leased, continue to exceed our expectations and dominate their markets with continued improvements in reported sales, which are now exceeding $1,200 per square foot. Growth in QSR concepts continues with demand for U.S. concepts such as Chick-fil-A, Chipolte driving higher rents.In many markets, we are simply out of space, but our national platform allows us to fill stores in some markets while we build new stores in other markets, developing bigger relationships quickly. And remember, if you're entering Canada, you want a landlord who can offer scale on a coast-to-coast platform. This platform, 100 Walmart Strong, 60-plus TJX banners, over 70 Canadian Tire banners, 50-plus full-line grocers, over 60 Dollarama, 65-plus pet stores and over 100 banks and financial institutions, and I can go on, provides the confidence that tenants have with us.We deliver what we say and we do it consistently across this country. All in all, the third quarter's operating results clearly delivered on every metric, occupancy, NOI growth, cash collections, renewals and an improving array of tenants serving the daily needs of each community, culminating for us in a stable and growing cash flows.With that, I will turn it over to Peter.

[Peter Slan, executive]

Thanks, Rudy. The financial results for the third quarter once again reflect the strong performance in our core retail business and the continued contribution from our mixed-use development portfolio through the ongoing closings at the Transit City 4 and Transit City 5 condo towers in the Vaughan Metropolitan Centre. For the 3 months ended September 30, 2023, FFO per fully diluted unit was $0.55, an increase of 12% from the comparable quarter last year and unchanged from last quarter. These results include $6.9 million or $0.04 per unit of profits from the closing of 274 condominium units at Transit City 4 and 5.Higher rental income was driven by increases in base rents primarily due to contractual rent step-ups, plus further lease-ups and an increase in percentage rents and rents from self-storage and apartment properties, all partially offset by higher interest expense. Our FFO also includes a noncash unrealized loss of $0.03 per unit from the total return swap. As a result, FFO with adjustments, which excludes both the condo profits and the TRS loss was $0.54 per fully diluted units for the quarter. Net operating income for the quarter increased by $2.9 million or 2.3% from the same quarter last year.Including our equity accounted investments, NOI increased by $12.8 million or 9.8%, largely due to condo closing profits, higher rental renewal rates, new leasing activity and continued strong performance at our Montreal and Toronto Premium Outlet centers. Same property NOI, including equity-accounted investments, increased by $2.6 million or 1.9% compared to the same period last year. Leasing activity remained strong during the quarter, which is expected to drive continued modest growth in NOI over the balance of the year.Our occupancy level, including committed leases, was 98.5% at the end of Q3, an increase of 30 basis points from the prior year and 40 basis points -- I'm sorry, 30 basis points from the prior quarter and 40 basis points from a year earlier. In terms of distributions, we maintained our distributions during the quarter at an annualized rate of $1.85 per unit. The payout ratio to AFFO for the 3 months ended September 30, 2023, was 96.1%, an improvement from 101.6% for the same period a year earlier.As I mentioned, during the quarter, we closed on the sale of 274 condominium units in our Transit City 4 and 5 developments for gross proceeds at the REIT's 25% share of $36.5 million and net profit of $7.4 million. The remaining 106 units at TC 4 and 5 are expected to close in Q4. Year-to-date, we have booked net profits on these two condo towers of $22.7 million on gross revenue of $122.8 million, all at our share, resulting in margin of 18.5%. Adjusted debt to adjusted EBITDA was 9.7x in Q3, representing continued modest improvement from 10.3x at year-end and 9.9x last quarter. The improvement was as a result of both growth in EBITDA and the repayment of approximately $118 million of debt during the quarter, including repayments under equity accounted investments.Our debt to aggregate assets ratio was 43% at the end of the quarter, a 20 basis point improvement from Q2. We expect to continue to repay debt over the coming quarters, particularly with the profits from condominium and shortly, townhouse closings. However, as construction proceeds on some of our larger development projects, short-term borrowings will begin to grow. Our unencumbered asset pool increased to $9.1 billion in Q3 from $8.8 billion last quarter. Our unsecured debt of $4.2 billion was virtually unchanged from the prior quarter and represents approximately 82% of our total debt of $5.1 billion.During the quarter, we recognized a fair value gain on our investment properties portfolio of $42.7 million, including properties under development. This adjustment is the net of several factors moving in opposite directions. For certain properties, primarily non-Walmart-anchored shopping centers in smaller markets, we increased our cap rate assumptions by 15 basis points. These changes, however, were more than offset by the improvement in valuations driven by rising rental rates and increased leasing activity, particularly at our Toronto Premium Outlet property.We also increased the fair value of our self-storage projects as a result of third-party appraisals that we received to support a portfolio financing of five such properties that we completed just subsequent to the quarter end. From a liquidity perspective, we are very comfortable with our current liquidity position with more than $550 million of undrawn liquidity as at September 30, including our share of equity accounted investments and cash on hand, but excluding any accordion features. The weighted average term to maturity of our debt, including debt on equity accounted investments is 3.7 years.Our weighted average interest rate was 4.13%, an increase of 10 basis points from the prior quarter. Our debt ladder remains conservatively structured where the most significant aggregate maturities are in 2025 and 2027. Approximately 82% of our debt is at fixed interest rates. Next, I want to touch briefly on our development projects that are underway. We have updated the new disclosure that we began providing in our MD&A late last year, focusing on those development projects that are either currently under construction or where site works have commenced. As you can see on Page 15 of our MD&A, there are currently 13 such projects, up from 10 last quarter.There were four additional projects that commenced this quarter and one project that came off the list upon completion. The new ones are two self-storage projects, one on Gilbert Avenue in Toronto and the other in Stoney Creek, the ArtWalk condominium project in the Vaughan Metropolitan Centre and the Canadian Tire Retail project on Laird Avenue in Toronto. The project that came off the list was the second phase of the purpose-built residential rental project in Laval, comprising 211 units where construction was completed in July of this year.The REIT's share of the total capital cost of these projects is approximately $790 million with the estimated cost to complete standing at $386 million. We expect several of them to be completed by the end of this year, including Transit City 4 and 5 and The Millway rental apartment project and several more to be completed in 2024, such as the self-storage projects and the first phase of the Vaughan Townhouse development.The recently started larger projects will take a little longer, of course, with the Laird project expected to be ready for occupancy in early 2026 and an estimated completion date for ArtWalk in the first half of 2027. Lastly, our self-storage joint venture continues to perform well and ahead of our initial expectations. Occupancy is strong at approximately 92.3% for those facilities that have been opened for at least one year with gross rental revenue of approximately $5.1 million year-to-date at the REIT's 50% share.And with that, we would be pleased to take your questions. [ Mitch ] will moderate the Q&A. So operator, over to you for the first question on the line, please.

[Operator]

[Operator Instructions] And your first question comes from the line of Sam Damiani from TD Cowen.

[Sam Damiani, analyst]

I just wanted to, I guess, clarify on the new retail deals that you're talking about. Obviously, Laird is now an active construction site, which is great. But I just want to clarify, Rudy, what you said about 300,000 square feet plus of new deals. Is that meant for new construction of retail or is that sort of just new tenants coming in? I just wanted to clarify that.

[Rudy Gobin, executive]

Both Sam. We have over 300,000 square feet of new construction that we are going to be building. And in the quarter, if you look at the space being leased up in terms of vacant space and churn, we have even nearly 300 or slightly over 300 as well. So it's both.

[Sam Damiani, analyst]

Okay, coincidence. And does that 300 include the Laird or is that just sort of the other deals that you've more recently?

[Rudy Gobin, executive]

It does not include Laird because Laird was signed prior to the quarter. So these are deals that are signed or to be signed shortly.

[Sam Damiani, analyst]

And so that would be in theory added to the construction -- active construction table in the coming months or quarters?

[Rudy Gobin, executive]

Exactly. And exactly and to our -- and will add to our total portfolio square footage on completion, yes.

[Sam Damiani, analyst]

And then, I guess, any guidance on the yields that you're targeting or expecting on that incremental capital for the new retail, excluding Laird?

[Rudy Gobin, executive]

Certainly, we -- as I mentioned some of the tenants' names that are coming, we are -- we are all of them reviewed and approved all the new pro formas updated for new construction costs and interest rates and so on. So as you can imagine, all of them are accretive to the REIT. So with big name tenants, as I mentioned, in terms of the TJX banners, grocery stores, Michaels, Gulf Towns and so on and solid covenants I might add.

[Sam Damiani, analyst]

Okay. That's helpful. And great to see. I mean it's obviously a very strong retail leasing environment in Canada. But are you seeing any signs of vulnerability or weakness in the industry in any tenants you're starting to put together a watch list that might be growing or expecting to grow over the next little while?

[Rudy Gobin, executive]

Yeah. As you know, we do -- Sam, as you know, we do have -- and Mitch you may want to add to this too. We do have a watch list that we monitor. A lot of the tenants that were on that list were unfortunately addressed as part of the pandemic, as you know, for some of these tenants. And they went into -- either went into CCAA, closed down a lot of locations. The one last one that was remaining was David's Bridal, as you know.And David's Bridal went in and came out of the CCAA process. And there are four locations with us all remain open at full rent. So they are back at it, doing well, they have restructured. And as of right now, we've dealt with sort of all of the tenants that we had some concerns over by either recapitalizing them or creating flexibility in their leases. So as of today, I'm going to find some wood to knock on, we don't have that concern with the portfolio that stands now.

[Operator]

[Operator Instructions] Our next question comes from the line of Pammi Bir from RBC Capital Markets.

[Pammi Bir, analyst]

Maybe just coming back to the comments around dispositions. You've been talking about this for a few quarters now. Can you just comment maybe on the mix of properties that are in those discussions? And at what point do you think you might see some deals move forward? And just curious if the current environment of higher rates is perhaps maybe still in the process down at all?

[Mitchell Goldhar, executive]

Yeah, it's Mitch. It's pretty -- well, it was pretty quiet there for a while. I mean, obviously, more things were not clear in the market in terms of potential sales, and I'll get to which ones are candidates. And now there's a little bit of life there, I would say. And it's primarily in our retail. I mean, we would be open to selling specific assets on the right terms. So there's a little bit -- there's a little bit of activity going on with respect to that.That's the quickest and cleanest and easiest. You would probably some of the profiles of those would be that probably isn't too much future development potential on those. But nevertheless, as you've heard, the occupancy are high. So the sale of very good recurring reliable income. But as I said, on the right terms, we would -- and then in terms of bringing is selling pieces of our densities or well let's start with that one. That's been pretty quiet. So a condo developer buying one of our zone sites right now is not something we're budgeting for -- bringing in a partner -- institutional partner for any of those developments is a little better probability, but not high probability and then bringing in partners for rental.That was what we were most active with a year or so, 1.5 years ago. But then quiet -- there's a little bit of that interest and life in that interest and you're back on. And there are some developers in certain parts of the country that are inclined for rental look in Quebec were -- we do have some discussions going on with potential partners for some of our rental buildings as opposed to the more passive institutional investors that have gotten a little bit quieter -- so that's the summary.

[Pammi Bir, analyst]

Just maybe coming back to the organic growth, stability in the business. Leasing spreads picked up a bit. Vacancy is obviously pretty tight in the portfolio and you're putting up some better overall organic growth than you have historically. With that backdrop and all the comments that were made around leasing in the pipeline, does it seem, though, at least maybe for the next maybe year or perhaps longer that maybe the REIT is in a better position to deliver some organic growth that is it above that sort of exceeds long-term levels of, I think, around 1% or so?

[Mitchell Goldhar, executive]

Yes. No, it feels that way. We're not -- some of it is actually a little bit of a surprise. We did anticipate a resurgence in our type of retail, but it's even a little bit stronger than we had budgeted for. So I would say the short answer is yes. I think we may see our type of bread and butter, our type of retail centers, producing -- contributing to higher than historic average internal growth rates.I think part of it really is, I mean, retailers did sit back for a long time, not just like we made before the pandemic. Just trying to understand where e-commerce was going to go and for a whole bunch of reasons. Certainly, e-commerce is here stay, but the visibility on it and the split and the cost is becoming more -- resellers more confident in terms of where the -- where that's going and how much control they have over it and what they'd like to see. So those are some of the reasons, I think, for this higher than average internal growth rates in the last five years or so.

[Pammi Bir, analyst]

That's helpful. Just maybe one last one. Just with all this -- some of the, I guess, headlines around developers and some financial issues that have come up through this steep move up in rental rates, et cetera, and development costs. Can you -- and maybe aside from the group selection issue on one of your projects. Can you just comment on maybe the health, your confidence analysis, some of your investment partners, development partners and the security position on any projects that are jointly being developed?

[Mitchell Goldhar, executive]

I mean we don't have a lot of partners. So we have a few partnerships -- most of the REITs partnerships are [indiscernible], I think, probably overall first that's -- that's a shaky weak covenant right there. But other than that I think some -- most of them are pretty good. Our other partner, obviously, SmartStop and I think the majority of Smart a lot of -- I mean SmartStop, our visibility on SmartStop is on the funds we're with them on, and they do they have good returns. They're quite accretive for us, and we know for them. So if the rest of what they're doing is similar to what they agree with us, I'd say that they're -- they're stronger than they were when we started partnering with them.And remember, they're an operator, and it's a bit of a machine. So that, I don't think we have too many concerns about. I mean generally out there, there's kind of have to be some casualties for sure. They naturally always are with respect to these situations -- anyone with high levels of debt and weaker tenants, I mean that's very [indiscernible] sensitive ecosystem. So I think all the years of trying to plan for heavy weather and have these strong covenants in the long term in the low levels of debt are 4x like this and those who didn't plan for this, it's kind of too late. So I'm sure there'll be -- probably be a couple of [indiscernible] on the side of the road -- before this is over.

[Operator]

Your next question comes from the line of Dean Wilkinson from CIBC.

[Dean Wilkinson, analyst]

Mitch, I think we all wish we could be a shaky a covenant as you. Peter, I just want to clarify, did you say that the margin on those condo completions was 18.5%.

[Peter Slan, executive]

Yes, I did.

[Dean Wilkinson, analyst]

Okay. Maybe a question for Mitch. How does that 18.5% compared to sort of your historical experience with development yields? And do you think that there's a little pressure going forward just given the high input costs, construction, labor, all of those components there?

[Mitchell Goldhar, executive]

For sure. I mean, that was a big building. I mean we max out with pricing either. I mean, so for sure, I mean, you're spot on. I mean, returns will not be -- the rates are higher and returns are going to be low. So that's what's going on which is -- other than people who get caught, I mean other than the underlying need for housing purely from a disciplinary -- discipline point of view and reality check point of view, it's probably not a bad thing. You'll probably see construction prices down and be more sustainable. You'll see sale prices come down, and hopefully, land prices will come down, but those who are caught in this there'll be something for sure.But I think in the interim, as we get there, as these adjustments have to pass through the system, so to speak. I think returns will be squeezed, as you said. [Technical Difficulty] I mean, the peak out, you can never plan that, especially in the building that takes 36, 39 months to build. You can't plan it, but there's guys who -- but the flip side is those same guys or probably some of the guys are going to be caught down. So it's kind of all averages at the end. That's why I like to just play it for more long-term with everything, including our tenant mix and such and such. But 18 plus is a very, very, very handsome size [Technical Difficulty].

[Dean Wilkinson, analyst]

Yeah, even in these rate environments. I guess at the end of its land basis matters more than anything. That's it. I will hand it back.

[Operator]

Your next question comes from the line of Lorne Kalmar from Desjardins Capital Markets.

[Lorne Kalmar, analyst]

Maybe just quickly on the rent growth. Sort of the 9 months really jumped versus, I guess, what you guys had in the 6 months at the end of June 30. I was just wondering if you could give a little bit of color because it seems like it was a pretty sizable jump quarter-over-quarter.

[Rudy Gobin, executive]

Lorne, yeah, the -- we are still -- I don't know, we are still benefiting, if you will, from tenants wanting to leave the enclosed mall. So as you see, our occupancy is up and we have tenants who prior to the pandemic would have left us to go into an enclosed mall. And now some of those same tenants are asking to come back in. And with our low operating costs, what we're finding is -- the existing tenants here and new tenants are asking for any of the vacant space that's available in our portfolio.So you have two things happening at the same time. You have an increase in demand from existing tenants. You have an increase in the new tenants categories coming in. And then the last part I would think that's making up this surge is the fact that most tenants want to come in, in the third quarter before fourth quarter Christmas sales, seasonal sales kick in. So they can get a sort of head start in the market. They don't want to come in, in the first quarter of the year when everybody has already spent their wallets. So the strength was a little bit surprising, as Mitch mentioned, but very welcome for those reasons that I just mentioned.

[Lorne Kalmar, analyst]

I can't imagine you be complaining too much about something like that. Is that sort of a good -- because I'm just even looking like even after -- back in 2022 through the 9 months, it wasn't as materially higher? Like is this sort of a mid-single-digit rent growth range kind of the go-forward expectation for the portfolio?

[Rudy Gobin, executive]

I'd say that would be a combination of factors. Sorry, Mitch, go ahead.

[Mitchell Goldhar, executive]

Sorry. Go ahead, Rudy. I'll comment [indiscernible].

[Rudy Gobin, executive]

Yeah. I was going to say, again, it's a function of a couple of things. One is coming off the sort of pandemic years when we were a slower growth in 2020, 2021, 2020 to, if you will, we're leveraging off of a lower base. So a little bit of that will be that one. And obviously, we're hoping that it continues. It can't continue -- those bumps will not continue forever, obviously. But we're coming off a little bit of a lower base, and we're coming off a lease up in our portfolio. So as we lease up, we will obviously never exceed 100%. So at some point, we will slow down because we're being careful about covenants, and we're being careful about market rents and so on. So maybe a little bit of that is temporary, but I would say for the most part of that, that should continue. Mitch, sorry.

[Mitchell Goldhar, executive]

No, I would just add that no, I don't think we'll be able to keep that up for like -- if you're thinking okay, [Technical Difficulty] go on us for years. I think it's kind of a little bit [indiscernible]. If you look at what we're negotiating right now, it's really very, very fundamental stuff. But just -- I think for the purposes of your question, I mean it's kind of one for years.

[Lorne Kalmar, analyst]

Fair enough. I guess all good things must come to an end. But I guess it's good to see even in the context of, I guess, kind of the concerns that retailers are still able to absorb these types of rental rates like that must be encouraging for you guys?

[Rudy Gobin, executive]

Absolutely.

[Mitchell Goldhar, executive]

Yeah. I mean -- we don't like it, to be honest, they can and for sure, but we're at this moment. It's just -- I don't want to get into it but you guys get it. It's -- the cost of construction is still high and retailers know it. And interest rates are high. So it's maybe a little bit of that. We are a discount minded value-oriented network, but nobody can ignore construction costs and interest rates where they do add number to rental rates at the moment, deals that are done in the [Technical Difficulty]. I must say that in the future, even though I don't think we'll keep these rates, so we'll keep them up for a while for sure.I think it's going to be very -- I think what we're doing now is we also redoubling our centers, like we didn't get into it here, but we -- the deals we're doing right now, when you see what they will do to existing centers, which are already solid, it's going to be -- you're going to see strong -- so you're going to see even stronger SmartCentres in terms of just overall traffic and sales on site in the next few years in a lot of places. So that begets things like traffic begets traffic. And so what that may mean in terms of future growth and what opportunities that may bring -- I think it's hard to predict, but just linear straight line yeah, you can't go on forever at these rates.

[Lorne Kalmar, analyst]

Okay. And then just last one for me, flipping the condo side of things. You guys obviously did pretty well in the first phase of the ArtWalk, but there has been -- in terms of [Technical Difficulty] anybody on the call, news of some issues with slowing sales [Technical Difficulty] sort of your sort of plans at all? And have you seen any of it or is it a concern for you for the projects that you're looking to bring to market?

[Mitchell Goldhar, executive]

Pricing is huge. We're not going to commence a condo project, but basically, other than ArtWalk at the moment, which is sold out the units that we put on the market, it's priced well got sizable deposits. I mean if you were starting right now from scratch considering in market somewhere, I mean what we have considered, we've delayed them. We're not going to do that even though we are ready to go. We have site plan approval. We have the zoning and site plan approval in a few places, meaning we can go in from building permits, go-to-market, sell, but we're delaying them. It's a bad thing.The bad thing would be if we had started them. And we had 20 stories up at 3 levels of underground, but we don't anywhere, and we don't for a reason. But -- so yeah, we're -- it impacts. It certainly impacts us. And then I hope we're not the only ones because it's the way markets cool off and doesn't help housing [indiscernible]. There's other mechanism for that. But it certainly is overall good for cooling things off.

[Operator]

And your next question comes from the line of Shalabh Garg from Veritas Investment Research.

[Shalabh Garg, analyst]

So my question, sir, on the fair value gains here today. They seem to be driven by NOI growth and stable cap rates. And in terms of the peers have raised their cap rates through this year. Any color on what's helping you keep those cap rates stable?

[Mitchell Goldhar, executive]

I guess Peter, do you want to -- I don't know, you want take that here?

[Peter Slan, executive]

Sure. I'll start and then maybe Rudy will add a bit of color. I think you're absolutely right Shalabh, the biggest driver of the fair value gains was NOI growth. So it's not like we adjusted the cap rates for the vast majority of the portfolio. They remain stable. We chose to do that after consultation with a couple of different third-party appraisers that we use each quarter plus our own internal valuations group, plus the valuations team at our auditors. And so it's extensively reviewed. And so it was mostly driven by the increased leasing activity, the increased occupancy and the higher NOI that you've seen. Rudy?

[Rudy Gobin, executive]

Yes. You will note that Peter mentioned earlier also that we did increase cap rates. If you look at some of our peers who were selling properties in the market, they're selling enclosed malls or weaker properties in weaker markets, our properties in even smaller markets and secondary markets are Walmart anchored. And for the vast majority of them, they're 100% leased because there is so much demand for space in those centers. So when we look at our properties in these smaller markets that were not Walmart-anchored -- that's what Peter mentioned earlier, where we increased the cap rates by the 15 basis points to reflect what our appraisers -- our third-party appraisers were telling us made more sense. But the growth in our NOI and leasing just appraisals that we did complete during the quarter led to that increase in our IFRS value, yes.

[Shalabh Garg, analyst]

Okay. That's really helpful, especially the color on open-ended bonds. So another question I have is on the [indiscernible] and maintenance CapEx, which is again up year-over-year. So I understand it's related to some roof work and maybe you had attended to some new leasing. So I just want to get a sense of exactly what's driving it and what to expect in '24, 2024?

[Rudy Gobin, executive]

Yeah. I think that is actually a good run rate for 2024. Our portfolio is probably the youngest in the industry from a design and from a build perspective. And we are certainly built in a way that it is very efficient, very low-cost maintenance, very, I'm going to call it, ESG-friendly low cost to consumers and our tenants as well. So when you look at how these were built, there isn't a significant amount of money because we don't have enclosed space to maintain and units to maintain -- our tenants maintain their own space.Our tenants maintain their HVAC systems and so on. We look after the lots and the roofs. So the run rate you saw for 2023 is probably a good run rate going into future years. No, no, I was going to say, remind you, I don't know what that number is, but it represents probably less than 0.2 of 1% of our value of our portfolio because of how new this portfolio is. So just in terms of how we -- when we do our valuations and we build in CapEx into those valuations, that's what our appraisers are telling us as well.

[Operator]

[Operator Instructions] And there are no further questions at this time. I would like to turn the floor back over to Mitch Goldhar. Mitch?

[Mitchell Goldhar, executive]

Yeah. Thank you so much, and thank you all for participating in our Q3 analyst call. Of course, please feel free to reach out to any of us if you have any further questions in the meantime. Have a great day. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this concludes the SmartCentres REIT Q3 2023 Conference Call. Thank you for your participation, and have a nice day.