First Capital Real Estate Investment Trust (OTC:FCXXF) Q3 2022 Earnings Conference Call November 2, 2022 2:00 PM ET
Corporate Participants
Alison Harnick – SVP, General Counsel and Corporate Secretary
Adam Paul – President and Chief Executive Officer
Neil Downey – Executive Vice President, Enterprise Strategies and Chief Financial Officer
Jordan Robins – Executive Vice President and Chief Operating Officer
Conference Call Participants
Mario Saric – Scotia Capital
Sam Damiani – TD Securities
Pammi Bir – RBC Capital Markets
Tal Woolley – National Bank Financial
Dean Wilkinson – CIBC World Markets
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the First Capital REIT Q3 2022 Results Conference Call. [Operator Instructions].
I would like to turn the meeting over to Alison. Please proceed with your presentation.
Alison Harnick
Thank you, and good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today’s call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements.
A summary of these underlying assumptions, risks and uncertainties is contained in our various securities filings, including our Q3 MD&A, our MD&A for the year ended December 31, 2021, and our current AIF, which are available on SEDAR and our website. These forward-looking statements are made as of today’s date and except as required by securities law, we undertake no obligation to publicly update or revise any such statements.
During today’s call, we will also be referencing certain financial measures that are non-IFRS measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the REIT’s performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this conference call.
I’ll now turn the call over to Adam.
Adam Paul
Thank you very much, Alison. Good afternoon, everyone. And thank you for joining us today for our Q3 earnings conference call.
In addition to Alison, with me today are several members of the FCR team including Neil Downey and Jordi Robins, who you will hear from shortly.
Before we get into the quarterly results, I’ll start with commenting on some of the strategy work that the Board and Management team have recently announced. On September the 15th, we followed through with our promise to unitholders and announced the full restoration and doubling of our distribution. Going back to January of 2021, the Board made the decision to reduce the distribution by 50%. We were clear at the time that this would be temporary and was being done to provide the trust with additional financial flexibility in the face of new government mandated COVID-related closures in several regions in which we operate.
We were also clear that subject to the duration and ultimate economic impact of the pandemic, the Board believed the reduction would be in place for a period spanning approximately 2 years. There were several factors behind our decision to restore the distribution last month. Firstly, the impact of COVID on our business is now behind us. This is supported by the fact that for several quarters now, we have reported strong and improving operating results.
Second, and this may not be fully appreciated. Given our tax profile, we have very little flexibility other than to restore our distribution without compromising our REIT status. And finally, this announcement fulfilled the pledge that we made to unitholders nearly 2 years ago. Last month, we announced the details of our enhanced capital allocation and portfolio optimization plan. This plan is the outcome of months of work by management and the Board on how best to unlock the value we have created over the past few years.
Notwithstanding headwinds such as the pandemic, high inflation and rapidly rising interest rates. FCR has delivered above average NAV per unit growth over the last number of years. This growth is a function of our best-in-class portfolio and operating platform that has continued to deliver peer-leading, same property NOI, lease renewal lifts and rental rate growth. It is also the result of the strategic decisions that we made including the sale of $1.5 billion of specific assets from 2019 to 2021, most of which were sold either because we chose to exit secondary markets, or sold properties in which we felt we had maximized their value and chose to reallocate that capital to more productive uses.
A major contributor to our strong NAV growth is our density pipeline. We have rezoned over 8 million square feet of space, with another 9 million square feet currently underway in Canada’s most desirable neighborhoods. While the contribution to net asset value has been strong, the cumulative impact of this industry leading development pipeline creates a short to medium-term drag on EBITDA and FFO, while also adversely impacting our debt metrics, which is why balance is so important in this regard.
As a result of the hard work and sweat equity of our team over the last few years, we now have an abundance of assets that are primed for either development, or monetization. Executing our monetization plan will ensure our capital is allocated in ways to drive the most value for our unitholders over the short, medium and long-term. It will also rebalance FCRs portfolio to a higher proportion of income producing assets that contribute to key metrics such as EBITDA, FFO, and our debt metrics.
In summary, our portfolio composition today is overweight long-term development opportunities for a public company. The depth and scale of our development pipeline is massive by any standard. At 24 million square feet, it is larger in size than our total existing GLA or built portfolio.
We are now in a position to utilize these assets to further enhance our short to medium term objectives while maintaining and to finance our attractive long-term trajectory. Our plan includes the monetization of more than a billion dollars of low or no yielding assets over the next two years. This is a large and impactful number. But it includes only a quarter of our density pipeline, leaving an opportunity with respect to more than 17 million square feet of future space.
A smaller portion of the assets we intend to monetize will not be development assets, but instead will be low yielding income producing properties in which our short to medium-term value enhancing goals have been achieved. King High Line residential property sale is a great example. This recently completed development has a stabilized occupancy level, and it offers no additional intensification opportunities. To be clear, this is a great asset in a great neighborhood. But that is not enough to keep our capital invested. Selling the property at a sub 3% cap rate and an attractive premium to IFRS NAV affords us the opportunity to reinvest that capital in significantly higher return endeavors, which today includes our NCIB.
What is not in our billion dollar monetization pool, our stable cash flowing grocery-anchored assets, which we now own only in top-tier neighborhoods with the best demographics in the country. Therefore, as we execute this program, our weighting of these core assets will continue to increase. Our FFO more than covers our reinstated distribution, all maintenance CapEx and all revenue enhancing CapEx. Therefore, the entire billion dollar plus of monetizations will be allocated to other more productive uses.
Specifically, at least $400 million to repay debt, with the balance allocated to both our NCIB and expected development investments through the end of 2024. Neil will walk through the details of the quarter but to summarize, it’s one of the strongest quarters we’ve had. I’m the first to say that a quarter does not make a trend. But when stringing Q3 together with the operating results we have delivered for several quarters in a row now, it is clear that the hard work of our talented team coupled with our strategic focus on high-quality, grocery-anchored properties low located within Canadian neighborhoods with the most compelling demographic profiles, continues to deliver solid operating results.
Leasing is critical to our business. And it’s been a bright spot for FCR through various economic cycles and world events. The strength we’ve demonstrated for some time now continued in the third quarter, with nearly 750,000 square feet of leasing, across 170 transactions at very healthy rent increases. This contributed to solid same property NOI growth of 5.3% or 3.4%, without bad debts, and lease termination fees for those who prefer to exclude them.
We also completed dispositions and made investments during the quarter to advance our real estate strategy and our development programs specifically which Jordi will review. We remain active on additional dispositions that are consistent with our enhanced capital allocation and portfolio optimization plan.
Finally, I would like to provide an update on our ESG initiatives. We recently released our 2021 ESG report marking our 12th year in publishing our results. And I’m pleased with the progress we are making executing on our commitments. From a sustainability perspective, we exceeded our stated three-year target of a 9% decrease in greenhouse gas emissions achieving a 12.7% reduction, and we once again achieved a four-star rating in the 2022 GRESB Real Estate Assessment.
For the third consecutive year, we achieved prime status for corporate ESG performance by ISS. And across the portfolio, we continue to invest in sustainable infrastructure. We now have over 250 electric vehicle charging stations installed across 76 properties with a commitment to install an additional 200 next year. Our head office building at 85 Hanna Avenue, and our Brooklyn Town Center were awarded the Outstanding Building of the Year Award from BOMA Canada in their respective categories.
Also at 85 Hanna at the entrance to the shops at King Liberty, we recently installed our first indigenous art piece by celebrated Anishinaabe artist Que Rock entitled Biindigen, which means Welcome. This brings a total of 31 public art installations in our longstanding public art program.
And to close my remarks today, I would like to make a special mention of FCR thriving neighborhood foundation volunteer team who hosted the first annual commercial real estate Softball Classic tournament in support of Kids Help Phone. Together with some of our real estate friends and partners. We raised over $100,000 for this important charity focused on kids mental health. It was a great day for a great cause. Thank you to everyone who made this day happen.
So overall a very busy quarter with healthy and strengthening operating metrics. Before I pass it over to Neil, one thing I did want to say is that the Board is committed to listening and responding appropriately to unitholders in accordance with its fiduciary duties, and the best interest of all unitholders.
As always, we strongly encourage constructive unitholder feedback and input. We believe the best form for this is for unitholders to engage directly with management and the board. Since the purpose of today’s quarterly call is to discuss our quarterly results. I respectfully request that questions in the Q&A period of this call, focus on the quarter and our real estate strategy.
And with that, I will now pass things over to Neil.
Neil Downey
Thanks, Adam, and good afternoon everyone. In my prepared remarks today I will be referring to our quarterly conference call presentation which is available on the website at fcr.ca. The third quarter themes are simple. First Capital’s operating metrics are solid and the bottom-line earnings growth was very strong. Regarding the latter, Q3 2022 funds from operations of 66.6 million increased by 13% from 59 million in the prior year. FCRs weighted average unit count during the third quarter was 216 million units, due principally to activity under the REITs normal course issuer repurchase programs. The unit count was 5 million units or 2% lower in Q3 versus the prior year. As such FFO on a per unit basis posted a growth rate of 15% to $0.31 in the third quarter of this year versus $0.27 in the third quarter of last year.
In providing some context and highlights with respect to the Q3 results, let’s walk through the FFO statements. Starting at the top of Slide six of the conference call presentation. Q3 net operating income of 109.5 million increased by 5.4 million or 5%, from $104 million last year. Higher base rents from new and renewable leasing, and higher contributions from variable revenue sources are the two most significant drivers of NOI growth.
Also contributing was a $1.1 million reduction in bad debt expense. Lost NOI related to disposition activity was $2.2 million. Lease termination receipts of 407,000 in Q3 were consistent the same amount in the prior year. Q3 same property NOI growth was $5.1 million, equating to a strong 5.3% increase. Year-over-year, growth was driven primarily by higher base rents and higher variable revenue contributions, as well as a $1.8 million decrease in same property bad debt expense. Excluding the bad debt expense and lease termination fees, Q3 same property NOI growth increased by a solid 3.4%.
Taking a moment to look at sequential results, Q3 NOI was $2.3 million, or 2% higher than Q2s $107 million. There are several key underlying factors. Higher variable revenues contributed $2.6 million to NOI growth. Leased termination fees increased by 400,000, quarter-over-quarter, and these were partially offset by lost NOI related to disposition activity of $600,000.
Turning to interest and other income of $4.9 million in the third quarter. This was an increase of 83% from $2.7 million in Q3 of 2021. Within this number, fee and other income of 1.3 million in the quarter was consistent with the prior year. However, interest and investment income of 3.4 million tripled from 1.1 million in Q3 of 2021. The key drivers of the higher interest in investment income included higher loan balances at $240 million at September 30, 2022 versus $180 million of September 30 of the prior year, as well as an increase in the loan books weighted average interest rate to 6.7% this year, up from 5.5% last year.
At September 30, about 60% of the mortgages and loans receivables were at fixed interest rates and 40% were floating, By year-end this year we currently estimate the scheduled repayments could result in our loans receivable balance declining by about 30% or $70 million. We believe our mortgage and loan portfolio offers good protection against higher interest rates. Based on last week’s increase in the prime rate to 5.95% and based upon the scheduled repayments and floating rate exposures, we currently estimate the weighted average interest rate could further increase to around 8% by early 2023.
At the G&A expense line and below, there’s a bit more noise in our Q3 results than is normally the case. To provide a bit of color, let’s start with Q3 G&A expenses, which were 10.9 million. This is an increase of 3.1 million on a year-over-year basis, and 2.2 million sequentially from Q2. The Q3 expense is higher than our quarterly run rate of approximately 9 million which is the number we’ve formerly guided to. We’re always seeking ways to streamline our processes and improve the efficiency of our operations. And in this regard, our Q3 corporate expenses did include approximately 1.5 million in employee severance and restructuring costs.
Below the G&A line in amortization expense, we also charged off about $300,000 for software applications that had reached their useful life. So the sum total of these costs including the accelerated amortization tallied to about a $1.8 million charge to Q3 FFO. Going the other way, contributing to FFO, you will also see that we recorded a $2.9 million credit to abandon transaction costs. This line item is normally an expense in any given quarter. However, during Q3, we did take into income a purchaser deposit related to a property sale that was not completed. So bringing all these amounts together, there was a net contribution or benefit to FFO of approximately 1.3 million during the quarter that’s about six tenths of $0.01 on a per unit basis.
Turning to Slide seven, you can see FCRs nine-month 2022 results and the prior year comparatives. I’ll be brief with four points of notes. Total net operating income of 318 million increased by 9 million, or 3% year-over-year. This is despite 6 million of lost income due to net asset sales and $1 million lower lease termination fees. Therefore, growth was driven by an aggregate contribution of $16 million from higher base rents, lower bad debt, and higher NOI from variable revenue sources.
Secondly, the year-to-date interest in other income of $15 million has doubled as the mortgage on loan book has grown, and we’re now benefiting from higher interest rates. Thirdly, interest expense of 111 million is 4% lower year-over-year due to lower debt balances. However, the effect of higher interest rates as of Q3 in particular, they’re now just starting to bite. And finally, our FFO prior to other gains, losses and expenses of 193 million, it’s $20 million, or 12% higher year-over-year. On this same basis, this drove the per unit results to $0.88 cumulatively for the year up $0.10 per units also equating to 12% growth.
Moving through the some of our Q3 operating performance metrics, on Slide nine portfolio rounded at the quarter was an occupancy of 95.7%. This is consistent with 95.6% at the end of Q2 of 2022. And it’s a modest 20 basis points lower on a year-over-year basis. During the third quarter we had 162,000 square feet of tenant possessions against 134,000 square feet of closures. In addition, we had 34,000 square feet of GLA subject to closures for redevelopment.
Moving to Slide 10, we turn to the subject of leasing velocity. And on this front, the Q3 volume and spreads were strong. Q3 renewal leasing volumes of 556,000 square feet were 19% higher than 466,000 square feet in the third quarter of last year. Q3 renewal leases were affected an average increase of 10.4% when measuring the first year of the renewal rent of $22.16 per square foot, relative to the $20.08 per square foot in the final year of the expiring leases. Now notably, the Q3 activity did include a 98,000 square foot early renewal of a Walmart lease. So within our very good Q3 leasing renewal spread of 10.4% about 19% of the total renewal volume was at a flat rental rates.
Including new leasing for future possession, total Q3 leasing velocity at FCR share was 669,000 square feet. On a platform basis, the total third quarter new and renewal leasing volume was 743,000 square feet, bringing activity at 2.6 million square feet for the first nine months. Also, as we referenced on Slide 10, our average in-place portfolio net rent reached $22.80 at September 30. FCRs in place net rent per square foot continues to make new highs. Growth during the third quarter was $0.08 per square foot. And on a year-over-year basis, it was $0.56 per square foot or 2.5%. Regarding the latter, rent escalations and renewal lifts provided 75% of the growth in rent per square foot.
Slide 11 provides distribution payout ratio metrics on a FFO and AFFO basis. Our Q3 2022, AFFO payout ratio was 57%. It was at the doubling of the monthly distribution in the month of September, this quarterly payout ratio increased by 12 percentage points from Q3 of 2021. On a go forward basis, based upon the 86% annualized distribution per unit, you should expect our AFFO payout ratio to move upwards into the 80s.
Advancing to Slide 13. The REITs net asset value per unit at September 30 was $23.47. This was a decrease of $0.99 per unit, or approximately 4% relative to June 30. And it places our net asset value approximately 3% lower from the beginning of the year. Change in the Q3 NAV had three major components. The first is a $272 million fair value loss on investment properties. This reduced our NAV by $1.23 per unit. Second influential factor was our retained cash flow after paying our distribution, which added approximately $36 million or $0.16 to the Q3 NAV. And the third factor was our NCIB activity which added approximately $0.05 per unit during the quarter and I might add $0.24 per unit a year-to-date basis.
Turning back to the property revaluations for a moment to disaggregate the Q3 fair value loss, I can frame the situation through three component parts. The first component relates to changes in individual asset level cash flow estimates. During the third quarter we updated or changed cash flow models for 81 individual properties, which resulted in a net fair value decrease of $36 million.
Now relative to $9.1 billion of total investment properties, this valuation decrease is essentially a rounding error. And it signals that we see stability in the performance of our assets. The second element relates to the contracted sale of our 50% interest in the residential component King High Line, $149 million sale price was more than $12 million above our Q2 IFRS value. And thirdly, we recorded a $248 million net fair value loss related to changes in valuation assumptions, specifically higher stabilized cap rates, higher terminal cap rates, and higher discount rates. In contrast to our second quarter results, the valuation modeling assumption changes during Q3 were much more broad brushed. In total, they impacted 120 properties were stabilized cap rates on individual assets were typically increased between 25 and 50 basis points.
In our MD&A disclosures, you can see that the portfolios stabilized weighted average cap rate increased to 5.1% at September 30, from 5.0% at June 30. For those of you who really liked the detail by take you beyond the one decimal place of rounding, the change in the Q3 stabilized cap rate during the quarter was actually an increase of 13 basis points. And for those of you who like the shortcut valuation approach, the $248 million fair value markdowns arising from changes in valuation metrics. This equates to an increase of approximately 15 basis points on the portfolio’s weighted average going in cap rate.
Providing an update on capital deployment as summarized on Slide 14, we invested 47 million into development, leasing and residential development during Q3. Most of this capital was invested into assets located in Toronto, Montreal and Vancouver. Also in Q3, we invested $21 million to repurchase approximately 1.4 million trust units under our NCIB bringing year-to-date purchases to September 30 to $91 million.
On a nine month-to-date basis. 2022 CapEx has totaled $119 million, including 70 million into development and residential inventory. Mostly due to project timing and commencement dates, we’re now guiding towards full year 2022 development related CapEx of approximately 100 million, all other capital expenditures including revenue sustaining, revenue enhancing and recoverable CapEx should be in the $65 million to $75 million range.
Turning to Slide 15, there was very little in the way of financing activity during Q3. On Slide 16 of the presentation you will see a summary of some of our debt metrics. FCR continues to demonstrate stability and strength in key balance sheet metrics. As at September 30, total liquidity was $859 million excluding construction facilities, quarter end general corporate liquidity on a revolvers was 625 million. The REIT ended the third quarter with a sizable $6.8 billion pool of unencumbered assets albeit down from $7.1 billion at mid-year due to Q3 asset sales and fair value adjustments.
On Slide 17, you see a graphical depiction of FCRs staggered debt maturity profile. Looking through the year end, I previously alluded to the capital that we expect to have returned from our loans and mortgages receivable over the coming months. In addition, we have 149 million of gross proceeds or 69 million of net proceeds coming from our King High Line residential sale. And finally, we anticipate placing $200 million or more of long-term fixed rate mortgages prior to year-end. Collectively, these capital sources will be applied to fund the $250 million contractual maturity of our Series P senior unsecured debentures on December 5, and to recharge our credit lines. So in this regard, we expect that our debt metrics and our liquidity position will further strengthen into year-end.
This concludes my prepared remarks. I will now turn the call to FCRs, Chief Operating Officer Jordi Robins to provide some commentary on property investments, operations and development.
Jordan Robins
Thanks, Neil and good afternoon.
I am really pleased that the positive momentum in our business seen over the past several quarters continued into Q3. This positive momentum is no accident. It’s a direct result of the strength of our high-quality grocery-anchored portfolio and the effectiveness of our dedicated team who continue to perform at the highest level every day.
To start with Q3 was a very busy period for our investment. We have sold or have a firm agreement in place to sell approximately $250 million of assets at low cap rates. This quarter we sold Bayview Lane Plaza a strip center located in Markham, Ontario for $35 million. After our addition of a freestanding Starbucks pad, there was a little more we could do to enhance its value. So we took the property to market and sold it to a private buyer for price that was more than 50% above our IFRS value.
This quarter we also sold Port to Gatineau center located in Gatineau, Quebec to a private local buyer at a double-digit premium to our IFRS value. This asset does not form part of our $1 billion enhanced capital allocation and portfolio optimization plan. It was a remnant center that was a geographic and qualitative outlier of our portfolio. We had explored it sale in the past, but it wasn’t until recently and we were able to secure premium pricing, which we require to transact. As Adam touched on his formal remarks last month, we entered into a binding agreement to sell our remaining 50% interest in our King High Line residential property for $149 million. This is a great asset in a great neighborhood, and we’ve retained ownership of the 155,000 square feet of premium grocery-anchored retail space.
Notwithstanding our enhanced capital allocation plan, we remain opportunistic, but selective with respect to acquiring assets. We have a proven track record in surfacing and unlocking value that others may not see or underwrite. A good example of this is our purchase of a 50% interest in Amberlea Shopping Center, located in Pickering, Ontario. We purchased this 100,000 square foot open air shopping center anchored by a high performing Metro Grocery store for only $450 per square foot. This price is approximately 60% of its replacement costs. It’s attractive market price relative to its replacement costs was only one of its compelling features. Amberlea is located only 1.4 kilometers from FCRs Steeple Hills shopping center. As a result of its proximity, we have in depth market knowledge and identified multiple levers to grow and release income by over 40% within the next several years.
As we touched on our last call, this quarter, we also purchased a small but strategic asset on Montgomery Avenue in North Toronto that completes our 13th property assembly. We have already submitted our OPA and rezoning application for this property, and we’ll update you on its progress next quarter. As set out in our disclosures as at September 30, we had $320 million in assets held-for-sale. This includes the residential component of King High Line. We made good progress through the third quarter on the sale of these assets.
We have also advanced several other identified disposition opportunities at premium pricing. We expect to be able to share the details of this progress with you in coming months. Our development team continues to advance entitlements for the 24 million square feet of incremental density in our pipeline. This past quarter, we filed an application for 895 Lawrence Avenue East, the application contemplates 412,000 square foot mixed use building, which will replace the existing 29,000 square foot building. At Morningside Crossing in the East End of Toronto, we filed a rezoning application on a discrete portion of the site. The application contemplates the replacement of an existing 7000 square foot pad with a new 410,000 square foot mixed use building.
Our development application at Young and Roselawn in Central Toronto is also progressing very well. Last quarter we received our final zoning order and signing the approved density and built form and allowing the next phase of our development to begin. Rather than restrict access to the site over the summer, while awaiting receipt of our shoring and excavation permit. We sponsored Fairgrounds an Onsite Community Focused Racket Club. This temporary club has garnered tremendous goodwill and help transform our site into a publicly accessible sports and social activation area.
The club which doesn’t require membership includes five pickleball courts and food and beverage facilities. Fairgrounds will continue operating through the fall and our shoring and excavation will be completed as scheduled in spring 2023. Finally, at 2150 Lake Shore in South Etobicoke, our final zoning builds were approved by City Council marking another important milestone on its path to redevelopment.
The date we have submitted for entitlements on 17 million square feet of incremental density representing 71% of our 24 million square foot pipeline. For the balance of 2022, we are gearing up to submit for another 400,000 square feet of incremental density. Today, over 8.25 million square feet of our development pipeline is now entitled, with a further 700,000 square feet of approvals expected by year end 2022. Even after the sale the density contemplated in our enhanced capital allocation and portfolio optimization plan, we will still possess more than 17 million square feet of incremental density in our residual pipeline. With this remaining density we preserve our medium and our long-term optionality, specifically, we can sell a partial or 100% interest in this density, we can develop it as part of our active development program, or we can simply wait and continue to benefit from the income in place. Regardless, the incremental density once developed will support the neighborhoods in which we have invested.
Our active development program also progressed well through the quarter at 200 Esplanade in North Vancouver, we are now 97% tendered on our 75-unit rental building, which is on scheduled for late 2023 delivery. At Cedarbrae mall in Toronto, the extensive renovation to the former Walmart store is well underway and on schedule for delivery in the second half of 2023. Most of this large new format space will be attended by nationals, some of whom will be relocated from 3434 Lawrence, our 35,000 square foot retail center located just across the road. You’ll recall we have submitted a rezoning application contemplating approximately 485,000 square feet of density on the 3434 Lawrence property.
In addition to improving the aesthetic and the merchandising mix at Cedarbrae by relocating tenants from 3434, we will simultaneously remove the lease encumbrances that would otherwise impact the ability to redevelop 3434 Lawrence. This will significantly increase the property’s value. Concrete forming is now underway at Edenbridge, our 209-unit condominium development located on our Humber Town Shopping Center lands. 88% of the units at Edenbridge are now sold. Shoring an excavation at 400 King Street West, our 460,000 square foot retail and residential condominium development in downtown Toronto is underway. 97% of the units there have been sold demolition of the existing structures on our 138 Yorkville development site is now complete, and we expect to commence shoring and excavation later this month.
As I’d mentioned on our last call, we have insulated ourselves well on our active projects from the impact of rising costs. We have secured construction financing on all of our active high rise projects. We have also awarded between 70% to 90% of the associated trade contracts, and so have fixed a large portion of our costs. We have also awarded 100% of the trade contracts in our two active retail projects at Stanley Park and Kitchener and Cedarbrae mall in Toronto.
In summary, Q3 was a very solid quarter highlighted by strong quarter-over-quarter metrics, including same property NOI growth and leasing spreads. It was also a quarter where we initiated and successfully launched our $1 billion enhanced capital allocation and portfolio optimization plan. Last but certainly not least, we advanced our entitlement program and our active development program.
And with that operator, we can now open it up for questions.
Question-and-Answer Session
Operator
Thank you. We will now take questions from the telephone lines. [Operator Instructions]. And the first question is from Mario Saric. Please go ahead.
Mario Saric
The first question just on the $248 million fair value loss attributable to the changes in valuation parameters that you cited during the call. I was curious if you can highlight how much of that would have been applied to the 1 billion of identified disposition. So as part of the strategic plan, essentially, I’m wondering if the fair value loss was kind of proportionate across the portfolio in the assets that you took the fair value loss on?
Neil Downey
Hi, Mario. It’s Neil. So I think we have stated in the past that there are more than 30 assets circled in that $1 billion pool that’s part of the targeted monetization assets for the next two years. And of course, because our Q3 fair value adjustment did reflect adjustments to a very wide swath of properties as I previously indicated, there were quite a number of adjustments specifically within that pool. In fact, I think it was more than half of the assets were subject to some sort of Q3 fair value adjustments. But I think what I can report to you, however, and hopefully this will give you a high level of comfort is that in that pool, specifically, the net adjustment in its totality was actually plus $2 million.
Mario Saric
Perfect. Okay. That’s great. And then, broadly speaking, just on the investment environment, can you discuss kind of what types of retail real estate in particular seem to be attracting the strongest buyer interest in the market today?
Adam Paul
Hey, Mario. It’s Adam. Yes, the buyer pool is evolved as the macroeconomic environment has evolved. And we’ve been in the market all the time for several years now, both looking for investment opportunities as buyer, but especially as vendor. And there’s definitely been a shift over the last few months where the majority of the groups that we’ve been dealing with who are most active on the purchasing side are the private investors that takes various forms from private equity funds to high-net-worth individuals. But that’s the buyer pool and in terms of the assets, as you know, we went through a period where we had a disposition program that was specifically targeted to improve the quality of our portfolio and so we sold assets that we thought were best not to own that’s not the case today, our program is very different today, given the composition of the portfolio.
So what we’re seeing in terms of the assets we own is, pretty strong demand across the board. So for us, it’s more selective around which assets fit the strategy we’ve laid out. And for all the reasons that we’ve laid out.
Mario Saric
And then, within the private buyer pool, like if we were to separate assets between kind of stabilized limited residential, upside over time, so higher yielding versus kind of zoned residential upside in place already versus approaching the zoning. Is there one group more so than the other two that would stand out in terms of what the buyers are most interested in?
Adam Paul
Not necessarily, but you do get some variability. If we were to take a stable cash flow in grocery-anchored asset, a buyer composition, I believe would be different than something that’s a development property that’s just been zoned. We’re not really in the market on development assets that have not been zoned. I mean, that’s one area where we’ve been very successful creating value and even in assets we’ve identified for disposition. There’s a short to medium-term value enhancing opportunity in assets that have rezoning potential and we plan to continue to take those through the rezoning eliminate the zoning risk and benefit from the value creation of that exercise.
Mario Saric
Okay. My last one is more of a housekeeping question in terms of the targeted 4% FFO per unit CAGR, 2021 to 2024. Can you just confirm that the base 21 number is the $1.14, that you disclosed in the statement? Or was it adjusted for something else?
Neil Downey
Sorry, Mario, the base would be, I think I have to double check about $1.075 seems to be the number that sticks in my mind. So we’ve often made reference to the variability in our OGLE items, and collectively in any given year, those have had a tendency to be a substantial contributors or detractors. So we really look past that in terms of the growth trend line rather.
Mario Saric
Okay. If it’s anything other than that, just maybe shoot a separate email. That’d be great. Thank you.
Operator
Thank you. The next question is from Sam Damiani. Please go ahead.
Sam Damiani
Just the first question is just on the occupancy. What are the biggest properties holding back occupancy from returning back to that pre-pandemic peak of 97%? And is that a goal of the company to get that occupancy back up?
Adam Paul
Yes. There’s not much specific properties that I can think of, it’s more pockets, and we’ve never been in 97%, our all-time high, I guess you’re rounding Sam, but our all-time high is 96.9 in Q4 of 2019. And then we headed into the pandemic. So this business has delivered occupancy that ranges from 95% to 96.9%, over 20 plus years. We view kind of anything in the range that we’re in now is full occupancy. We always have natural turnover. Sometimes that turnover interrupts cash flow, but it usually leads to higher cash flow down the road. Some of the Walmart’s we’ve repurposed as a very good example of that. So if you take Deer Valley, we have a Walmart, that’s vacated, so there’s a pot, but that’s one space. So that’s what it is more than a property that’s got, a chronic amount of vacancy, it is fairly broad based. And we would view the portfolio mid to high 95s as somewhere in the range of full occupancy, depending on some of the movements that are occurring underneath.
Sam Damiani
Okay. That’s helpful. Thank you. And just on the mixed-use rental residential pipeline, with King High Line leaving the portfolio, that does reduce the collection of apartments in the portfolio. Is there a plan to replenish that? Is that a priority? How do you see that opportunity in the marketplace today? And what sort of two or three projects would you see teeing up in the next couple of years to further that?
Adam Paul
For us, it was never a goal to get the portfolio to X percent residential, as we continue to be involved in it. It’s an area where on the projects, we’ve done, certainly in aggregate, we’ve made a lot of money on them. But it’s simply capital allocation decisions for us and so like we said King High Line is a great asset, but we think we can make more for our investors, by reallocating that capital elsewhere. And so we’ll always continue to view where and how we invest through that lens. And so we’ve got active projects now that the [majority] [ph] has gone through, some of the ones that, we’re looking out the front window and are quite excited about our Young and Roselawn project, our 1071 King project in Liberty Village, and a little bit further down the road, the development at Christie Cookie.
Sam Damiani
Okay. And just finally, on the NCIB, is there any activity post September 30. And you’re looking at that differently today, given the increased distribution going forward?
AdamPaul
We’ve been in black out from the quarterly results post September 30. So correct me if I’m wrong, Neil, but I do not believe we have any activity post September 30 on that basis?
Neil Downey
Yes. If there has, it has been immaterial. And I guess just more thematically what I would say on that, Sam, is that, we continue to view the repurchase of our units as one, if not the most attractive, risk adjusted, return opportunities available to us. And so, our desire to continue to buy back units is high. And I think in this regard, I would simply reiterate comments that I think I’ve already consistently made in the past, and that the repurchase of units, the cadence of those repurchases will be governed by the progress on monetizing assets under our enhanced capital allocation plan, the progress, the timing and the quantum. And obviously, secondly, the unit price itself.
And then, in terms of the bigger picture on the framework, we are directionally very, very focused on achieving those balance sheet objectives that we outlined back at the end of September, in terms of key debt metrics and total debt levels so.
Sam Damiani
Okay. That’s helpful. Thank you. I’ll turn it back.
Operator
Thank you. The next question is from Pammi Bir. Please go ahead.
Pammi Bir
Neil, I think you’ve touched on it a bit. But just with respect to the reorg and the severance costs, can you maybe just elaborate on, what changes are being made? And should we perhaps anticipate any further costs in the next few quarters?
Neil Downey
Hi, Pammi. Good afternoon. As I noted earlier, it was principally severance in terms of the charge. And we’re just trying to continually find ways to be more efficient, to do things better to empower our people to make faster, better decisions. So this was basically streamlining in that vein, if you will. I guess what I was saying maybe this is the part where you’re sort of aiming towards is that, we’re mindful of the fact that we expect more travel and in person and face-to-face business on a prospective basis.
We are mindful of the fact that, inflation has been high. Now, hopefully, that peaked back in June at 8% print. But we do know that labor is a lagging indicator and the labor market remains tight. And so, I think FCR like many companies is facing higher G&A expenses overall. So, the restructuring was part and parcel with that. But if you want to think about your modeling, because I’m kind of anticipating your question here, that as you look out to 2023, probably at this point pencil in at $10 million run rate for G&A, as opposed to where we had been running in the last 12 months for the run rate, of course.
Pammi Bir
Right. Yes, okay. Got it. Just looking at the renewal spreads, again, they’re pretty strong. But as we do shift to lower gear in the broader economy, are you anticipating any moderation or anything in lease maturity mix next year that might bring some of these spreads down a bit?
Adam Paul
Absolutely not. The counter to that is replacement cost to replace that space, while in most markets, we’re in is theoretical given the physical barriers to entry for new supply. But the rents that would be required to replace the space are higher than they’ve ever been. So our focus is on driving those spreads higher, not maintaining or anticipating them being lowered. And given the locations that we’re in, and the quality of the tenants that we have and the productivity of the space vis-à-vis the sales generating capability of that space. Yes, we absolutely do not see a softening of the renewal spreads as we look for.
Again, I’m not talking about on a quarterly basis but my sense wasn’t looking at a specific quarter in terms of what you were asking. So hopefully that answers the question.
Pammi Bir
Yes. No, that’s, that’s good color. And then, just as we do look to next year’s maturities under lease profile, is there any? Is there any space that you’re expecting of any larger space, you’re expecting to perhaps get back? And then should we be thinking about any downtime at all? Or is it sort of just a routine year?
Adam Paul
It is a routine year. But that doesn’t mean we don’t have any large spaces that we get back. We typically get some back every year. And Walmart’s have been a good example of that in terms of our ability to repurpose the space and come out well ahead from a value and NOI perspective, even factoring in obviously, downtime, releasing costs, loss gross rent, during the downtime, et cetera. We do have one out west. That has been on our radar for a while, which is the Walmart in our West Mountain Center. I don’t think there’s any others. Yes, we’re looking around. We don’t think there’s any others that are coming back next year that fall into the large space. Certainly, it’s a normal year. If there’s any others we missed, we’ll let you know directly, Pammi.
Pammi Bir
Got it. And then just lastly, on the debenture maturity, I think you mentioned that you’re looking at, are there some [200 million] [ph] to mortgages that might be in the works? Where are you sensing that these may sort of price in, or in terms of the all in costs? If this is something that you’re planning to get done before year-end, I presume.
Neil Downey
You can use a range of 5.5% to 6.0% as a reasonable band in terms of where those should be pegged. And certainly, longer term. So think eight 9, 10 year money.
Pammi Bir
Right. Okay, thanks very much. I’ll turn it back.
Operator
Thank you. The next question is from Tal Woolley. Please go ahead.
Tal Woolley
The Ontario government came up with the revitalized housing plan. Just wondering if you guys have had any principal thoughts or opinions delivered to you if you can put maybe some context about how you’re thinking about how it might impact how you look at development, or maybe asset sales going forward?
Jordan Robins
Hi, it’s Jordi. I think I’ll take that one. What was announced, I would say to you is a very good start. And frankly, I think we at least internally applaud the provincial government and taking what we’re — I will say meaningful steps to create more housing more quickly. I would say notwithstanding — we anticipate to be a positive impact on supply, in other words, that it will create, ultimately more housing. We think by virtue of the changes that they are contemplating to reduce both the time to and the cost of development, it will also have a positive impact on our development value. So I would say generally speaking, we feel good about it. Certainly indicative of what we learned thus far. We think there’s a lot of great things in it. And the devil will continue to be in the details, obviously.
Tal Woolley
Okay. And then, just looking at your development pipeline, you’ve got, I think, three condo projects, sort of in the works. And they’re sort of at various states of presale, I think like 138 Yorkville, I’m not even sure you started marketing that one yet. As this environment has changed, wondering if you can talk a little bit of a presale or how you’re thinking about selling strategy, the financing strategy for condos. And not that I’m trying to like speak anything to existence, but just like maybe contingency planning to just in case, the market does get a little bit rough, and you have to start closing into maybe a tougher environment.
Adam Paul
So the two projects we have underway are well advanced, and so they’re largely pre-sold, and they were pre-sold in a market where, the market value of the condos we sold continue to escalate after we sold them. We’ve also locked in substantially all of our costs on those two projects. So at this stage, we’re comfortable that we’re in good shape to see them through. 138 is a very different animal and it’s going to be a very, very high-end product that is geared towards a very, very small group of — what we’ll call the condo purchasing universe. And so we also feel that that group is less sensitive to economic cycles in terms of what they’re prepared to pay for that space and more geared towards what level of luxury is delivered, what standard of service is delivered. And we think that’ll actually play a larger role in the price that the product gets sold at so. Very different. We’re not contemplating any other condominium starts at this point, in part because of our real estate strategy, also, in part because of the macroeconomic backdrop that we see surrounding new condo starts today.
Tal Woolley
Okay. And then, for the disposition, or the new disposition program, you’ve given some idea of where the proceeds might go, is there any, like leakage that might be in that disposition number just from like taxes or things like that, that we should be thinking about?
Neil Downey
No. Short answer is no. No, you shouldn’t be thinking about tax leakage in that program, or the short answer to your question is no.
Tal Woolley
Okay. And then, I don’t know exactly how many deals you’re looking at, or disposition deals you’re looking at right now? Are you finding the depth of the market is still roughly the same from where you will say, like 18 to 24 months ago? Or are there certain kinds of buyers maybe that are, I would think maybe, like the spec condo developer might not be in the market, just as you’re sort of sitting here saying, like, “Hey, we’re not going to be greenlighting anything new,” the depth of the market changed at all?
Adam Paul
Yes, the depths of the markets certainly changed. It’s shallower today than it was 18 months ago. We’re focused on the one buyer that will buy our asset at premium pricing. And so we need one of those for each asset sale. And so while the pool is shallower, it’s still constructive enough to achieve what we’re trying to achieve. And so we’ve identified specific assets that we want to sell, we require premium pricing to transact, we have a number of transactions in progress beyond what’s been announced. And we feel very confident today that the market is constructive enough for us to achieve what we’re trying to achieve.
Tal Woolley
Okay. And then just lastly, on the debt strategy, you’d sort of talked about some mortgages with some serious term on it, 8 to 10 years. I’m just wondering, like, have you thought, like, given that the weighted average sort of maturity has kind of started to come down a bit. But rates are rising, like, are you think the right thing to do right now is to continue to try and stretch that term? Or I’m just wondering, it’s a different time, like the rate environment has changed, how you how you’re sort of thinking about the term on your balance sheet?
Neil Downey
No, Tal, it’s an excellent question. The flip side is, with short rates, being comparatively high versus long rates, there’s also, I think, a strong rationale to really carry no debt on your overnight basis or on your revolvers today. So reaching for some term is always a risk mitigation strategy in real estate. So the longer term money makes sense, in that vein, it makes sense in the vein that your point being in our terminal maturity has shortened over time, and that’s principally rather been a function of us being a net seller of assets.
So, in short, we’re going to maintain a very strong liquidity position, we will probably be extending some term loans, as well over the next 6 to 12 months. And then, selectively we’ll be placing mortgage longer term mortgage financing. So it’s about balance. It’s about liquidity strength in the environment today.
Adam Paul
The important point to know Tal, which I know you’re an advocate of reduced leverage, which we have been doing and it’s easier to keep your ladder longer when you’re refinancing debt when you’re paying off debt when it comes to maturity, like we have been in many cases, you’re inherently going to shorten the ladder so.
Tal Woolley
Got it. All right. Perfect. Thanks, gentlemen.
Operator
Thank you. The next question is from Dean Wilkinson. Please go ahead.
Dean Wilkinson
Neil on the billion that’s been identified, should we be thinking of average size of that of 30 million give or take or is there a wide spectrum there and maybe some larger assets in that pool?
Neil Downey
Well, Dean, as you know, when you talk about averages, invariably you spend your time above the average or below the average, even though there’s such thing as an average. So we did identify the fact that there’s more than 30 assets. So if you take a billion and you divide it by 30, something, you’re going to get the average. But truth be told there’s a very wide range of individual assets in that pool in terms of their size. And some could be $10 million, and some could be $149 million.
Dean Wilkinson
Okay, fair enough. And are all of those free and clear of debt or do you have some favorable debt that you could be sort of offering up in that sale process?
Neil Downey
There are a very limited number that have properties specific financing or stated, ultimately said they’re substantially free and clear.
So we have options been on that in some cases where it’s a relationship lender, we can port the loan. In others, like the case of King High Line, the debt went with the purchase. And obviously, that’s a factor in the valuation. In the case of King High Line, the mark-to-market was like inconsequential. And then, as you probably know, we have interest rate hedges on that loan, which we retain those, we didn’t sell those. So it’ll depend but if the debt goes with the property, we obviously value the debt and factor that into our decision-making in this context of looking for premium pricing for assets for selling.
Dean Wilkinson
Got it, makes sense. And maybe last one for Jordi, of the 254 million sort of cost to complete? How much of that would be at risk versus what you’ve got locked in on fixed price contracts? And maybe a secondary question, can you even get a fixed price contract today when you’re looking at something or is inflation just gone out of control?
Jordan Robins
I’m going have to get back to you on the first part of the question, because I don’t know what offhand. In terms of the second part, it’s a very good question. I would say it is certainly more difficult today to lock in fixed price contracts, we were lucky. Or I would say smart at the time to do it and take advantage of those contracts at the time. At the same time, we do business with a lot of these contractors, and so have very deep relationship with them. And I think that has proven and will prove to be helpful going forward as well.
Dean Wilkinson
Okay, great, I guess to Neil’s point, the best fixed price contract you’ve got right now is $15.83 a unit. Thanks, guys. I’ll hand it back.
Operator
Thank you. There are no further questions registered at this time. I’d like to turn the meeting back over to Adam.
Adam Paul
Okay. Well, thank you very much. And thank you very much, everyone for attending our third quarter earnings conference call. We hope you have a wonderful afternoon. Bye-bye.
Operator
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.
Be the first to comment