RioCan Real Estate Investment Trust (OTCPK:RIOCF) Q2 2022 Earnings Conference Call August 9, 2022 10:00 AM ET
Company Participants
Jennifer Suess – SVP, General Counsel and Corporate Secretary
Jonathan Gitlin – President and CEO
Dennis Blasutti – CFO
John Ballantyne – Chief Operating Officer
Andrew Duncan – CIO
Conference Call Participants
Sam Damiani – TD Securities
Mark Rothschild – Canaccord Genuity
Mario Saric – Scotiabank
Pammi Bir – RBC Capital Markets
Tal Woolley – National Bank Financial
Jenny Ma – BMO
Operator
Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust Second Quarter 2022 Conference Call and Webcast. As a reminder, this conference call is being recorded.
I would like to turn the conference over to Ms. Jennifer Suess, Senior Vice President, General Counsel and Corporate Secretary. Ms. Suess, you may begin.
Jennifer Suess
Thank you and good morning everyone. I am Jennifer Suess, Senior Vice President, General Counsel and Corporate Secretary for RioCan. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today’s call, which were posted together with the MD&A and financials on RioCan’s website yesterday evening.
Before turning the call over, I am required to read the following cautionary statement. In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan’s objectives, its strategies to achieve those objectives, as well as statements with respect to management’s beliefs, plans, estimates, and intentions and similar statements with respect to management — excuse me, similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts.
These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements.
In discussing our financial and operating performance and in responding to your questions, we will also be referencing certain financial measures that are not generally accepted accounting principle measures, GAAP under IFRS.
These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers.
Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan’s performance, liquidity, cash flows, and profitability. RioCan’s management uses these measures to aid in assessing the Trust’s underlying core performance and provides these additional measures so that investors may do the same.
Additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward-looking statements, together with details on our use of non-GAAP financial measures, can be found in the financial statements for the period ended June 30th, 2022, and management’s discussion and analysis related thereto as applicable, together with RioCan’s most recent annual information form that are all available on our website and at www.sedar.com.
I’ll now turn the call over to our CEO, Jonathan Gitlin.
Jonathan Gitlin
Thanks so much, Jennifer and thanks as always to everyone for taking the time to join us again today. I hope you are enjoying the summer. As usual, I’m surrounded by the exceptional senior management team here at RioCan. Through the second quarter, we and the 600 others who make up this great organization demonstrated RioCan’s ability to succeed in any environment.
The team is united and concentrated on the critical pillars that support the five-year plan we shared earlier this year at our Investor Day. Our second quarter results reflect this continued and acute focus on reimagining retail, customer centrism, intelligent diversification, and responsible growth. Based on the quality and positioning of our portfolio and the strength of our balance sheet, my confidence in our performance remains unwavering despite the obvious unpredictability in the economic background.
The underlying macro level factors obviously necessitate a language such as cautiously optimistic, and I’ll address these factors in the moment, but before doing so, I want to highlight the portfolio’s performance in this last quarter.
The best way to summarize our operating results is to say it was a tremendously successful quarter. And we’re achieving results that are in line with where we said before COVID.
Occupancy is at 97.2%, bolstered by our retail occupancy, which is now at 97.6%. FFO per unit is 7% higher than it was in this quarter in 2021. Leasing results, which are I would say the purest indicator of the overall health of a commercial portfolio, well, they’re very strong. Blended leasing spreads are 10.5% for the quarter. Same-property and why grew by 6.2%. Tenant retention was over 93%.
Now, this number tends to bounce around a little — while it tends to bounce around a little, the prevailing trend confirms the tenants value, the space and the service that RioCan provides and they really don’t like to give it up. The 11.2% spread achieved on renewal rents in the quarter highlights how aggressively tenants are pushing to maintain existing space.
As most of the time leading up to March of 2020 as a stabilized environment, there’s much emphasis on comparing current results with those achieved pre-COVID. We’re proud to deliver results in line with our pre-pandemic metrics, but this underlying context that further enhances my confidence in our growth trajectory.
You’re well aware that RioCan’s commitment to enhance the quality of our offerings started long before the pandemic and in fact, accelerated during the pandemic environment.
We continued to sell low growth assets and advance our major market presence. Over 92% of our income is now generated in the [indiscernible] markets. On average, the people shopping at RioCan’s properties have a household income of $129,000 and come from a population base of over 206,000 people within a five-kilometer radius of our centers.
We also invested in our physical property, technology, ESG, and the dynamic team here at RioCan. Those improvements and investments are now paying significant dividends.
Since 2020, we’ve delivered a combined total of 1.1 million square feet of successful development, mainly in Toronto. That number is expected to increase to 2.5 million square feet of new development completions by the end of 2023, including our iconic Toronto development [indiscernible]. We now have 2005 residential rental units in the portfolio with another 1,134 under construction. Demand for these units has continued to demonstrate the desirability of the RioCan living offering.
The resilience and diversity of our tenant mix is markedly enhanced with over 95% of our tenants classified as strong, stable or compelling traffic drivers. Our standing as an ESG leader in the commercial real estate sector has only improved. Simply put, our efforts over the years are yielding results now and will continue to bolster our success despite market volatility.
The scarcity of quality retail space further enhances our competitive advantages. It’s safe to say that in major Canadian markets, very little new retail supply has been created in the past decade. Replacement costs for well-located retail are now well above market values.
Now, I’m going to illustrate that with some numbers. The implied value of our income producing properties in our current unit price is about $330 per square foot. Now, if you compare that to the cost of construction, new retail, it’s quite eliminating.
In the GTA with the high construction costs and market value of land included, the cost to construct new retail is in the range of the mid-$600 per square foot. This tells us a couple of things. First, there’s a clear gap between valuations and replacement cost. Second, it’s virtually impossible to buy land and construct new retail without a substantial increase in market rents.
It’s only feasible to build new retail on land that’s already owned or as part of a high density mixed use development. This means the quality retail space, the kind that we have RioCan offer is and will continue to be in short supply.
Meanwhile, particularly in the GTA, the population continues to grow, driving demand further upward. These conditions are entrenched and reinforce our confidence in the sustainability of solid operational performance well into the future.
Yes, as I mentioned a moment ago, there are numerous unknowns that linger in the environment. Our stakeholders have voiced their concerns about how these factors impact RioCan and I’d like to address these questions.
First, I’ll talk about the recessionary environment, specifically the viability of retail during a prolonged economic slowdown if in fact that arises. 86% of RioCan’s tenants are categorized as strong and stable. These businesses have stable rent paying ability, strong covenants, and reliable foot traffic. They provide the day-to-day essentials consumers require in any economic climate.
I’ll pause here for a moment to reflect on our performance in Alberta over the last 10 years. Now, I use our performance in Alberta as a logical barometer as our portfolio composition in that province mirrors that of our national portfolio that comprises largely open air, necessity-based retail, and has exceptional demographic profiles.
The Alberta market has been in the throes of a resource-based economic slowdown for the better part of a decade. And within those 10 years, the operational metrics for our assets in Alberta we’re equal to or better than our national portfolio. And as much as anyone can draw any conclusions in this uncertain environment, we feel that our consistent performance Alberta in the face of an economic downturn is indicative of our portfolio’s resilience and viability in any market conditions. Our leasing results support that conclusion as demand for our space continues to be high, driven by national grocers, discount retailers, beauty, medical, and pharmacy uses.
Next, I’ll address concerns about rising interest rates. And we’re fortunate to have a debt ladder as we always have that helps us to shield the impact of violence bites and interest rates.
We have $411 million of debt due for the remainder of 2022. Now, as Dennis is going to tell you, we will benefit from our $250 million hedge of the underlying GLC [ph] bonds, which will drive down the actual cost of the remaining financings for this year.
In 2023, we won’t have the benefit of those hedges on new financing and there will be an impact on our FFO results. But due to the timing of 2023 debt maturity, the FFO impact will be weighted more to the second half of the year. It’s also important to note that the overall impact even if rates continue to increase will be offset by numerous positive FFO factors including gains from the scheduled sale of condo units, and increasing NOI from development, delivery, and organic growth from our existing income producing portfolio.
Finally, there’s inflation. This impacts us in several ways including an impact on consumer spending and increases in construction costs. As I already mentioned, much of our tenant base provides necessity-based goods that consumers need in any economic cycle.
Many of our tenants have the ability to pass through inflation to their customers. That said some of our prominent retailers including Walmart, who have indicated that inflation drives shoppers to avoid high margin discretionary items in favor of lower margin necessity items.
This is a concern, but will not, in our view, impact the long-term viability of our largest tenants, as they have a long and strong track record and sizable balance sheets. With respect to construction costs, they’ve been impacted by sustained year-over-year inflation for many years now. The vast majority of RioCan’s in-the-ground construction projects have fixed contracts, which provide a high degree of cost certainty.
When it comes to new project starts, RioCan will continue to exercise a high degree of discretion, scrutiny, and judgment in assessing whether costs and revenue conditions are suitable before we proceed. Our future development sites are typically active retail sites that currently generate high quality income. As such, when conditions suggest the timing isn’t favorable for development, we can simply elect to wait.
Now, I’m not for a second downplaying the obvious volatility in the macro level environment, but we face these conditions confident that we have strategically and responsibly managed every aspect of our business over which we have control. Our efforts over the years it’s that RioCan for success. We’re hitting our stride and executing on key growth initiatives. We remain confident in our growth trajectory and the ongoing demand for our scarce and high quality real estate.
The objectives in our five-year plan were established with purpose and conviction. In concert with RioCan’s many differentiating attributes, these objectives are achievable in almost any environment. Aligned with our strategic pillars, we’ll continue to grow responsibly and sustainably, we’ll continue to support this growth by investing in talent and structuring our team to maximize alignment with our objectives.
With this in mind, I’m pleased to announce the recent appointment of Oliver Harrison to the position of Senior Vice President Leasing and Tenant Experience. This hybrid role was designed to support our commitment to customer centrism by optimizing value to our tenants from lease execution, all the way through construction, onboarding, and renewal.
I’m also pleased to share that RioCan’s cans Board of Trustees continues to evolve with the recent election of Marie Josée Lamothe. Ms. Lamothe is well-known for her expertise in global branding and digital transformation. Her experience is especially relevant for RioCan can as we continue to support our tenants through the merging of e-commerce and physical retail.
With that, I’m delighted to turn the call over to Dennis Blasutti to take it through our balance sheet metrics and provide insight into how an active disposition programs have supported them. Dennis, over to you.
Dennis Blasutti
Thank you, Jonathan, and good morning to everyone on the call. Despite a very volatile market backdrop, RioCan had a very productive quarter. We have a lot of ground to cover this morning as we discussed the fundamental strength of our business, and the attributes that will drive our success in any environment.
First, as Jonathan mentioned, we had another strong quarter operationally. This is driven by our best-in-class team and high quality portfolio which continued to deliver results. These results, and the outlook for a business, gave us the confidence to once again reaffirm our FFO guidance for 2022. FFO per unit was $0.43 for the quarter. This year-over-year growth of 7% was driven by the straightforward building blocks that we laid out at our Investor Day.
Same-property NOI growth and development deliveries. As to our [ph] SPNOI growth for the quarter was a robust 6.2%. When we adjusted for the impact of the pandemic-related provision as well as legal and property tax settlement gains in the prior year, our high quality operations posted a solid 3% SPNOI growth.
Our development deliveries and ongoing development activities also contributed with growing residential rental income, gains on condo sales, and fees we earn as development manager. All together development added — development activity added $0.03 per unit.
FFO in Q2 was also impacted by some restructuring costs. Excluding these costs, FFO per unit was $0.44 cents, or $.10 — sorry 10% growth over the prior year quarter. Our strong operational performance and development progress also provides us with competence in our growth expectations for 2023.
From the perspective of our fundamental building blocks, we intend anticipate SPNOI to remain strong as the robust leasing activity in the current year will translate into full year NOI next year.
We expect to deliver an industry leading 1.7 million square feet of developments over the course of this year and next, with the commercial component of the well expected to meaningfully contribute to FFO in 2023 as the majority of that project will be delivered in earning rent over the second half of this year and the first half of next. We have provided additional information on this timing on page 43 of our MD&A.
We also note that the impact of the current higher interest rate environment on 2023 FFO have been muted by financial risk management activities, namely, in 2021, we preemptively refinance $250 million of debentures and $345 million of mortgages at very attractive rates.
Our weighted average interest rate on 2021 financing was 2.6%. That left $448 million of debt due in 2022. We hedged $500 million of the GLC component of plan 2022 financing at an average rate of 1.56% for seven-year blocks, which has been significantly below the actual rate.
In April, we utilized $250 million as a hedge when we raised a seven-year debentures at an effective rate of 3.83%. As Jonathan mentioned, we intend to utilize the remaining hedge for finance activities that we expect to complete in the coming months.
As a result, the interest rate impacts on 2023 FFO relating to financing activities completed our plan to 2022 has been minimized. Looking at our 2023 refinance requirements, those are distributed throughout the year, again reducing the impact of 2023 FFO. To assist with modeling, we have provided a breakdown by quarter on page 44 of our investor presentation on our website. We continue to evaluate all options for these products activity to ensure that we optimize the cost of funds and our financial flexibility.
Now, turning to our development spending. We reduced our guidance for the year by $50 million to a range of $425 million to $475 million. This was the result of minor shifts in timing of projects following strike activity by certain trades in the second quarter that are now resolved.
Looking forward, our basic assumption of annual development spend about $500 million per year in the five-year plan that we presented at Investor Day remains unchanged. We continue to believe that our development pipeline, which includes 16 million square feet of zone density is an attractive use of capital. However, we do have ability to scale this back at the macro environment warranted.
As Jonathan mentioned, we have the ability to pause projects that remain productive retail assets until the market is ready. I would also point out that the projects that contribute FFO in our five-year projection, disclosed at Investor Day are already underway. Any potential deferrals mentioned in our comments today would be related to the start of new projects that would be delivered beyond that five-year horizon.
With that said, we would have the ability to pause projects and reduce spend by approximately 25% in 2023 and 50% in 2024, if required and be prudent beyond those years, the spend is virtually all discretionary. The balance over development spend in the two years mentioned is already under construction and substantially contracted, so the exposure escalation is mitigated.
Moving now to our valuations. We booked a $46 million fair value loss in the quarter. We took a targeted approach to this, which I will unpack further. Within that number is $108 million of reduction in fair value largely related to enclosed malls and secondary market assets.
Given discussions we’ve been having in the market, we see these types of assets which comprise a relatively small percentage of our asset value as being at the highest risk of impact in a rising rate environment. This was offset by $41 million increase in the fair value, predominantly related to higher NOI forecasts across many of our properties, driven by a strong leasing activity in the first half of the year.
We also recognized a $21 million gain on development properties, predominantly relating to advancements of our lease side and [indiscernible] projects. On an overall basis, we view our asset values relatively conservative and the following two factors support this assertion.
First, we took write-downs as at December 31st, 2020 of $527 million as a result of the COVID pandemic. And we did not reverse much of this, in spite of strong — in spite of strong asset level performance. Our cumulative fair value movements from that point until now, or remain in a loss position of $410 million.
Second, we have taken a conservative approach to value density 95% of the value for our property and underdeveloped properties under development recognized on our balance sheet relates to projects that are currently under construction. We ascribed relatively low value to the remainder of our zone density as we apply strict — set a strict set of criteria before we recognize that value.
We can also look at our valuations from a cap rate perspective. We note that our weighted average cap rate today of 5.33% compared to 5.28% pre-pandemic at the end of 2019 as far as in spite of market evidence of cap rate tightening over the past couple of years.
However, it is important to note that this five basis points increases on an absolute basis. On a same-property basis, our weighted average cap rate is 18 basis points higher than it was at the end of 2019 as a result of the above noted write-downs. This increase was partially offset by 13 basis points decreasing cap rates related to an asset mix, as portfolio quality improved through the development deliveries and acquisitions combined with a disposition of lower quality assets.
While rising rates pose a potential risk to our values going forward and we continue to monitor markets closely, we believe these mitigating factors combined with our income growth and advancement of our development pipeline, provide defensive attributes.
Next, I wanted to add a few comments regarding our capital allocation for the quarter. Our asset sales program has progressed well with $123 million of completed disposition during the first half of 2022 and a total of $376 million when adding firm or conditional deals. These were at an average cap rate of 6.7%, as we have been selling lower quality assets, further improving our overall asset quality and recycling that capital into more productive uses.
During Q2, we allocated capital from disposition proceeds and retained earnings to our development program, as well as unit buybacks to our NCIB, which totaled $129 million or 6 million units. This is an addition to the 8 million units that we repurchased in Q4 of 2021. We see these buybacks as an attractive use of capital as recent news unit prices, these repurchases this quarter reflect an implied cap rate of over 6%. This implies the unit price of these purchases was at a discount for income producing properties and ascribe effectively no value to our development pipeline.
Expressed another way, the price implies a value of approximately $340 per square foot of our income producing property, or 230 per square foot base our income boost reducing properties plus zone development properties.
When compared to the replacement cost metrics that Jonathan mentioned earlier, these numbers are quite compelling. To round up my comments, I will briefly highlight some of our balance sheet metrics.
Our net debt to EBITDA continue to trend downwards, and was that 9.4 times at the end of the quarter, we finished the quarter with $1.4 billion of available liquidity and unencumbered asset pool of $9.2 billion. These items provide us with substantial financial flexibility. Our unencumbered asset pool has decreased slightly since year end, as we have added construction loans to development projects and sold some income unencumbered assets.
We expect that to decrease further the next quarter as we are in process of raising approximately $300 million through secured mortgages. We’re doing this tactically given the current disconnect in interest rate spreads between secured and unsecured debt markets.
At the same time, we continue to seek opportunities to raise low cost CMHC secured financing where it makes sense. In the long-term, we are not changing our strategy to move to a greater proportion of unsecured debt and maintaining a large unencumbered asset pool.
We hope the information provided in our materials and on this call helps our unit holders to better understand why we believe that the quality and resilience of our portfolio combined with our strong balance sheet position REO can to perform well in any environment.
With that, we have concluded our remarks and we’ll pass the call over for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]
The first question today comes from the line of Sam Damiani from TD Securities. Please go ahead, your line is now open.
Sam Damiani
Thanks and good morning, everyone. Congrats on a great quarter. First, a question is just on the pace of dispositions and further NCIB activity. I wondered if you just give us a sense as to how we should expect disposition completions to look in Q3 and Q4 and resumption of the NCIB?
Jonathan Gitlin
Sure, I can start and I’ll hand it over to Dennis for any further color. Hope you’re doing well, Sam. And I think disposition, as we had suggested coming into the year are largely based this year on qualitative assessments where we can make our portfolio better sort of addition through subtraction.
And we’ve been — we didn’t really rely tremendously on the quantitative element of dispositions this year as we have more so in years past. So, we didn’t set dramatically high targets for disposition. And we’re well on track to be well within those targets in terms of the dispositions that we’re doing.
Most importantly though, some of those dispositions will make our portfolio better and higher performance and higher growth. The disposition market is not dead by any stretch, we are actively in the midst of a few transactions on varying types of assets in various geographies within Canada. And I don’t think we’ve disclosed sort of what our target is for the rest of the year. Dennis?
Dennis Blasutti
I think we’ve just mentioned that we have the 370 if we include the firm or conditional to close out.
Jonathan Gitlin
Yes. So, I think that’s an accurate sort of gauge on where we’re going to be. And then with respect to NCIB, as Dennis mentioned, we’ve been very active. I mean, it really is a compelling use of our capital at this point. And in terms of our plans going forward, it really does depend on where our balance sheet is.
We will not partake in NCIB, if it comes at the expense of balance sheet metrics. And so if we — like last year, when we sort of outperformed on dispositions, and we’ve sold a little more than we had pre-masticated, we utilize those excess proceeds to buy back shares, and I’d say the same thing is in line for this year. so, really only if our balance sheet metrics permitted, it’s something we would absolutely — I think be prudent to consider as a logical use of capital. Dennis anything further to add?
Dennis Blasutti
No, I think that’s bang on. I think the numbers in terms of the value accretion, replacement cost metrics, et cetera, are very compelling. But we absolutely need to be at the appropriately cautious in this environment, make sure that we keep — always have one eye on our balance sheet, on our liquidity and — before we make any of those decision. So, we’ll continue to monitor the disposition market. We’ll actively work to close the dispositions we have in process and presuming that capital arrived, we’ll evaluate.
Sam Damiani
That makes sense. Thank you. Next question just on the widening gap between in place and committed occupancy? Any anything going on behind the scenes that drove that in the quarter? And how do you expect that to evolve over the belt of 2022?
Jonathan Gitlin
So, I’ll start then hand it over to John Ballantyne. I think that what we’re doing is actually getting closer to historic norms with about 100 basis points separating the two. And I think it just speaks to the different nature of tenancies that we are putting in place where there is a little more work and a little bit more time involved between the time we sign the lease and the time they move in.
For instance, the well is — these are more complex processes in mixed use environments, where again, it just takes a little bit longer for the tenant for the landlord work to be completed, and then ultimately, the tenant work to be completed. But as I said, I don’t think — I think what was the anomaly was how we tighten that gap so significantly over the last couple of quarters, I think, we expect it to be somewhere in this range, not far off at going forward, maybe a little bit lower. But I think it just generally is in keeping with the nature of tenancies that we’re now entering into. But, John, over to you.
John Ballantyne
Yes, I agree with that. And I would say the historical norm is probably more like 70 basis points, Sam. I would also add that we do have a bunch of office backfills that we’re working through typically slower. And I have to say an Andrew would probably agree the purchasing, especially in the Greater Toronto Area has been dramatically slowed over the last couple of years and we’re hoping that that speeds a little bit.
Sam Damiani
That’s great. That’s helpful. Last question for me is just on the leasing pipeline. Currently, you look through the list of all the potential leases in the discussions on how does that sort of look today versus historically? Are you seeing any sign of slowdown in I guess retailers’ interest in committing to new leasing?
John Ballantyne
Yes, I’ll answer that as well, Sam, it’s really the supply/demand dynamics in the market right now. We are very much benefiting from that, especially on the larger box side. We have had some tremendous response from grocery operators, over some available space in three different markets, to the point where we’re seeing some competition there for this space. So, obviously, that really benefits pricing.
If you look at kind of the list of major retailers in Canada, being Loblaws, be it Empire, be it Canadian Tire, be it Metro [ph], they’re all looking to expand store count right now, there has not been that much retail built over the last five years. And I doubt they’ll be a ton built over the next three. So, we are definitely benefiting from that demand.
Where we’re seeing a little bit of slowness still, again, is on the office side. Although the space that we’re seeing out, specifically in our Young Shepherd asset was full force space given back by one of the bigger banks taking a little bit longer to divide up and put people in. But for the most part, we’re very happy with [indiscernible] demand. And with existing tenants wanting to keep their space as well our retention 93% is well above our historic norm, it’s something that we will definitely see go down as we get a little more picky and choosey over the next three or four years. But again, demand has been great.
Sam Damiani
That’s great. Thank you very much and I’ll turn it back.
Operator
Thank you. The next question today comes from the line of Mark Rothschild from Canaccord Genuity. Please go ahead, your line is now open.
Mark Rothschild
Thanks and good morning. Kind of continuing on the point you were just addressing that there hasn’t been a ton of new retail development and obviously, not much near the assets that you own. But are you seeing this slowing down even more to the point that it would impact rental rates and the rising development costs and rising costs and general impact the rental rates you’re getting? And specifically, would this lead to better leasing spreads over the next year or two?
Jonathan Gitlin
Yes, I think that the market dynamics are very favorable for landlords such as RioCan where we own space in high demographic, neighborhoods and we are definitely seeing that the ability to replace and create new space is become very, very, very difficult. And that means that — and I think couple of that marked with the reconciliation that occurred during COVID where I believe a lot of retailers and I say this with a lot of discussions in in the background with our retailers, they have recognized the importance of being able to distribute from the stores. And so that that along with the supply/demand constraints have either increased the increased the desirability of our shopping centers and it is created upward pricing tension, and we believe that it will continue to do so.
And while I can assure you that leasing spreads will be consistent in this sort of double-digit number, we do stand behind our guidance from our Investor Day presentation where we said it’ll be in the high single-digits over the span of a five-year period. And of course, it ebbs and flows, quarter to quarter, but we think over the long run, because of those dynamics, those are sustainable numbers.
Dennis Blasutti
Mark, we look at, internally, obviously, the economics of any of these new retail developments all the time. And even with them, we’re building on pre-existing land that carried at a very low cost base. And even with that, it becomes challenging to make these projects pencil without, pretty good market adjustments.
If we layer in the market value of land, if someone were to go out and actually buy that land and build new retail, our view is that it’d be virtually impossible to make the numbers work right now, at current market rents.
So, at some point, that that pricing dynamic has asked to give supplies to his to come on. But unless it’s part of a high density mixed use project or on an pre-existing land, we really think that the economics are very, very challenged for anyone to develop.
Mark Rothschild
Okay. An d just following up on the numbers that you could [indiscernible], my understanding that, while you expect the leasing spreads to be strong, you don’t expect it to generally be in the double-digits?
Dennis Blasutti
Well, again, what I said Mark was that our guidance of high single-digits over the course of five years is something we stand behind.
Mark Rothschild
Okay, great. Thanks. I’ll leave it there.
Jonathan Gitlin
Thank you.
Operator
Thank you. The next question today comes from the line of Mario Saric from Scotiabank. Please go ahead, your line is now open.
Mario Saric
All right. Thank you. Good morning. I just want to turn to the to the occupancy of the in place of 96.2% embedded within your guidance for the year, can you remind us of whether you believe you can maintain are slightly increased occupancy by Europe?
Jonathan Gitlin
Yes, I think it is certainly something we’re comfortable saying that we can maintain and slightly agree. I mean it’s — as we said, the conditions are very favorable and truthfully, I mean, we believe that the numbers we are added, it’s almost as though we’re stabilized. So, I think once you start hitting the 98% committed, you actually can’t really or don’t want to go much higher than that, but there’s still a little bit of room there.
Mario Saric
And then in terms of the well, it was noted about the kind of least or in discussions that 81% that’s up 200 basis points quarter-over-quarter, given we’re approaching completion of construction next 12 months, give us a bit of sense in terms of the trajectory and expectations of 81% up to the well trigger?
Jonathan Gitlin
So, we feel that the given that the physical plant is now much closer to being completed and some of the retailers that we’re trying to get at the — we are overconfident that we will get at the well are those that really — they’re more local in nature, they’re not once to singing two or three years in advance.
We feel that now that we’re in that sort of homestretch of the last 12 months, we will be able to start increasing that occupancy number on a consistent basis month-over-month until we do have our grand opening.
Remembering too that the grand opening is just really a date for a ceremony, we will be opening tenants in advance of that date. And I think the leasing philosophy, just given the momentum of the site given its aesthetic and given that there’s a lot more hype around it right now, we’ll continue to — I think, move towards full occupancy at a reasonably consistent pace.
So, we are not in the least bit concerned about getting the appropriate tenant mix there in the appropriate time before that grand opening date. I can’t promise you that it’ll be 90% occupied within a year. But I think again, for us, the more important outcome is the tenant mix and we feel confident that we’ll be getting close to that over the course of the next medium to long-term.
Mario Saric
Okay. And then in terms of the pretty strong least spreads that you announced, with the numbering be notably different on an effective basis?
Jonathan Gitlin
For the numbers on leasing spreads on a net effective basis, I don’t think they would be significantly different. Jon, is that accurate?
John Ballantyne
Yes. That’s accurate, yes. Cost of deals have not increased over and above what we’re seeing in just general construction costs increases. But as far as dealing with tenants extracting high rents, we are not paying higher turnaround packages.
Mario Saric
Great. Okay. And the last one is just pertaining to the assets that you have on your discussion for disposition. Would it be fair to say those are mostly concentrated in the closed malls part of the portfolio? And then secondly, what would the kind of mortgage debt attributes associated with those potential dispositions be generally free and clear of that or do they have other tenants?
Jonathan Gitlin
So I would say that there, there is an emphasis on the closed mall portfolio, but that’s not the entirety of it. We are focused just on lower growth assets. And the debt attributes really vary, as you know, I mean, our unencumbered pool of assets is significant, which means that some of the assets we are going to sell will be free and clear, but some of them do have mortgages attached to them, and those rates given today’s market, given the fact that most of them have been refinanced over the last five years. They’re generally favorable mortgages at this point, which makes the saleability of them enhanced and Andrew Duncan, I’m not sure if you have anything to add to that.
Andrew Duncan
No, that’s fair on Jon. It’s a mixed bag. There is some enclosed components, but there’s also some unenclosed components that are lower growth, and some have leverage on the property level leverage on them and somebody don’t.
Mario Saric
Great. And then in terms of expected timing on those dispositions, is the Q3 event, or do you think it can bleed into Q4?
Jonathan Gitlin
It could bleed into Q4. I think the number that we’ve given in terms of properties that are under contract. Those are — those could definitely bleed into Q4.
Dennis Blasutti
Yes, I would probably to – I just looking at it kind of spreading pretty easily in Q3 to Q4 from a conservative perspective.
Mario Saric
Perfect. And one last quick question for me more of a general question strategically, I think, real candidates, one of the most active in terms of the share buyback, the management team has been pretty responsive to your change in cost of capital relative to some others. You’ve laid out this five-year strategy recently on the implied cap rate at above 65 basis points this year, the volatility in the public markets that we’re seeing, does that change anything on the strategy on the margin?
Jonathan Gitlin
No, I think what we’ve said is, you in the way we raised that capital, we did suggest in our Investor Day that we were going to look to lean more into the unsecured market rather than secure given the volatility in the unsecured market right now. And the pricing differences Dennis had referenced in his remarks, we are going to tactically started looking at some — sorry, some unsecured debt, just given that price difference.
But overall, again, if I look at that five-year plan, I look at our — I look at our objectives with respect to multi-res with respect to the way we diversify our tenants, the way in which we’re actually going to apply capital intelligently to our shopping centers to make them just a better offering, the way in which we’re going to invest in technology and ESG and our people here at RioCan. I don’t believe that’s the volatility — the current volatility in the market is in any way going to impact those around the margins or otherwise, those objectives, those pillars that we came up with, were intended to be versatile and be in place, regardless of the economic backdrop.
Dennis Blasutti
And what I would kind of add in, Jonathan said exactly right. Things like shifting to more of a secured financing in the short-term, that’s a tactic, no strategy. Likewise, I made some comments around our ability to defer development starts, if that came to pass that would be a short-term capital preservation move.
But again, that’s a tactic, no strategy. Everything we’re saying, it really tries to highlight the ability or our flexibility to adapt in these volatile times. But in terms of the long-term goals, we’re not changing those.
Mario Saric
Okay. Thanks guys.
Operator
Thank you. The next question today comes from the line of Pammi Bir from RBC Capital Markets. Please go ahead. Your line is now open.
Pammi Bir
Thanks. Good morning.
Jonathan Gitlin
Good morning, Pammi.
Pammi Bir
Just given the comments around the 2023 refinancing, you mentioned some higher anticipated costs there. And then you also made some comments around same property NOI. What can you share with us in terms of maybe your thoughts on hitting perhaps that 5% to 7% annual — average annual — sorry, FFO growth target for next year?
Dennis Blasutti
Yes. I think those comments were directed at that I made earlier are directed at the fact that we believe that is achievable. I think the steps that we’ve taken from a financing perspective this year protect our FFO expense next year. We’ve given more detail on the timing of some development ramp up, including one thing we do want to clarify sooner MD&A is that there’s actually a very small gap, if any, between what we define as completion on the well and rents commencement.
And that’s because the different period were — are so much longer at the well than our typical retail sites, that we took the conservative approach of not calling them complete until the fact that that extra work was done. And so there’s a very, very small gap there. So, that’s a strong ramp up and much of those leasing there is complete, certainly on the office side is progressing well on the retail side at attractive rent.
And then we look at leasing spreads this year, I mean, getting a solid leasing spreads in the first half of 2022, actually really drives more towards the full year results in 2023. So that positively momentum this year contributes next year. So putting all those pieces together, we feel pretty good about hitting in that range. Certainly, there are risk scenarios that exists, but in almost any environment, we feel good.
Pammi Bir
Great. No, thanks for that. You mentioned earlier that net effective rents haven’t really changed. But just looking at maintenance CapEx in TI, they are running maybe a little above last year, but still below your guidance. You’ve also done of course, some more leasing this year. So I’m just curious, what are tenants asking for today that might have changed say versus pre-COVID whether it’s the lease terms, or maybe even the types of inducements?
Dennis Blasutti
Well, again I think, I’ll turn this over to Jon to get more on the ground color. But my view is that tenants are asking for as much as they can get. And thankfully, because of the shifting dynamics and demand, we are able to ask for what we want in return. And so we’re seeing a nice balance now, where there’s actually a logical tenant inducement allowance that is similar to where we were pre-COVID, depending on the space, dependent on the tenancy.
There really isn’t any sort of outside measure of TIs. And with respect to landlords work, really, it’s also very similar other than that work has gotten more expensive for us, given the given the inflationary environment in construction costs. But tenants also of course, asked for low growth, and we asked for high growth, and there’s a dynamic there that you obviously have to negotiate.
And thankfully, given that — given the market, we are able to extract reasonable year-over-year growth and in many cases from our tenants, which is why we have a strong belief in our growth profile in our same property NOI trajectory going forward. But again, in any environment, tenants are going to ask for as much as they could possibly get. The real question though, Pammi is what we’re able to negotiate based on those requests and what we can get, which is in favor of the landlord, which as I suggested, is really kind of in line with where we were before COVID, a reasonable TI reasonable landlords work, not a lot of rent free concessions and reasonable growth year-over-year. But John, you — more color on it.
John Ballantyne
Yes. The only thing I’d add Pammi, further what Jonathan said earlier about, tenants are really embracing the fact that their physical state is the fact of fulfillment centers for the consumers. They want to be able to get people in and out as efficiently as possible. So we are spending more time with them to make not just their unit center, but our shopping centers, more contingents people getting in and out of the centers square, because that means working with parking areas, working with shipping areas, giving larger back house, as Jonathan mentioned in his scripts, we now have created something called our tenant experience department. That’s to do exactly that. It’s not just the build out specific kind of space. It’s really not a white luxury with our tenants to ensure that they’re maximizing the efficiency of their space. So again it’s not necessarily costing us more, but it’s we’re putting more intensive resource efforts into it.
Jonathan Gitlin
And it’s a great point, John, and I think we know, the other things we’re doing, it’s just investing in technology and other elements that make the tenant experience better. So that we are in a better position to ultimately get better economic terms from our tenants, because they will ultimately when needed to make a decision as to be in a RioCan center or elsewhere, we hope will elect to be in a RioCan center and be willing to pay to have that benefit of all of these services that we would like to offer to differentiate ourselves.
Pammi Bir
Thanks. Thanks. That’s great color. Just maybe on that point, better terms, are you getting better annual steps in the leases, and some of maybe you’re stronger markets, like maybe the GTA, and just if you can kind of share what those steps might be, and if they’re being built in on an annual basis?
Jonathan Gitlin
It’s certainly something we’re attempting. And it’s really — it’s tenant-by-tenant. Historically in Canada, you follow steps every five years. But based on our experience down in the US where there was more than norm to actually get annual bumps, we’ve started instituting that in as many weeks as we can hear in Canada, and it really is market dependent and tenancy dependent, but we are able to negotiate that in many cases, with respect to the actual percentage of growth each year, I think it’s in line with the some of the same property NOI numbers that we’re trying to achieve. Might not be 3%. But it’s certainly we attempt to achieve 2% growth funds each year. But as I said, that’s — that really does vary wildly between tenancies. John, if you have any further call on that.
John Ballantyne
No, no. The only thing I’d add absolutely we try for 2% to 3% a year. I would also say tenants are really trying to extend lease terms that longer than the typical five-year rule. They’re also trying to tie up space before expiring. So we have a bunch of national guys coming to us a year, two years in advance, and they want to lock in space now. And it really gives us the benefit of building in that future growth.
Pammi Bir
Thanks. And just last one for me just coming back to the wealth, any update on the types of tenants that you’re speaking to on the retail side and on the balance of this space, and any changes in the strategy just given the broader economic backdrop?
Jonathan Gitlin
Yes. I’ll start and hand it over to John. But no, we’re not. Well, first of all, we’re not changing the strategy, we really do want the appropriate types of tenants that define that downtown west corridor, the types of tenants that will be suitable for not only the constituents within the office there, but also the residents and the residents around the neighborhood.
So a lot of F&B, a lot of experiential uses, but then also some uses that help with a day to day needs of all of those, all of the people around that retail component. So I think you’ll see that the mix of tenants is totally appropriate within that context. And that’s been our strategy for a number of years. And it hasn’t changed at all based on this economic backdrop. This is a generational type of asset, one in which we feel that, a blip in the economic backdrop is not going to alter the way in which we fashion it. John, any further call on that?
John Ballantyne
No, I think you got it all. Again, emphasis is really on food. Right now, especially in filling in our market. We got 1.2 million square feet of office and people are going to be there every day as far as revenue. We know it’s a very important component of this for the people living and working there, but also as an attraction of people throughout the city. So we have a team of people working specifically on the food side and I think what we’re coming up with is going to be pretty exciting there.
Dennis Blasutti
And just given some breakdown by types, I’m not going to names necessarily, but it is that mix that both Jonathan and John mentioned, so we have necessity based type tenants like 16,000 square foot, pharmacy a 15,000 square foot, medical office, a dental office, et cetera. These types of — a couple of bank branches. So, these types of things that residents need day in and day out. We have a large food purveyor. We have the market hall and then some proprietary brand type athletic wear types as well. So getting that mixes, it fits pretty wide swath.
Pammi Bir
Thanks very much. I’ll turn it back.
Dennis Blasutti
Thanks, Pammi.
Operator
Thank you. The next question today comes from the line of Tal Woolley from National Bank Financial. Please go ahead. Your line is now open.
Tal Woolley
Hi, good morning, everyone.
Jonathan Gitlin
Good morning, Tal.
Tal Woolley
Hey, good to hear you.
Jonathan Gitlin
Hi.
Tal Woolley
Just to put a bow on the guidance conversation, it seems to me like basically, based on what you’re seeing you feel comfortable with the growth outlook for 2023 and for the remainder of the plan that you had laid out earlier this year, is that a fair statement?
Jonathan Gitlin
Yeah.
Tal Woolley
Okay. When you’re looking at new projects right now, I’m just wondering, if you are looking at a new residential project, would you be more likely to kind of look at the condo prospects for that property, or the rental prospects for that property?
Jonathan Gitlin
Well, I think we are looking at it the same way we always do, which is one it is site specific. So it really depends on how many units we are planning on creating. And if it is, like we said that there’s too much absorption for multi res rental, we’re also going to supplement that with some condo. Two, we’re looking at sort of the balance sheet within that project. And oftentimes, as you know, building multi res rental alone is quite, quite cost prohibitive, and you’re going yields are not tremendous. And we look at everything on an IRR basis, not necessarily going in yields, because that doesn’t tell the whole story.
But oftentimes, you’re aided by the sort of the upfront cost recovery and profit that you get from a condo building. And that helps you succeed in building your multi res rental building. We have a – we have a defined ambition to get to between $55 million and $60 million of residential NOI, within that five year period, which is now we’re six months into it. So call it four and a half years. So we – and we believe that is the right thing to do for our company long term and for our unit holders.
So we will still continue to build multi res rental. But of course, we will supplement it with condo where it makes sense. So I know that’s a bit of a vague answer. But it really is project specific. But from an overall corporate objective perspective, we are still very much focused on growing our multi res platform and having the RioCan living brand utilize its scale and its capabilities to make those environments really, really exceptional for our residents, which will, of course, in the long term, provide much needed living space, but also provides, I think, enhance rents and growth for our organization.
Tal Woolley
And can you just remind me is there a big difference in like the development charges or associated fees with respect to building rental versus condo?
Jonathan Gitlin
Well, the big difference is that we get charged HST on building a multi res rental property. And we do not get charged HST when we build condo that gets flowed through to the ultimate buyers. So I mean, again, I’m not going to criticize taxation policy, although, I will point out that, it does make it a little more difficult on a multi res rental project to make the numbers work based on that. And I think, again, if we are speaking, enhanced supply out there, which is needed to address what I think is a housing crisis. That HST factor does definitely make a difference when it comes to building multi res.
But in terms of actual development charges and levies and things of that nature, my belief is that there is total consistency between the two. But I’m going to look over to Andrew Duncan, just to make sure that I didn’t get that wrong.
Andrew Duncan
That’s right, Jon. The only exception to that is in cases where there’s some of us consideration for fees related to doing affordable rental in certain jurisdictions. There’s an affordable housing policy, like in Toronto where the open door policy where there’s a break on some development charges related to those units you are delivering that are affordable. But overall, whether it’s a condo unit or market rental unit, these development charges are exactly the same.
Tal Woolley
Okay. But a couple questions are more on the retail side. Just to go back to your earlier discussion on the grocers. They had sort of been pretty quiet in terms of growth, sort of prior to COVID. When you’re talking to them now, it like what are they what are they seeking? Is it you know about relocating into bigger box sizes? Is it about absolutely unit growth or we looking at new entrants? What do you think driving the growth in that category?
Jonathan Gitlin
Well, yeah, I think it’s a combination of things, the color that I get from speaking to some of the high level executives at the national grocery changes. One, that a lot of them have acquired new banners that they want to expand, some of them have discount banners that are doing better or just sort of are requiring more growth than their mainline banners, so they want to grow those out as well. And some have ancillary businesses like pharmacies, which they’re very hyper aggressive in their growth plans, what that leads to is one an expansion of some box spaces that they already have. But more, I think, mostly it is actually just acquiring that new space, whether it’s existing boxes, or having new boxes built for them.
But as we suggested, the whole prospect of building new boxes for them is becoming increasingly difficult. And that’s why there’s so much demand. And we literally are seeing some reasonably fierce competition for any boxes that open up that are, I would say, that can accommodate grocery stores, because of these expanding profiles.
Tal Woolley
Okay. And nothing new on the entrant side then no major new entrants, or anything like that, that you’re seeing at this point?
Jonathan Gitlin
No more just expansion of smaller newer newly acquired properties. But you know, TNT, for instance, or Farm Boy, — non-frills is also looking to expand them aggressively. So those I think will keep us busy. And I think we’ll definitely I think our grocery store chains here have done a remarkable job of evolving. And I think, because of that evolution, they’re going to be seeking new space opportunities, but I have not heard like some of the US biggies. You know, like all the vitals, we’ve always kept an eye on, I haven’t heard anything definitive about them and their Canadian expansion plans they have any. So it really is just the same players in Canada looking to expand and extend.
Tal Woolley
Okay. And then now the duct has somewhat settled on, COVID, across the retail landscape, I’m just wondering, like, as you look around, are there opportunities out there, where, large – large retail platform like yourself could be a little bit more opportunistic in retail, like, I’m thinking maybe there’s street rent, that, you know, obviously, certain parking, in certain areas, sort of under pressure, or, office retail there. Any – any other parts of the retail sort of space complex that you could be getting more involved in?
Andrew Duncan
Well, I think the first place we turn to is inwards, and we have some tremendous properties that can use some more attention within our own portfolio. And that’s something that we’re hyper focused on investing in actually making our own portfolio better, not just through these massive redevelopment into mixed use properties, but also even our ubiquitous, suburban shopping centers, just making them, as Jon suggested before, making them more amenable to, to providing the services that our tenants need to make their stores better in this kind of hybrid online environment.
But in terms of other opportunities, the truth is, retail in Canada has fallen into the hands of some very well-heeled and responsible balance sheet, heightened entities that aren’t really like desperate to sell on mass. So there might be certain opportunities around the edges where, if available, we will certainly look to avail ourselves. But I don’t think I could have that ramping. And I think everyone is sort of waiting for a shoe to draw based on higher interest rates. But all of a sudden, like the market is going to fall off a cliff, from a values perspective, allowing people like us to have a tremendous amount of opportunity.
But it’s not just interest rates that, they create pricing, it’s also flow of capital and close bonds. And we just, we have a sense that there’s a lot of people with capital who really liked the retail space. And so I don’t think there’s going to be like, large scale opportunities out there, but you can rest assured that if they exist, we will find them and try our best to take advantage of them. So that’s really what I will say there. I don’t know, Dennis if you have any further thoughts on that.
Dennis Blasutti
I think that’s bang on and it’s one of the reasons why quarter and a quarter out we talked about our liquidity both as a defensive position for us going forward but also as an opportunistic position. If the rising rate environment does create some – some opportunity down the road it says people get jammed up by refinances, et cetera.
Tal Woolley
Okay. Perfect. Thanks, gentlemen.
Jonathan Gitlin
Thanks, Tal.
Operator
Thank you. The next question today comes from the line of Jenny Ma from BMO. Please go ahead. Your line is now open.
Jenny Ma
Thanks. Good morning, everyone. Just wanted to ask about the – the debt strategy, Dennis, I’m not sure if you had mentioned what the gap between unsecured versus secured debt is. So if you could give us that? That’d be great. And then you also talked about leaning a bit more towards secured debt for some of the near term maturities. And I’m wondering, tactically, is there a view of playing around with short term versus long term in order to get a more attractive cost of capital? Or is the preference to really turn that on as long as possible?
Dennis Blasutti
Yeah. So I think, yeah, thanks, Jenny. The first question is that, we haven’t seeing in the neighborhood of what’s called 75 to 85 basis point, gap and spreads between secured and unsecured on financings that are active in right now. So that is a fairly substantial disconnect. So we will take advantage of our secured assets to do that. And, I think, it’s hard to know exactly why that is. There’s a lot of funds flow dynamics and market dynamics out there. That’d be a lot to think about. But I think one thing that a mortgage lender does at a business level that a fixed income portfolio manager can’t necessarily do is they are underwriting down to the asset.
So they’re taking the couple months that it takes to go lease by lease through an asset, get comfortable with the credit quality, and underwrite on a very different risk basis than a typical fixed income investor can do. And we think that is that is helping the viewpoint there. It would be interest of the audience converge over time. But that’s where it’s been today. We are active on $300 million of secured financing now that we need to refinance our upcoming maturity of our events in October. And we are looking at seven year because we haven’t had yet for seven year logy TOC components. So that kind of takes care of the balance of this year.
As we go into next year. So we don’t have any major financings after that until we get into first half of next year. Our mantra right now is just making sure we know what all our options are. So we’re looking at a term or looking at type of debt of all types. And we’ll continue to do that. We always have to have one eye on the ladder and the risk. So our preference would be to go longer. The way, the curve is right now, it actually is kind of attractive to go – go longer. But again, the way the markets move these days, it’s hard to know how that lasts. But the – we have an inverted curve that the 7, 10 year end of that curve has come down a lot in the last few weeks as well. So we continue to monitor.
Jenny Ma
Okay. Great. And then turning to your strategic initiatives and the guidance, it sounds like you’re fairly confident about hitting the 5% to 7% in 2023, based on where we stand today, but I’m just wondering, in the fullness of your five year plan, when you think about the performance of hitting those goals, do you look at sort of a 5% to 7% FFO per unit growth discretely year-by-year, or, is there room to say in five years’ time you look back and if you get to an annualized number of 5% to 7%, that that’s satisfactory as well, like how should we think about your goals on a year-by-year basis?
Dennis Blasutti
So our model that we put on investor day was an average five year. So it’s a CAGR basis over that five – five year period. So there, there could be bumps in the road. You can always find scenarios that could be negative, but we think they would be temporary. So you read that in the market, things like stagflation, low growth high interest rates. To be honest, at this point, we wouldn’t do much the impact 2023 because we’ve advanced a lot of the leasing already and taking care of a lot of the financing. But you start getting into 2024, maybe that has an issue but in the fullness of time over the five year plan. These things tend to normalize and we feel comfortable running a lot of different scenarios, including some pretty high interest rate scenarios that these numbers are made available over that period of time.
Jenny Ma
Okay. Great. That’s helpful. And is there a plan to issue 2023 guidance next quarter or is that going to be something in early next year
Dennis Blasutti
I think we would typically do it like we did this year as we would launch something or put that out in early, early 2023.
Jenny Ma
Okay. Great. Thank you very much. I’ll turn it back.
Dennis Blasutti
Thanks, Jenny.
Operator
Thank you. I’m showing a set of questions at this time. I would now like to turn the conference back to our President and CEO, Jonathan Gitlin
Jonathan Gitlin
Thanks, Bailey, and thanks everyone, for hanging out with us this morning and for reading through our results and very pleased with where we are and where we are going. And looking forward to speaking to all you again very soon, or at next quarter when we are report again. Thanks.
Operator
Thank you all for your participation. You may now disconnect your line.
Be the first to comment