SmartCentres Real Estate Investment Trust (OTCPK:CWYUF) Q2 2022 Earnings Conference Call August 12, 2022 10:00 AM ET
Company Participants
Mitchell Goldhar – Executive Chairman & Chief Executive Officer
Rudy Gobin – Executive Vice President, Portfolio Management & Investments
Peter Sweeney – Chief Financial Officer
Conference Call Participants
Sam Damianim – TD Securities
Jenny Ma – BMO Capital Markets
Dean Wilkinson – CIBC World Markets
Tal Woolley – National Bank Financial
Operator
Good day, ladies and gentlemen. Welcome to the SmartCentres REIT Q2 2022 Conference Call. [Operator Instructions]
I’d now like to introduce Mitchell Goldhar. Please go ahead.
Mitchell Goldhar
Good morning and thank you for joining us on our Q2 conference call. I am Mitchell Goldhar, Executive Chairman and CEO. And I am joined by Peter Sweeney, Chief Financial Officer; Rudy Gobin, EVP Portfolio Management and Investments; and Mauro Pambianchi, Chief Development Officer. .
Our commentary will refer mostly to outlook and some of our mixed-use initiatives section of our MD&A, which is posted on our website. I refer you specifically to the cautionary language at the front of the MD&A materials, which also applies to the comments any of the speakers make this morning.
We are pleased to report that the REIT delivered another solid quarter demonstrating once again its ability to consistently drive growth, starting with our core asset base. Since the rest of my commentary is covered in our press release, I will turn it over to Rudy Gobin to present leasing results.
Rudy Gobin
Thanks, Mitch and good morning everyone. Throughout the second quarter, we saw the underlying strength of our centers in driving leasing activity and customer traffic. Tenants in most categories were back, wanting more space and locking up locations in our high traffic centers. And we’ve virtually 100% of the reach properties having a full line grocery, a near 70%, including a Walmart Supercenter, a wide variety of tenants were back, adding locations to our well located centers, including Dollar stores, the TJX banners, health and beauty, the Canadian entire banners, pet stores, medical full line and specialty grocery, distribution, logistics, and much more, all driving traffic and improving in our already strong tenant mix in each center.
Here are some key highlights. We closed the quarter with an improved occupancy of 97.6% with committed deals. This improvement was widespread across all provinces, including the releasing of two of the previously vacated home outfitter stores, which closed all locations in Canada and four within our portfolio at the end of 2021.
You may recall that we negotiated a buyout of a significant portion of the remaining 2022 and 2023 rents, which was recognized in our Q4 results. So, the releasing provides an improved cash flow overall. We are now close to releasing the last two of the locations at the same or slightly higher rental rates. With this, we see occupancy continuing to improve in the coming quarters and working to get us back to 98%.
At the quarter’s end, we have already completed or near completed 4.2 million square feet of the 2022 renewals, representing 83% of the maturities in the year, and at a 3.6% rental rate with excluding anchors. Over 150,000 square feet of leases were executed for build space during the quarter, and I would add with better covenants than the previous tendencies. New entrance to the market in a number of categories, including health and beauty, furniture, sporting goods and QSRs have started with strong interest in our open format and resilient portfolio. We continue to work with our tenants, helping them to adapt to their changing needs, which gives them the flexibility they need, and only serves to strengthen our partnerships and maintain our high long-term occupancy levels. We’ve been fortunate with no credit or filings in 2022, which speaks to the high quality of our tenants and trusting that the worst is behind us.
From a rent collections perspective, we ended the quarter at 98.5% and subsequent to the quarter have made further collections relating to the quarter, bringing collections to 98.8%. This is happening simultaneously with higher rental levels and NOI, and we expect further improvement in the coming quarters. Once again, demonstrating the stability and the financial strength of our tendencies.
Regarding our Premium Outlets in Toronto and Montreal, both continue to improve. And with the signing of another [indiscernible] in the Montreal Premium Outlets, we are now at 100% occupancy in both centers. With the pent-up demand, accumulated disposable savings and the reopening of the Canadian/U.S. border, we are experiencing a solid start to 2022.
From all perspectives, 2022 is recovering nicely and the shaping up to be a strong year in retail and especially in the value segment, an area where we dominate. As Mitch has said time and time again, this portfolio was built for heavy weather. Our value focus tenants are adapting. Customer traffic is improving occupancy and cash flows are back to near pre-pandemic levels. And most importantly, all of this is happening concurrently with the extensive mixed use development initiatives already identified in over half of our existing centers, rezoning achievements made and continuing, current construction already in progress in condos, apartments, retirement, self storage, industrial and retail, as previously mentioned, and all contributing to significant current and future NAV growth.
With that, I will now turn it over to Peter Sweeney.
Peter Sweeney
Thank you, Rudy and good morning, everyone. The — excuse me — the financial results for the second quarter reflect a continued steady improvement in our core business, as Rudy has mentioned.
For the three months ending June 30th, 2022 FFO per unit with adjustments and excluding various anomalous items increased by 5.8% or $0.03 over the comparable quarter last year. This increased resulted principally from improvements in the core business’ NOI as compared to the prior year. Please note that for the quarter we have presented FFO information net of the impact of anomalous items, including expected credit losses, condo, and townhouse profits, income or loss from the total return swap and the dilutive impact associated with equity units issued pursuant to the acquisition of the VMC West Lands.
IFRS fair value adjustments in our investment properties portfolio represented an approximate $10 million increase for the quarter, principally reflecting changing assumptions used for some variables in the valuation process as a result of the improved leasing environment that Rudy has mentioned. Otherwise, cap rates and corresponding discount rates did not change in the second quarter, with the exception of an increase in the cap rates used to value the handful of indoor shopping centers in our portfolio.
Total assets exceeded $11.9 billion at the end of the quarter as compared to $11.3 billion for the comparable quarter. And on a proportionate non-GAAP basis, total assets exceeded $12.2 billion as compared to $11.5 billion for the comparable quarter. These year-over-year increases are primarily attributed to both acquisitions and fair value gains that have been recorded over the past 12 months.
They say that every cloud has its silver lining. And certainly that was the experience during the quarter for our total return swap. Given the direction of the Trust’s unit price in the second quarter, over 2 million additional notional units were purchased at an average price of $27.85 by the financial intermediary during the quarter. Accordingly, by the end of the quarter, the total return swap had approximately 3.5 million notional units with an average price of $28.36.
Recall that this total return swap initiative was implemented last year as an alternative to an NCIB. And it has approximately three years remaining before it is expected to be wound up. It’s hope that over this remaining term, that this initiative will continue to provide continued earnings growth, while avoiding any longer term debt financing that is typically associated with an NCIB program.
We encourage you also to read the outlook section in this quarter’s MD&A, which speaks to the distinctive safety, security and stability of our core business and its ability to endure stormy weather of many types. Our financial results in the corresponding financial metrics have followed a consistent trend over the last several successive quarters, demonstrating both the safety, security and stability of the business and the steady continued growth in our operating platform. This foundational strength provides the business with a unique strategic advantage that permits the continued expansion in our development of mixed use opportunities.
We have also continued our focus on further fortifying the strength of our balance sheet. In this regard, we note the following strong debt metrics for the second quarter as compared to the comparable quarter in 2021. Number one, our debt to aggregate assets ratio has now improved to 43% as compared to 44.6% in the comparable quarter. Number two, in keeping with our strategy to repay maturing mortgages and to grow unencumbered pool of assets, unsecured debt in relation to total debt has increased to 77% from 70%. And our unencumbered pool of assets has continued to grow increasing to an excess of $8.4 billion at the end of the quarter as compared to $5.9 billion last year.
We continue to employ a strategy to repay most maturing mortgages. Accordingly, we expect these metrics to further improve in the future. The strategy has permitted us to gain further agility when considering future financing opportunities and alternatives for our portfolio of mixed use developments.
Given the recent increases in interest rates our weighted average interest rate for all debt increased during the quarter to 3.3% as compared to 3.27% for the probable quarter last year. We note that this is the first increase that we’ve experienced now in approximately 10 years. Rising interest rates by their nature will result in additional interest costs. However, we have structured our debt ladder conservatively to permit staged and manageable maturities to occur over the next several years. And our weighted average term of debt continues at approximately 4.5 years. As at June the 30th, approximately 84% of the Trust current outstanding debt is fixed rate debt, which provides tremendous stability during periods of interest rate volatility.
For clarity, we have $200 million and $100 million in maturing debentures in May of 2023 and August of 2024, respectively. Accordingly, we are continuing to monitor debt capital markets for interest rate movement. However, we are permitted tremendous flexibility when considering refinancing alternatives for maturing debt, which is a meaningful advantage in this current rising rate environment. This historical bias to extend both the weighted average term of our debt and fixing interest rates was deliberate and is yet another example of the risk mitigation strategy that we have employed now for several years to insulate the Trust from interest rate volatility, as we are experiencing in this current rising rate environment.
As we look to the immediate future and continue to manage through the current uncertain capital markets environment, in addition to the conservative debt metrics noted previously, consider also that when factoring in our cash on hand together with our new $300 million facility that was established earlier this year to support the $500 million VMC West acquisition, the $150 million new revolving line of credit that was completed late last year, and the $250 million accordion feature associated with our existing $500 million operating line, we have ample liquidity to provide appropriate flexibility for the capital funding requirements associated with our pipeline of development activity.
Currently, we are focused on completing several new construction financing facilities to support the developments that were previously mentioned, including the flagship Canadian tire site and lease site, our new industrial site in Pickering and the ArtWalk condominium development at SmartVMC.
And finally, it’s important that we confirm our unwavering commitment to our balance sheet. It has withstood the unprecedented challenges over the last two and a half years. It has permitted the REIT’s development plans to continue without delay impediment, and it is in a position to serve as the backbone to fund and support the vast array of growth oriented opportunities that lie ahead for SmartCentres.
And with that, now I’ll turn it back to Mitch.
Mitchell Goldhar
Thanks, Peter and Ruby. As you can tell from our collective remarks and our press release, the portfolio remained strong and we continue to thoughtfully grow. We are also continuing to focus on our mixed use intensification program to our SmartLiving residential brand, a name that will soon be synonymous with thriving massive planned communities for all Canadians.
With that, I will now turn it over to the operator in addressing your questions.
Question-and-Answer Session
Operator
Yes, of course. [Operator Instructions]
All right. So, first question comes from Sam Damianim TD Securities. Please go ahead.
Sam Damianim
Thank you, and good morning, everyone. I guess two questions for me. First off, just on the funding of the development program, any plans to step up dispositions or other sources of capital raising in the near to medium term?
Mitchell Goldhar
Hey, Sam. We are in the process of — we’re in negotiations with various entities to potentially join venture. Some of our developments straight up to dispositions. I mean, they do happen. We don’t at the moment have anything significant listed per se, for sale. But we have quite a few now properties that are approved for intensification, and we have interest from third parties to commit to those. So that’s one of several capital raising initiatives that are going on right now.
Sam Damianim
And is that something that could sort of get across the finish line within the next six to 12 months?
Mitchell Goldhar
Yeah. Yeah. Yeah. It’s been going on for, goodness, probably, more than six months. It does take time, as you know. But I think, for sure. I mean, if it gets done, it will get done within the next six to 12 months. Yes.
Sam Damianim
Okay. And these are sites where active construction would start in the near-term, further sort of alleviating the stress on the REIT’s battle sheet.
Mitchell Goldhar
I mean, it depends on everything, but one step at a time. Let’s say, the joint ventures get completed, then together, of course, we would decide if we’re happy with the conditions to proceed. But the idea, obviously, of doing the joint ventures is to proceed, but certainly not going to commit a folly. If we don’t think it is, but obviously, a long-term — short, medium and long-term program. It’s not the only capital raising program, but it is one that’s active. So, I mean, we could sell outright sell sites if we wanted to and thought that was the right thing to do, not join venture them and not develop them. So, these are two examples of capital raising programs. And obviously, we could also sell outright sell shop, retail, but say we don’t have anything listed.
So, we are looking at these things every day. We are very committed to putting our balance sheet back where we were and that’s what we want. So, we’re arraying all of our options every day and we will get there. It’s just question of, which way or ways we going to get there.
Sam Damianim
I understand. And just secondary of questioning, is this on the fair values. Just wondering what your thought process was during the quarter. Obviously, given the spike in interest rates, even though they have come down a bit already, but in the context of the portfolio with the Walmart leases with long-term extensions at flat rents?
Mitchell Goldhar
Well, I don’t know if you’re implying that they were — I don’t know what you’re implying, but I mean, I’d say the leases with Walmart are flat or not flatter among the most valuable leases. There are in retail in terms of their security and the value they bring to the center themselves. So, we don’t see them — we definitely do not see the value of those having gone down. Arguably, they’ve certainly held their own. The rates have moved, but the centers are busier than ever. And the role they’re playing in their communities is increasing, because of course, people are shopping physically more and also because communities are growing and there’s no retail growth for all intensive purposes in the markets that we’re in.
So, it’s just kind of like exponential. The centers are dominant, most of them in their marketplaces. And fact — I think Rudy alluded to the fact that we’ve got sort of a resurgence of new interest. So, I don’t think — it’s a very difficult moment in time to say, did they go up? But they certainly didn’t go down.
And in terms of other reasons for values to go up or down, yeah, we were in a little bit of an uncertain time. And so, we are looking very closely at the values of our properties where we’re intensifying, because obviously things are a bit in flux right now. But that’s temporary. I mean, our intensification program is going to — is going to go ahead. It’s just a question of doing it safely. So, those properties values are increasing, but we’re just — we’ve increased a bunch of them already. We’re looking at finding the right evaluations for each one of the properties as they get approved or as they get close to getting approved. So, hence long winded way of just saying that’s where we — that’s why we landed, where we landed, Sam.
Sam Damianim
Fair to say that you basically — within an absence of the transaction data points there, just wasn’t a compelling reason to move the needles in any big way.
Mitchell Goldhar
Yeah. I wish I had phone you before you asked that question. And that was eloquent way of saying, what I said. Absolutely, yeah. There’s not a lot — in terms of data points, but intuitively I think, we’ll see value increases in many of our properties where the approvals continue to come through and I feel that our retail’s very solid in terms of its current values and potentially — could see some movement upward, depending on background macroeconomics, but very solidly. I think very in demand. I think they’re quite liquid even in this marketplace with no data points.
Sam Damianim
That’s great. Thank you. And I’ll turn it back.
Operator
Great. Next question comes from Jenny Ma from BMO Capital Markets. Please go ahead.
Jenny Ma
Thank you. Good morning. I dived a little bit late, so I apologize if my questions are repetitive to what you may have discussed before. But I’m just wondering philosophically with rates having moved as much as they have over a short time period, does it change your longer term strategy in terms of how you think about advancing projects in your development pipeline?
And then, also how you think about the balance sheet, because you’ve advanced a lot more unencumbered debt over the years to a pretty nice number now, but would you be a bit more tactical over the short term to sort of respond to rates or is it — or do you really view it as still, I guess, transitional or something you can manage through without changing your philosophy on either developments or the balance sheet?
Mitchell Goldhar
I mean, for sure, we’re going to forge ahead. We’re not going to flinch in terms of the approval process. In terms of proceeding, to actually go to market, we’ll look obviously very, very carefully before we do that. And yeah, with the cooling off of the condo market, obviously, we’ll be looking at it with those — with these new conditions in mind. I don’t think it changes anything really long-term for us. I mean, in the meantime we’re operating our shopping centers. There’s very few properties where we’re deciding between building retail and building residential. So, we’ll continue to operate our shopping centers. We haven’t really moved anybody. We have the right to move, most of the tenants where we want to build, but we haven’t actually given notice in many — in most of those cases.
So, we’ll continue to operate the shopping center. And we’ll make the move when we think it’s safe to do it. But ultimately, we do think that we’ll get there and, of course, there’s a yin yang with the interest rates. And that is that we hopefully will see some backing off of construction costs. And that doesn’t mean there’s no market. It just means that for a month or two there, that was seemingly virtually no market, but there is a market for housing. And so, it won’t necessarily get — a 40-story tower may not get sold out over a weekend, but may get sold out over six months or 12 months. And that’s fine. Something actually quite healthy about that.
So, we’ll continue to forge on. But when it comes to pulling the trigger and actually building, we will be looking left and right, and up and down and everything before we actually per proceed, but nothing’s going to change in terms of our efforts and our energies towards the intensification program.
Jenny Ma
So, you — in the press release, you talked about how the floating rate debt on the construction loans have impacted sort of the development pipeline. Do you just sort of see it as something you have to absorb as part of the development, so that you’ll manage the balance sheet over the longer term appropriately, or does that itself give you pause or cause you to renegotiate or change your negotiations in terms of how you underwrite rental rates?
Mitchell Goldhar
Well, it’s not all rental. I mean — but yeah, I mean, rents are — okay. I mean, it’s obviously — I mean, it’s dynamic. So, if it was all one way and rates are going up and costs are staying where they are, pricing is going down and demand is going down, that equals we’re not going to recommend proceed. But embedded in our pro forma, always these variables that you’re — or these — the data points that you’re referring to. And, of course, we will — if it makes sense — if the returns are risk adjusted interesting enough to proceed, we’ll proceed.
But obviously, the equation has changed, but doesn’t mean that the equation doesn’t — isn’t good enough to proceed. It’s just we’re not going to blithely proceed. We’re going to impute it all and decide whether it’s something we can proceed with. Remember, we’re not buying land. We own the land. We’re not out there acquiring new lands at market or even yesterday’s market or today’s market. We own it. We’re operating shopping centers on them. And that was always the intention here. So, we’re not under pressure to proceed and we’re not — we don’t need to do anything. We’ll do it if it’s safe to proceed with all those variables that you mentioned in mind.
Jenny Ma
Okay.
Mitchell Goldhar
We’re not going to develop for the sake of development because we said we’re going to develop whatever it is. $14 billion worth of development. Just blithely proceed, we’ll do it, but we’ll do it carefully and thoughtfully and we’ll get there and just respecting mother nature.
Jenny Ma
Great. And then, what about on the balance sheet side? If — and it’s a big if, the spreads between unsecured and secured persist, would you be willing to tap into your encumbered pool to get some financing at slightly better costs over the short time period? Or is it — you’re still more committed to maintaining a large unencumbered pool and leaning on the unsecured market?
Peter Sweeney
Yeah. I think — Jenny, it’s Peter. Good morning. I think the latter is the case. Our strong preference is to continue with the strategy that we’ve employed now for several years, which is continuing to unencumber those properties as mortgages mature. And it’s not necessarily only a financial decision, right? It provides the property, many of which or most of which are now subject to rezoning and intensification initiatives. It allows tremendous flexibility in convenience when choosing to take sections of that property offline for development. So, to have an abundance of those properties, unencumbered, I think will assist our development program, certainly both in the short and in the longer term.
Having said that, there is a bit of a disparity, as you mentioned between bond rates and mortgage rates. However, I think it’s fair to say that we’re very fortunate to have the support of the Canadian banking community behind us because there other– there are other forms, at least, for us today of unsecured financing that we’re pursuing. And those other forms of financing are quite competitive with any secured mortgage type financing alternative that you can think about.
So, at least, for now, given where spreads are in the bond market, I think we’ve said publicly that for now, we’re not assertively looking at the bond market, and we’re pursuing other courses. But those other courses aren’t secured courses, there are other unsecured courses through the Canadian banking community. Does that help?
Jenny Ma
Okay. Yes, that’s very helpful. Thank you. And then turning to the Pickering land acquisition. I didn’t see the numbers tied together, I think in the MD&A, but it was the $16.6 million for the 38 acre piece. Is that correct?
Mitchell Goldhar
Yes, that’s correct.
Jenny Ma
Okay. That seems like a fairly low price for industrial land. I mean, I recognize it’s Pickering and there’s different submarkets. But can you sort of talk about why that might be, or what the opportunity is, or just how that submarket might be a bit different than the ones that a lot of other players talk about, probably on the west end?
Mitchell Goldhar
Yeah. I mean, we — it’s owned by the go — it was owned by the government. So, we love the area. We think it’s a little bit of flu, a little bit under the radar, when we identified it a year ago. And yeah, so we have a user, which you need to have to be able to buy this particular piece of land. So, we were fortunate enough to have that and be able to buy this land. So, the reason for the prices to do with, I guess, the government wanting to create activity, jobs and whatnot and taxes, and open up this area. So, it’s called Seaton. I mean, everybody’s heard about that area. Maybe no one knows where it is. It’s basically Pickering on the 407.
So, yeah, it’s an emerging industrial business park right on the highway there. Kubota [ph] is already there. There’s some others under construction and then there’s us. So, yeah, we have other lands for industrial. We will be talking about those in future quarters, I’m sure where we were — we’re up to other potential industrial developments in some of our other properties, but this one, of course, is the first one AND we actually acquired it, specifically for this purpose.
Jenny Ma
Can you expand on the need to have a user? Is that tied to the government, or is it just that you need a user to the table?
Mitchell Goldhar
Yeah. You’re not allowed to buy the land unless there’s an actual operator or tenant. You can’t buy the land and speculate on it. They didn’t want the land to go crazy in terms of — they wanted businesses their on opening day. It was a criteria. It’s a condition of acquiring the land. So, yeah. User can buy it, or a landlord or developer can buy it if they have a tenant. So, yeah. It’s owned by IO, Investment Ontario. And it’s really — it’s all serviced. It’s really well kind of manicured industrial land, ready to go, basically just in the 905. So, it’s really cool. Well, the rest of the city is going crazy in terms of pricing. This was reasonable and I think very strategic actually.
Jenny Ma
So, is it a matter of just bringing a user? Because I mean, 38 acres is quite a bit, so is it just — is it opportunity to find other users to ultimately fill up that space and you start with one or, I mean –?
Mitchell Goldhar
Yeah. You have to have a user and be able to buy the land. And we were able to negotiate what we were able to negotiate. I don’t think we would’ve been able to negotiate 138 acres, right? But we were able to — in sort of — as part of the negotiation, I mean, we didn’t want to go there just to build on 10 acres. It wasn’t sort of something that would maybe be something we would do, but through the negotiation, the government saw that it would fulfill their, I guess, their vision of creating assessment there in jobs, by getting us started with a user that we had and allowing us to expand from there. So, yeah, we have surplus lands, but it’s all within the parameters of the of IO’s vision there. Yeah.
Jenny Ma
Okay. So, this is a user that’s third-party to you and the government.
Mitchell Goldhar
Yeah. Absolutely.
Jenny Ma
Okay.
Mitchell Goldhar
It’s a third-party. They’re a tenant. And we are sort of anticipating that they’re all one who need to expand over time and hence, some of the extra land and there’s other interests. We have other interests from third parties, but we haven’t buttoned it down yet. But the deal that we have with the third-party had to be done before we were allowed to acquire the land. So.
Jenny Ma
Okay. Okay. Now, if I look forward, is this like a one-off opportunity that you guys had, or does the government have more land that, that is sort of saleable to the market, assuming that the market for development is there to you or to any other developers?
Mitchell Goldhar
I can hear everybody hanging up the phone. Calling IO. Yeah. You should drive out there. I mean, you’ll get it. As soon as you drive, you go. Yeah, of course. Why would people not want to look at this? So — but yeah, I mean, we aren’t really in a position to buy more land, because we had negotiated — you got to look at it from the point of view of that we have a user, that’s not insignificant. We want them to be able to expand and we want to be able to do more to buy, to develop out there. But there’s also physical reasons why it made sense to buy that 38 acres. Exactly. So, that’s how we landed on it. But there’s lots more land. They have — I don’t know actually how many more acres of land they have. I mean, it’s not infinite, but it’s on both sides of the 407 north and south side of the 407.
So, yeah, there’ll be lots of other I’m sure, announcements in terms of industrial facilities around us there. As I said, we’re not the first ones there’s others there. It’s all serviced. Like in certain — I mean we sometimes service our lands before we actually do deals in our retail. But not many private developers would go and service grade and manicure, the several hundred acres of land and build the intersections before having deals. But, of course, it is the government and they wanted to make this happen. So, you can go out there and see it. It’s inevitably going to be a vibrant industrial area of Toronto.
Jenny Ma
Okay. Sounds good. That 38 acres you own is, is a contiguous piece, correct?
Mitchell Goldhar
Sort of. I mean, if you mean it legally, technically. I mean, it’s on either side of a road, but I mean, they’re beside each other and for all intents and purposes — from the development and marketing point of view, they’re basically beside each other. Yeah.
Jenny Ma
Okay. Great. Thank you very much. I’ll turn it back.
Mitchell Goldhar
Sure.
Operator
All right. Next question comes from Dean Wilkinson from CIBC World Markets. Please go ahead.
Dean Wilkinson
Thanks. Good morning, everyone.
Mitchell Goldhar
Good morning.
Dean Wilkinson
Mitch, just on the — another way of coming at the development side of things. I mean, we all talk about the rising interest rate environment, but when you look at the 10-year bond yield, it’s not far off where it was in 2018. In that developments tend to be long time lead items, have the economics really changed from when you were looking at development back when we all thought COVID was just a tasty beverage, and how has anything really changed?
Mitchell Goldhar
I mean, first of all, the majority of our efforts and energies and really where the money is made is, is actually in the land use, the master planning approval. So, I mean, first, for us, if you were here in our office, and lived in our world, you would see and understand that actually — I mean, the approval and getting that right is what — majority of our neurons are applied to. And it comes time to pull the trigger. We look at — obviously we look at the world every day and we sort of intuitively feel whether or not it’s safe to go or no go. But when you really look at it, a multi-res deal today, is it that different than it would’ve been in 2018 in terms of returns? No, probably not, because rents actually have kind of firmed up and costs are sort of coming down, and yeah, rates of — background — short term rates, borrowing rates have gone up. But if you looked at it all today with a takeout financing, I mean, probably isn’t really much different.
You could probably make the needle move more by replacing materials, or figuring out a way not to build that extra level of underground parking than what’s going on in terms of background interest rates. So, to your point.
Dean Wilkinson
Great. And then, just Peter, on that exposure to the variable rate, correct me if I’m wrong here, the majority of that is in inactive developments, so I believe most of that just gets capitalized. So, that rate move really doesn’t have an impact on FFO for you, right?
Peter Sweeney
Yeah. It’s quite muted. You’re absolutely right, Dean.
Dean Wilkinson
Okay. Great. And last question was just on the Premium Outlets, the increase in rent there, are there percent rents associated with those properties?
Mitchell Goldhar
Yeah. Absolutely. Dean, there are all leases as well as the base rent that has annual steps.
Dean Wilkinson
Right. So, you would’ve seen an uptake in the percent rent, I’m assuming with everything reopening.
Mitchell Goldhar
Absolutely. And we’re seeing — we’re actually seeing sales for many retailers are actually exceeding the 2019 levels, which would’ve been the high watermark.
Dean Wilkinson
Yeah. I think my daughter was part of that. So. Yeah. I’ll pass the thanks along to her. That’s it for me. Thanks guys.
Mitchell Goldhar
Thanks. Bye Dean
Operator
All right. And the last question we have comes from Tal Woolley from National Bank Financial. Please go ahead.
Tal Woolley
Hey, good morning, everybody.
Mitchell Goldhar
Good morning, Tal.
Tal Woolley
Mitch, you had made some reference to condo sales. I just wanted to go back to that for a second. If you’re looking at sort of recent releases, I think, obviously, you’ve still been successful at selling through. Are you getting any sense of like a shift in pricing or, the demand level that’s out there in more –?
Mitchell Goldhar
Strangely, we haven’t had any real pushback on pricing. I mean, the sales that we are doing, right now, are not being reduced by any changes in our pricing. Pricing being pre — the little bit of turbulence, I mean, over the last few months. So, ArtWalk was sold out just before the world changed a bit. And that was at around 1200 a foot, up here in Vaughn where we are right now.
And then, right after that, we went out with Park Place, which is a much bigger development than ArtWalk. And that’s when we — our timing on that was right when everything started to slow down and yet we’re taking the long-term approach. We’re chipping away and we’ve sold half the units we’ve released at the same basic price. Just obviously, it’s been two months versus ArtWalk, I mean, ArtWalk sold out in like three weeks. So, pricing hasn’t changed really. The rate has changed, but our relationship is — I mean, we’re in this for the long haul.
And I’ll tell you, there is a bit of a silver lining too, because our relationship with the brokerage community who are part of that program is, this is an opportunity everybody’s — it’s much more of an opportunity to develop these relationships during these slightly slower times. And they get that. We’re not mercenary developers that we’re in it for the long-term and building communities. And I mean that, with all these life stuff around them. And this period of time has enabled us to tell them that story. And they really — if you read their — if you go onto websites brokers, who’ve been to our developments, particularly, VMC, their comments, talk about our master plans. And so it’s — we’ve used this time well, and we continue to sell much slower, but at the same price.
Tal Woolley
And when you make reference to the brokerage community, are you talking about brokers who are buying themselves and looking to do assignments at close?
Mitchell Goldhar
Yeah. I mean, like, a lot of the condos are sold. Like if you’re a real estate — residential real estate agent who specializes in the sale of condos, you may have two or three or four or five clients that regularly buy condos and rent them out. It’s quite a — I mean, it is one of the forces at work in the sale of condo in Toronto and Vancouver. So, that’s for the most part done through brokers. So, you got to have a relationship. You really want to have a relationship with that community. And then, of course, up in our developments, we see a higher percentage of user buyers. But a lot of condos are sold to investors who rent them out.
Tal Woolley
And what would be the split? What would be your estimation of the split on the –?
Mitchell Goldhar
I mean, I would say, honestly, downtown, I mean, historically being, up until the slowdown, I would say that it’s bloody — I’d be — if it was 80%, I’d be surprised. If there were 20% end users in the majority of condos sold downtown Toronto, I’d be surprised. But VMC, maybe the split would be — I don’t know, 65&, 70%, depending on the moment in time, brokers selling to investors and renting them to renting market versus 85% — 80% to 90% downtown, probably.
Tal Woolley
Okay.
Mitchell Goldhar
Really depends on what part.
Tal Woolley
Sorry. And any concerns then just with like, if you have brokers buying multiple units, like ability to close or anything like that, I appreciate it has –?
Mitchell Goldhar
No, no, it’s not the brokers not buying them. It’s not the brokers buying them, it’s their clients. And — but still, we always have concern about. Well, if we enter into a contract with them, we’re still worried about, because their deposits initially are not that big. So, the way it works is, I mean, you get an initial deposit, which is refundable to them for 10 days. And then, if they don’t rescind, then the deposit is firm. And then, there’s milestones for further deposits. But until you get those further deposits, I mean, you’re not in the clear, so, with Park — with Park Place. I mean, I wouldn’t say — even ArtWalk, I wouldn’t say, we’re totally in the clear, like we’re going to stress test all of our deposits and buyers at ArtWalk, and obviously Park Place. But it’s the structure that’s behind every condo that’s been built in this city. And that’s a lot, including our own. But it’s not the brokers, it’s their clients, right?
So, you have a broker, you have three or four investors that you know, that have — whatever sort of wealth and they want to be in the rental market. That’s a good market to be in. You bring — present to them different presale, pre-construction, they call it, opportunities to investing. And your investment is not huge upfront, it’s a deposit. And so, your betting on that location and the value of, or the return in the future’s three years from now.
So that’s the game that’s going on and has been going on for a long time and continues to go on. But it’s always been the game. And the good thing for us is that, quite frankly, I mean, we see a condo as a rental. I mean, if we ever proceed with a condo, we are perfectly prepared to take it as a rental. Just so — I mean, so is our backup plan. But that’s not what you’d normally have going on with a private developer, they want out and they don’t have those contingencies. But anyway, just a little insight into the — yeah, with the offstage stuff, which is the condo development business.
Tal Woolley
And I guess, just a bigger picture about the development program, like the decision to go, no, go on a project. Is it really like a function of the individual specifics of a project, or when you look at the plan in totality, like, is there — would there be a certain key sort of macro variables that like you would sit there and say like, okay, like if we get kind of get to this point on interest rates or this point in terms of where the economy’s at, like we would really start to slow down. I’m not trying to suggest that’s what should be done here. I’m just trying to get a sense of how you think about that.
Mitchell Goldhar
No, it’s a great question. But it’s always — I guess, we do these calls and we answer questions and the things that get taken away are sometimes maybe overly simplified. I mean, like in the best market, in the lowest interest rate market, in these — the most prosperity in wealth flying around, we still are extremely cautious about proceeding with the high rise development. And we look at it as everyone’s going to — what happens if everyone defaults and that’s the worst case scenario, just so you know, and don’t close.
So, I mean, when things get a little bit like this, of course, even more so, we’re not on automatic pilot. But just like, I mean, use all the examples you want out there. I mean, the right thing, that’s — the thing that’s going to happen in Pickering is it’s going to be the master plan that you can see on our website. The question is, how we’re going to get there. And so, it’s going to happen. It’s the right thing for that particular infill location, with the transportation infrastructure, with the changes going on in Pickering and what’s going on in the city, et cetera, etcetera, macro, it’s going to happen. The question is, how do you get to that completed master plan safely?
I mean, Canary Wharf, I mean, you guys are probably too young on the phone, but that’s a classic example of blowing it like, because you go on, automatic pilot. You have a vision and you get kind of seduced by your vision and you just go. But obviously, it’s an amazing property and a great vision, but you can still blow it if you don’t execute properly.
So, we’re not just going to go. Macroeconomics, long-term, it’s going to be great. No, we’re not going to — we’re not going to get seduced by that. It’s going to be any one project, not being a success is a huge failure here. And it’s just not — we don’t need to go and we are not going to go just because big picture, this is going to be a great master planner. We can’t wait to see it come out of the ground. It’s just not going to happen. So, it’s going to be based on getting there proper deposits. And there are steps along the way. You don’t go from, okay, we’re going and then you’re gone and you’re on to the next thing. You may start even — you may start doing your underground and monitor and know what your exit plan is, while you’re digging. I mean, so there’s no automatic pilot.
Tal Woolley
Okay. That’s helpful. Peter, just a couple of housekeeping questions. Does the miscellaneous revenues line that’s I’m assuming is parking and percentage rent mostly.
Peter Sweeney
Yeah. You’re absolutely right, Tal.
Tal Woolley
Okay. And then, on the balance sheet side, I know one of the things, you’d sort of — after the land purchase in Vaughan, you were interested in making sure you retain your current credit rating. Where do you think you need to get that ratio by the time you come up for review and when is the review with DBRS?
Peter Sweeney
I think the review — I mean, DBRS is going to review things when they think it’s appropriate. But typically what happens, Tal, is, our credit comes up for review in December of each year. In our most recent discussions with DBRS, there’s been nothing that’s been intimated or suggested by DBRS that would change that. So we would expect that sometime in the late fall, we’ll commence discussions with them. And no doubt they’ll have questions leading up to their report in — we expect in December.
With respect to your first question on where does that debt to EBIDA metric have to be, again, I think, I would refer you back to DBRS’ report from December of last year, Tal, and I’m going from memory, but I seem to recall them suggesting that we would have to — by the find a way to guide it down below 9 5, 9.5 times. And so as you would expect, and I think we’ve talked about this before, we’re doing and making roads and inroads to try to find ways and means to get there. From a timing perspective, it’s almost impossible to predict with any precision when, and if we’ll get there, but certainly we’re doing everything we can to ensure that we’re, first of all, aware of the expectation by DBRS.
We’ve said that we do — I respect our credit rating and we spent a long time getting to the point where we’re at now. And so, we wouldn’t think it would be appropriate to let it go frivolously. And so, we’re making, and taking every step we can to try to ensure that at some point we find ways of getting that debt to EBITDA level down to a level that’s appropriate and acceptable to DBRS to maintain credit rating as is.
Tal Woolley
Okay. That’s it for me. Thanks very much, gentlemen.
Peter Sweeney
Thanks Tal.
Operator
And that was the last question we had in the queue.
Mitchell Goldhar
Okay. That was the last question. Sorry. All right. Well, thank you for the time to participate in our second quarter call. Please reach out to any of us for further questions. Stay safe and have a good rest of the day. Thank you.
Operator
Ladies and gentlemen, this concludes the SmartCentres REIT Q2 2022 conference call. Thank you for your participation and have a nice day.
Mitchell Goldhar
Thank you.
Peter Sweeney
Thanks. Bye.
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