SmartCentres Real Estate Investment Trust (OTCPK:CWYUF) Q3 2022 Earnings Conference Call November 14, 2022 2:00 AM ET
Company Participants
Mitchell Goldhar – Executive Chairman & Chief Executive Officer
Rudy Gobin – Executive Vice President, Portfolio Management & Investments
Peter Sweeney – Ex-Chief Financial Officer
Peter Slan – Chief Financial Officer
Conference Call Participants
Mario Saric – Scotia Capital
Jenny Ma – BMO Capital Markets
Sam Damiani – TD Securities
Pammi Bir – RBC Capital Markets
Johann Rodrigues – iA Capital Markets
Tal Woolley – National Bank Financial
Dean Wilkinson – CIBC World Markets
Operator
Good day everyone, and welcome to the SmartCentres REIT Q3 2022 Conference Call. [Operator Instructions].
I would like to introduce Mitchell Goldhar. Please go ahead.
Mitchell Goldhar
Thank you. Good afternoon, and thank you for joining us on our Q3 conference call. I am Mitchell Goldhar, Executive Chairman and CEO; and I am joined by Rudy Gobin, EVP Portfolio Management and Investments; Peter Slan, our new Chief Financial Officer joining us with a wealth experience spanning nearly 30 years and over 20 of those with Scotiabank. We welcome Peter to the SmartCentres team and look forward to working with Peter in the future months and years.
Peter Sweeney, who will be leaving us shortly, having served us well over the past eight years as Chief Financial Officer. Thank you Peter for your great contribution over this very active period. And on behalf of the analysts and investor community, we wish you all the best. And personally, I have very much enjoyed working with you and I wish you all the best in your next chapter.
The third quarter was both interesting and relevant from the continued in-store customer resurgence in leasing momentum — or I’m going to sorry. I want to preface that by saying today I’ll be speaking about the quarter’s strong operational results, which is taking place virtually in every operational category as well as our success in achieving some significant mixed-use entitlements.
And I’ll provide brief updates on the near completion of Transit City 4 and 5 condos in the Millway. I refer you specifically to the cautionary language at the front of the MD&A materials, which also applies to comments any of the speakers make this afternoon.
The third quarter was both interesting and relevant for the continued in-store customer resurgence and leasing momentum at least and unenclosed value-oriented formats. The Canadian consumer has voted with their feet and their dollars again this quarter in the direction of physical retail. Not only are we experiencing higher demand for space in our value-oriented unenclosed retail centers in their existing form. But we are also welcoming new retailers to our centers in nearly every segment, allowing us to expand beyond existing banners, pushing our occupancy through 98% for the first time in three years. This momentum continues to build into the fourth quarter holiday shopping season.
We continue to not only expand in our existing footprint, but demand for new retail construction is also growing in various segments, such as full-line grocery, pet stores, furniture, beer and wine, crafts, home decor and QSR, and nearly all with strong e-commerce delivery and/or pickup channels. From a portfolio perspective, we continue to work towards derisking our tenant base, as reflected by our improved tenant covenant, liquidity and recovered collections.
Retailers have figured how best to adapt their product offering store sizes and in-store experiences and distribution to fit the needs of Canadian consumers. Initial tenant collections have now reached 99% and continue to improve with provisions for non-payment at or near zero.
On the land use permission and development front, we soldier on. Most recently, we have achieved nearly 750,000 square feet of mixed-use rezonings to the latest quarter alone, bringing the total to six million square feet so far this year.
Development is a long-term game and we are committed to unlocking the tremendous value embedded in our lands, which I will remind you, sits in the midst of highly populated communities in nearly every major market across Canada. We are what we are zoned.
While we can read the details of many of the developments planned for our portfolio in our MD&A, here are a few highlights of what’s currently underway. Construction of the fourth and fifth Transit City towers at SmartVMC comprising 45 and 50 stories respectively, are nearly — are near completion and remain on budget and on schedule, anticipating first occupancies in 2023.
Also within SmartVMC, the Millway our 36-story apartment building is nearing completion and commitments for space have already started showing strong demand. Our apartments in Mascouche and Laval are near completion and demand for rental suites in those markets is also reflecting a high level of interest.
Construction continues on our new retirement residences and seniors apartments totaling 402 units at Ottawa, Laurentian. In Vaughan Northwest, we recently commenced the construction of a townhouse subdivision with a partner. Construction of a 241,000 square foot industrial space has commenced on 16 acres of a 38-acre site in Pickering, with half of the space pre-leased.
Lastly, we are under construction of three additional self-storage facilities in Markham, Brampton and Aurora, of which two will be completed before the end of our fourth quarter. In all, we have 70 projects scheduled to commence construction in the next two years, again demonstrating the significant opportunity that lies within our underutilized lands that are already owned.
On the financial side, maintaining our conservative balance sheet remains a priority with an unencumbered pool of assets of $8.4 billion, a 43.7% debt level and significant liquidity, which Peter Sweeney will speak to shortly.
Lastly, today’ environment of higher interest rates, higher inflation or US political shutdowns, would be easy to say that, we at SmartCentres are heating the challenges, adapting to new risks and otherwise playing it safe navigating carefully and thoughtfully with the various mine fields.
And while that accurately reflects our approach and it is the tidier script to follow. This linear narrative is not the whole story. For example, while higher interest rates may cost us in the short-term at SmartCentres, we believe the benefits will outweigh the cost of higher interest rates. SmartCentres, we are far too forward thinking to be derailed or distracted by noisy headlines to take our eye off the long-term price.
ESG, for example, is and has always been woven into the fabric of our organization. It is embedded in everything we do and how we oversee our business, interact with our tenants and engage our associates, engage with our communities and of course, impact our environment.
Although ESG is getting renewed attention as of late, it has been part of our D&A since the beginning. And when you assess our portfolio, you can see that ESG principles have been applied throughout. We are developing our metrics and refining our three-year plan and commitment, which will be posted in the coming days, so look out for that.
A final note my thanks, appreciation for the exceptional work of our talented and dedicated associates who bring their enthusiasm and focus to our business and communities every day.
Now I will turn it over to Rudy Gobin for an operational update.
Rudy Gobin
Thanks, Mitch. Good afternoon, everyone. Operationally, throughout this third quarter we saw greater customer traffic throughout the portfolio to at or near pre-pandemic levels. This drove a significant amount of leasing interest and signed deals in the quarter.
Tenants in nearly every category were back and wanting more space and wanting to secure available locations within our high-traffic centers. And with virtually 100% of the REIT’s properties having a full-line grocery and near 70% including a Walmart supercenter, a wide variety of tenants who are adding new locations in our centers where they weren’t previously represented including as Mitch said earlier Dollar Stores, Winners, HomeSense, Health and Beauty, the Canadian Tire banners, pet stores, full line and specialty grocery stores, liquor and beer as well as distribution and logistics, a mix that is very consistent throughout our portfolio and all driving more traffic and improving tenant mix in each center.
For some key operational highlights. We closed the quarter with an improved occupancy of 98.1% with committed deals a full 50 basis points increase over the prior quarter. This tremendous improvement was widespread across all provinces and demonstrates the resiliency of the portfolio. Most of the space previously vacated by tenants during the pandemic has now been released and we are at our pre-pandemic occupancy.
At the quarter’s end, we have already renewed or near completed 4.3 million square feet of the 2022 lease maturities, representing near 86% of the maturities for the year and at a 3.3% renewal rate excluding anchors. Over 200,000 square feet of leases were executed for built space during the quarter, and I would add at market rents and with better covenants than the previous tenancies.
Another sign that physical retail is greatly improving was reflected in the lack of any bad debt provisions being booked in the quarter and no tenant filings for financial restructuring. New entrants to the market are continuing in a number of categories including health and beauty, specialty grocery, furniture, sporting wear and QSRs all with strong interest in our open format centers.
We continue to work with our tenants helping them to adapt to their changing space needs giving them the flexibility they need, while strengthening our partnership with them. As Mitch said from a rent collection perspective, we are at 99% and an expecting improvement in the coming quarters.
Higher collections and rental levels are driving improvements in NOI. For the third quarter, we had same property NOI of 3.1% excluding anchors driven predominantly by higher traffic and an expanding customer base for our tenants. Regarding our premium outlets in Toronto and Montreal both continue to improve with higher-than-expected customer traffic driving sales back to their pre-pandemic levels with both centers at 100% occupancy, the pent-up shopping demand and accumulated disposable savings, we are expecting a very strong performance from the outlets this year.
From all perspectives, 2022 is recovering very well and Q4 is expected to be no different. Physical retail and especially, our value-oriented unenclosed centers continue to be in high demand in communities across the country. Our value-focused tenants are adopting. 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 our extensive mixed-use development initiatives already identified and in the pipeline.
And now I will turn it over to Peter Sweeney.
Peter Sweeney
Thanks very much, Rudy and good afternoon, everyone. The financial results for the third quarter reflect solid performance in our core business. For the three months ended September 30, 2022 FFO per unit with adjustments and excluding various anomalous items was $0.54 per unit unchanged from the comparable quarter last year. Note that these results include the non-cash impact of a $0.03 loss for marking to market the total return swap for the quarter.
Higher rental income was largely offset by higher G&A costs and higher interest expense was largely offset by higher interest income during the quarter. Please note also that for the quarter we have presented FFO per unit information net of the impact of anomalous items, including year-over-year changes in, number one, expected credit losses of approximately $0.01; two, condo and townhome profits from last year’s Transit City 3 closings being approximately $0.04 per unit; three, the loss during the quarter from the total return swap being approximately $0.03 per unit. And lastly, number four, the dilutive impact associated with units issued pursuant to the acquisition of the VMC West Lands being approximately $0.01 per unit.
Net rental income for the quarter increased by $3.6 million or 2.9% from the same quarter last year, same-property NOI increased by $3.9 million, or 3.1% in the quarter, or 2.3% excluding the impact of expected credit losses.
Also, as Rudy had mentioned, leasing activity continued to improve during the quarter, which is expected to assist NOI going forward, as these new and renewed leases commence. Our occupancy level including committed leases was 98.1% at the end of the quarter, representing a 50 basis point improvement from the second quarter, which is an extraordinary achievement.
Recall also, that our Board did not adjust distribution levels over the past two-and-a-half years. Therefore our annual distribution level of $1.85 per unit has been maintained. Our payout ratio, relating to cash flows from operating activities on a rolling 12-month basis for the period end September of 2022 was a very respectable 86.6%, an improvement from 96.8% for the same period ending in 2021.
Total assets exceeded $11.8 billion at the end of the quarter, as compared to $11.3 billion at year-end. And on a proportionate non-GAAP basis, total assets exceeded $12.2 billion as compared to $11.5 billion at year-end.
For the quarter, IFRS fair value adjustments in our investment properties portfolio resulted in net losses of approximately $92.5 million, principally reflecting an increase in our capitalization rate assumption of a 10 basis point increase for most retail properties in the portfolio with a few modest exceptions. This adjustment reflects our inherent conservatism, rather than any observed market transactions.
During the quarter, we added 941,990 additional notional units to our total return swap, at a weighted average price of $27.42 per unit. Accordingly, at the end of the quarter, the TRS had approximately 4.4 million notional units at an average price of $28.16, resulting in mark-to-market non-cash losses of $4.9 million.
As we have noted on previous calls, this TRS initiative was implemented last year as an alternative to an NCIB and it has approximately two-and-a-half years remaining before it is expected to be wound up. We believe that over this remaining term, this initiative will continue to provide opportunities for earnings growth while avoiding any longer-term financing that is typically associated with an NCIB program.
With respect to our continued focus on further strengthening our balance sheet, we note the following: number one, our debt to aggregate assets ratio has improved to 43.7% from 44.5% a year earlier. Number two, in keeping with our strategy to repay maturing mortgages and to grow our unencumbered pool of assets, which at the end of the quarter exceeded $8.4 billion, unsecured debt in relation to total debt increased to 77% from 70% last year. This strategy permits us further agility when considering future financing opportunities and alternatives for a portfolio of mixed-use developments.
Number three, with rising interest rates, our weighted average interest rate for all debt increased during the quarter to 3.67%, as compared to 3.3% in the second quarter. We remain confident that we have structured our debt ladder conservatively to permit staged and manageable maturities to occur over the next several years. Number four, our weighted average turn to maturity for all debt is approximately 4.2 years. Number five, as at September 30, approximately 83% of the REIT’s current outstanding debt is fixed rate debt, which provides tremendous stability during periods of interest rate volatility.
As noted previously, we have two series of debentures maturing in May of 2023 and August of 2024 in the amounts of $200 million and $100 million respectively. Accordingly, we’re continuing to monitor debt capital markets for interest rate movement and we have tremendous flexibility when considering refinancing alternatives for maturing debt. Our longer average term to maturity and our historic bias towards fixed interest rates have insulated the REIT for more significant volatility in interest rates, as we are witnessing in the current market environment.
And then lastly, number six, we continue to be comfortable with our liquidity position. Currently, we are focused on completing several new construction financing facilities to support several development projects that are rapidly moving ahead that Peter Slan will speak to momentarily. Our balance sheet remains strong. It withstood the pandemic well and we believe that we are extremely well positioned to fund the various growth-oriented development projects that are currently in our pipeline.
And before I ask my successor, our incoming CFO, Peter Slan to provide some comments on the REIT’s outlook, I would like to say how much I’ve enjoyed these past eight years and to thank you, our unitholders, the analyst community as well as Mitch and my colleagues here at SmartCentres for your continued support and confidence over these past eight years and I’m confident that you will provide Peter with the same level of support and confidence as he takes over from me.
And with that, I’ll now pass it over to Peter Slan. Peter?
Peter Slan
Thanks very much, Peter. I’m tremendously excited about joining SmartCentres and participating in the next phase of our growth. The outlook for our business is strong. I view SmartCentres as two related businesses, the Walmart-anchored portfolio of retail shopping centers and a robust development business. Both businesses are set to perform well over the coming years.
On the retail side, our portfolio continues to perform well with strong leasing activity. We expect most metrics to return to pre-COVID levels over the coming quarters as you heard from Rudy. The continued strength of Walmart’s business model is unparalleled, aligns well with Canadian consumer demand resulting in strong performance across all economic cycles.
The development business is particularly exciting to me as the newest member of the management team. We have over three million feet of mixed-use development projects that are currently under construction and expected to be completed and drive growth in FFO over the course of 2023 and 2024. All of our projects are currently proceeding on time and on budget.
As Mitch noted earlier, some of the notable projects include 395,000 square feet of self-storage space across three properties, more than 1,000 condominium units and a further 174 town homes, more than 900 residential rental units on three separate projects, 413 senior housing units and a 241,000 square foot industrial project.
Not only are these projects expected to drive earnings growth, but we also expect them to allow us to recycle some capital into other projects in our pipeline and facilitate prudent management of our capital and liquidity needs. In addition, we are currently working on several project financing initiatives including the industrial site in Pickering, the Canadian Tire site at Leaside, the ArtWalk condominium and rental development at SmartVMC, and the Vaughan Northwest Retirement Home project.
Once again I want to thank my new colleagues for a warm welcome over the past three weeks and I’m excited to be part of the team here at SmartCentres.
And with that I’m going to turn it back over to Mitch to moderate the Q&A.
Mitchell Goldhar
Thanks Peter. As you can tell from our collective remarks, the core portfolio remains strong and that — continues to grow. Our tenants and our priority intensification program remain our priority. We also continue to focus on our specialty projects such as storage and seniors — senior housing.
With that, I will now turn it over to the operator in addressing your questions. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question comes from Mario Saric from Scotia Capital. Please go ahead Mario.
Mario Saric
Hi guys. Good afternoon.
Mitchell Goldhar
Hi Mario.
Mario Saric
Maybe we’ll start on the operational side, Rudy, in terms of the — in terms of the quarter-to-quarter occupancy gain, it’s pretty impressive at 40 basis points on in place to about 140,000 square feet. How would you characterize that 140,000 of net new demand between new tenants for SmartCentres versus the expansion of the existing tenants where SmartCentres are taking more locations?
Rudy Gobin
Yes, I think it’s — most of it, Mario, is our existing tenancies expanding into centers where some vacancy became available as a result of tenants who had left throughout the pandemic as you know and the likes of some of the national tenants that I referred to earlier like the Winners, HomeSense, Pharmacy, Beer and Wine, Dollar Stores, they are — that was the majority of it.
There are a few tenants who have signed on with us that are going to be part of the committed deals. So, you will see them opening up. They haven’t opened yet but they will be opening up in the coming months. So, it is a blend of the two, but most of it is our existing sort of in-house tenants — or from our tenant mix.
Mario Saric
Got it okay. And then your comment on the strong expected performance from the outlook in Q4. Can you remind us of the typical seasonality involved in there so for example the percentage of total portfolio revenue that would come from the outlets in Q4 versus the average of Q1 to Q3?
Peter Slan
Hi Mario. I mean I don’t think we differentiate that out in our financials. So, — but what I can tell you is our outlet portfolio is performing actually better than pre-pandemic. So, when we look at what we expect the NOI to be in 2022, we can say to you that us and Simon are expecting a strong performance for those properties compared to the pre-pandemic numbers, in fact slightly better.
And as we see sales already improving, traffic is as you know crazy there, we are expecting a very good year so not — so different than what it was in 2019, but certainly the best since then.
Mario Saric
Okay. And then my last question just pertains to the G&A. The tick up a bit in Q3, primarily on a lower amount of G&A that was capitalized Q3 versus pretty much any quarter going back to 2021. What’s a good run rate for that in G&A going forward on the quarterly basis?
Peter Slan
Yes, I think a good run rate would be anywhere from maybe 600 to 700 per quarter. We had a catch up Mario. I think — I don’t know if it was disclosed properly, but it’s a catch-up that represented the whole nine months in one quarter. And it’s all based on development activity, right? So when development activity is sort of mainstream, there will be less of that, and when development activity is less. There will be a little bit more. But I think on a run rate basis anywhere from that sort of 600 million to 700 and then you should see some of that in Q4 as well.
Mario Saric
Okay. So when you say $600 million to $700 million like, if we look at your Q1 and Q2 G&A is about $7 million net of capitalized and allocations to Penguin, and so on and so forth. So we’ve got $7 million to $8 million or $6 million to $8 million quarterly run rate is that a pretty good number going forward?
Peter Slan
The 600,000 – sorry in terms of the overall G&A?
Mario Saric
Yeah, — method?
Peter Slan
Yeah, all I’m saying is yeah, it would be to add $600,000 to $700,000 per quarter to each of those prior quarters as a G&A number yes.
Mario Saric
Okay. Great. That’s it for. Thank you, guys.
Peter Slan
Thanks, Mario.
Operator
All right. Next question comes from Jenny Ma from BMO Capital Markets. Please go ahead.
Jenny Ma
Thank you. Good afternoon. Congratulations to Peter Slan and Peter Sweeney, look forward to working with you Peter Slan. I wanted to pivot to the development. I think, in past calls you had guided to about $300 million of spend for 2023. And I’m wondering, if you could provide an outlook for 2024?
Peter Sweeney
Jenny, it’s Peter Sweeney. Thank you. Maybe this will be my last comment. I think, we’ve guided in the past that for 2023, we thought that $250 million was the expected amount of spend – development spend for that year. And I think given where we are today and what we know to be moving forward today, et cetera, that you should expect the same amount of development spend or a similar amount at least for 2024 as well.
Jenny Ma
Okay. Great. Thank you. And then when we think about the capitalization of interest, it’s moved up throughout the year, and I presume a lot of that is from SmartVMC West. But net-net when you think of some of the completions and the spend, that we just talked about directionally do we expect capitalized interest to remain flat, or maybe move up a bit moderately?
Peter Sweeney
I think, if you wanted to analyze it, Jenny, the right way to do it would be to take the Q3 capitalized amounts and extrapolate that across and annualized for a 12-month period only, because as we know interest rates have moved up over the three months ending September. And a big part of that, you’re absolutely right a big part of the capitalized amount pertain to VMC West, and the debt associated with that property specifically.
And then on the other properties that are part of the portfolio, they either have property-specific debt, some of which may be variable, which is subject obviously to rising interest rates. And some of the debt is assessed at capitalized amount based on our weighted average interest rate, which as I mentioned in my script, had increased obviously as well. So, I think, if you take the amount capitalized in Q3, and you extrapolate that over a 12-month period, you’re not going to be that far off for the next 24 months.
Jenny Ma
Okay. Great. That’s helpful. And then lastly, with regards to the Pickering industrial development, I’m not sure, if I’ve missed it, but did you ever disclose what the cost of the Phase 1 development is you provided the yields and the leasing but any sense on cost?
Mitchell Goldhar
No, we haven’t specifically right in the course.
Jenny Ma
Okay. Will that be something that’s forthcoming in future quarters?
Mitchell Goldhar
Possibly, I mean, we’ve provided the yield. So – it’s a build-to-suit contract. But I guess, we might in time, I guess, provide the cost associated with that project. But there’s nothing – remarkable in terms of that cost that just we haven’t and sometimes do not give exact details, because in this case it is a build-to-suit for a specific tenant. So just out of respect for the tenant and there’s specific spend on this project. It’s got some finished office. It’s got some unique things in the warehouse. It is a bit of a competitive-ish proprietary. There’s reason for a proprietary and competitive market reasons for not disclosing every one of those details.
Jenny Ma
Okay. That’s fair. Is it more or less in line with what we’d expect the market cost to be, or is it an outlier either way?
Mitchell Goldhar
No, but it is a unique building. I mean, it’s a 40-foot clear. I don’t know if we emphasize that, which in the industrial is highly desirable from a tenant point of view, but higher than average industrial space, and which increases the cubic area. And, I mean, that’s something that’s unique. But other than the cost that might be associated with going with the higher — per height there’s — it’s not an outlier.
Jenny Ma
Okay. All right. Thank you very much. I’ll turn it back.
Mitchell Goldhar
Thanks Jenny.
Operator
All right. Next we have a question from Sam Damiani from TD Securities. Please go ahead.
Sam Damiani
Thanks and good afternoon, everyone. With the further diversification of SmartCentres activities I was just wondering between all the different income property types, obviously, retail, self-storage, departments, industrial, senior housing, which two or three of them are most attractive given the market dynamics today and expected for the next year or two?
Mitchell Goldhar
That’s great. I love that question. If you go in terms of short-term, I mean just like answering you the second, I mean storage is a real satisfying form, because it’s easy to zone and improve. It’s not parking intensive. In fact it’s cheap. Parking is surface parking and it’s low parking demand. And it’s not expensive construction and its quick construction and is being over performing in terms of lease-up. So I don’t want to distract from much bigger and ultimately more — move the needle potent program being the residential. But the — ignoring the overall size of the program, the storage has been really quite an overachiever.
Sam Damiani
So that was real standout versus the other type property types?
Mitchell Goldhar
I mean, yeah, it’s just because of the reasons I said. I mean, it’s so easy to get it built. I mean the process is so quick and every respect. There’s not a lot of objections to a storage facility. It doesn’t take the same analysis at the municipal level. And then construction is efficient. So — and it just happens to be we’re in good locations and there’s pent-up demand. So it just happens to be that we’re — I mean, I think we’re something like 90% leased we’re ahead of schedule.
So, yeah, I mean for all kinds of reasons, but it is a great program and we’re very committed to it. Actually we think we’ll do quite a bit more of it. But the big needle move or the medium long-term transformational forms are residential for sure, which are performing great. I mean, look our condo program has been extremely lucrative and so will the residential ultimately, I’m sorry, the multi-results, but they take a lot longer and the approval process is more arduous. So it’s just — as I say it’s — the storage has been just a bit of a wonder child.
Sam Damiani
I hear it makes sense. I guess just on the condo side. I’m sure the Transit City 4 and 5, the profit margins there that you’re expecting to book, I guess next year are pretty much intact. But going forward, how do you think about the market today to build a similar product and achieve similar profit margins given cost inflation and the market dynamics that you see today?
Mitchell Goldhar
Yes, I mean we sold that out — in a different market. We also sold it cheaper, but we locked into lower construction costs. So, we’ve got very good margin there. Frankly, Park Place and even ArtWalk are actually more profitable than TC four and five, is subject to the construction prices like that we haven’t — completely satisfied ourselves with now interest rates of course. But if you took some sort of — you took construction prices of a year ago, ArtWalk is more profitable than TC four and five.
And of course, with ArtWalk we own, 50% the REIT versus 25% which is a really important detail in terms of bottom line. But — and I don’t see at the moment, you sort of mentioned this at the beginning of your question. I don’t think we’re really exposed to four and five like I think most of the buyers there, are very committed to closing. So I think they are pretty safe as — you had said.
Sam Damiani
Okay. Thank you. Just last one from me. I guess there was a subsequent event with some mortgages receivable being paid off. Has that been completed? And can you disclose, which properties they were secured on?
Peter Slan
I don’t — it’s Sam. I think we gave a number. There was approximately $140 million — in excess of $140 million of mezz loans outstanding again, — sorry at the end of Q2. And as we said, subsequent to quarter end, a substantial amount of those amounts outstanding were repaid. I didn’t bring the details on them. But certainly, as we get to Q4, you’ll be able to see that in the disclosures to which of those mezz loans have been repaid.
Sam Damiani
Excellent. Okay. I’ll turn it back. Thank you.
Operator
All right next question comes from Pammi Bir from RBC Capital Markets. Please go ahead.
Pammi Bir
Thanks. HI, everyone. Maybe just building off of the last question there from Sam, just Peter do you know what the rate on those loans repaid was given — in sort of the average?
Peter Slan
It’s based Pammi. I mean if you look at our disclosure, it’s based off a BA rate and it varied subject to BAs and prime moving. So I think, it’s in our disclosure in each.
Mitchell Goldhar
They were close to seven, they were just under seven around seven recently, but go ahead — slower.
Peter Slan
If you can’t find it in our disclosure Pammi, let me know and I’ll point you in the direction to it in both the financial statement notes, as well as the MD&A.
Pammi Bir
Got it. Maybe just switching gears and coming back to the occupancy discussion. Your comments certainly suggest some good strength there. What are your thoughts on how much further upside, in occupancy do you think you can pick up? And over what timeframe, do you see that maybe playing out?
Mitchell Goldhar
I mean, there’s certainly — there’s been some pent-up demand. There’s been a lot of retailers having a chance to think about, what they want to look like. Over the last two three years they’ve been planning that. So, I don’t want to be — I want to manage expectations because everything is constantly evolving and changing. But there seems to be from very, from this — from a lot of the stronger retailers in this country some interest in expanding and for new units.
So I mean, it’s hard to say, but it does seem to have some legs for sure. So it’s not just filling vacancies, but it’s new space on owned lands and then some new retailers as we said, some retailers that weren’t in our portfolio have — reached out. Some of them are existing concepts that are regional and want to expand and some are new concepts from existing national players, who want to try new concepts.
And it’s a fairly significant space like these concepts are large floor plate and value. They want big space, they want good parking and they want good rent. But those are players who are interested in some of our vacancies which is great. That’s new over the last couple of years.
Rudy Gobin
Yes and Pammi, the other two that I mentioned earlier, and I mentioned it last quarter too, the covenant quality that Mitch referred to is much better in the incoming tenants versus the outgoing tenants during the pandemic, as you can imagine the sort of the weaker retailers who maybe didn’t have a good e-commerce platform, didn’t have good click-and-collect that wasn’t in the essential services or essential products suffered more than the others. Those were not without strong balance sheets and liquidity, so now the ones that are showing up we’re very – we’re being very particular, and also trying to manage the mix of tenants.
We don’t want three or four of the same type of tenants in a shopping center. You go to one of our shopping centers, you will see $1 store in a shopping center. You will not see two or three or four. So we’re very mindful of covenant quality. We’re very mindful of the tenant mix in deciding, who should be in and that will drive the leasing more so than anything else.
Mitchell Goldhar
I would add on the leasing note as well, which we didn’t mention that there was some preliminary interest from some office tenants for some of our properties. So stay tuned on that. But there’s some strong covenants interested in build-to-suit office space which is – that’s something we factor into our growth numbers.
Pammi Bir
Sorry, Mitch, are you referring to office – interest in office space at VMC or just some of the existing retail centers?
Mitchell Goldhar
No I’m talking about new build-to-suit office building space, building office space for a specific user not filling office space. We actually for all intents and purposes have zero – let me think yes, I think we pretty much have zero vacancy in our office portfolio. Now if you want to nitpick I guess, we have a lease signed for a vacancy of about 4,000 feet but it’s assigned, but it hasn’t commenced. But for all intents and purposes I’m talking about interest in having an office building built for specific office user.
Pammi Bir
Right just – got it. And then just on the – as you kind of approach Q1, it’s I know it’s still a few months away but typically we do get some seasonal weakness. Are you anticipating anything there in terms of any potential closures? And then secondly, if you could remind me if there’s any exposure to Bed Bath & Beyond, and if there’s any – Canadian closures but just any thoughts, if there’s anything that may show up in your portfolio?
Mitchell Goldhar
Yes, I mean the first part I would say one of the few good things about COVID is it did separate the weak from the stronger. And so, we really don’t have that sort of feature happening. We don’t feel like this year that we’re going to have that at whatever percentage happens – has happened historically.
It’s always been relatively small with our portfolio but I don’t think we have any of that this year actually. But we do have exposure to Bed Bath & Beyond but not much. I think we only have two Bed Bath & Beyond and we – and they’re in good locations in Cambridge and in Halifax. And we have very strong interest in their space in both cases. So actually, I mean we don’t know what’s going to happen with them. Hopefully, they’ll continue to be business as they in the current form. But actually, we already have interest in those spaces so.
Pammi Bir
Okay. Last one from me. Just any update on the progress of presales at Park Place, I think you released a portion in the first phase if I recall. And then just lastly, you mentioned some comments — you commented on sort of interest in Millway as well. So I’m curious, if you have any pre-leasing updates there?
Mitchell Goldhar
I mean with Park Place, yes, we continue to sell there, I think we’re probably — I don’t want to miss quote so take — put a sort of asterisk on this. I think we’re sort of in the 150 to 170 units wise there. And as you know ArtWalk is sold out in terms of the units that we put on the market and the only units we didn’t put on the market were the very lower floors and the very higher floors for strategic reasons to do with just giving us flexibility on design some design matters.
And the Millway, if you look closely if you come up you’ll see there’s the podiums. So we’re focusing the leasing direct enough focus to the podiums right now. The podiums of the — of Transit City four and five are actually Millway and then the podium of the Millway is also Millway. So, I would say we’re probably 50% lease if you will on the two podiums of four and five, which is where we’re directing. We do have leasing in the podium in the Millway, but we’re not directing things there. So and that’s — look it’s still got a crane on it. It’s still a construction site. And the anatomy of the leasing profile of the rental building is usually when there’s completion and there’s a — you can tour the building and you can go into a bottom suite or two, which by the way we are currently decking out. But we’re just not there quite yet and yet we are leasing as strong. It is right beside the subway. It’s a brand-new building. There’s huge rental demand. So — and there’s nothing up in the area like it. So, it makes sense that the interest is strong for the Millway — and a good rent — and by the way I will say at slightly better rents than we had performed.
Pammi Bir
Okay. And then just — sorry just your comment on the 150 to 170 units at Park Place, is that units sold? And what was the number of units released for Phase I?
Mitchell Goldhar
Yes, I mean, it’s sold correct with deposits and past rescission dates. That’s what I’m quoting you. And number of units released well, that would probably be — I’m guessing plus or minus 50% I would say. I can’t remember the exact number, yes, I’m three being shown here three, yes. So it’s approximately maybe a little bit more than 50% of the units that are released. And by the way, we continue to do sales events and build relationship with the brokerage community or with smart living. It’s really important. We’re new players, but we’re not mercenary developers. So we’re very, very much into building the brand with the brokerage community and the user community.
And that is really being appreciated in this sort of more challenging time. The brokers love it that we are reaching out to them and having them up and showing them our portfolio of developments and so on and so forth. And that’s something, we feel that we have caught up very much to the condo developers that are more — being in the market longer than us. So we’ve been using this time in addition to selling to building those relationships.
Pammi Bir
Thanks, very much. I’ll turn it back.
Peter Sweeney
Pammi, it’s Peter Sweeney. Listen just for your benefit. The reference to the MD&A is on page 69 and the financial statements in page 108 on those mezz loans if you were looking, okay?
Pammi Bir
Thank you for that.
Operator
All right. Next question comes from Johann Rodrigues from iA Capital Markets. Please, go ahead.
Johann Rodrigues
Thanks. Hi, everyone. So a couple of questions. So one, you’ve been selling a few land parcels here in there [indiscernible]. You obviously have a huge growing up pipeline with more excess land than you probably ever build on and have spent a great deal of time thinking about exactly what you build, but cam I have a rough idea of what you wouldn’t build, i.e., how much excess land you’d like or expect to monetize?
Mitchell Goldhar
You mean, in the next year or…
Johann Rodrigues
Yes, or even five years, however, what you thought about?
Mitchell Goldhar
Your comment that we’ve got more land that we can build on. I mean, it seems maybe like that right now, which is a great thing, considering none of it is reflected in our unit price. I mean — but it will be monetized in a variety of ways.
I’m assuming, you are implying some of it will sell out right over the years. Some of it will JV and some of it will build condos on. Some of it will build condos on with partners, that’s the monetizing. I guess the multi-res you could say is monetizing as well, which will do ourselves in certain partnerships.
But, I mean, we’ve got a long-term development plan. I mean, it will be — it will take us 10, 15 years to develop out all of our lands, basically. So if you say 15, if we just don’t have the pedal to the metal, which we likely will not, we’ll manage that each phase prudently as we go. But I’d say, we’ll probably end up building out in the next — everything out in the next 15 years including VMC.
Johann Rodrigues
Okay. Thanks. And just wanted to touch on your comments about taking the cap rate up 10 bps across all shopping centers. So is there a differentiation between how you see cap rate movements in the primary — well, the vector markets versus primary market — other primary markets and then secondary markets or is it just — ?
Mitchell Goldhar
It’s been popular in the last, I don’t know, 10 years to differentiate between small and large markets. But in our case, we are Walmart anchored, very often with a Canadian Tire or a Home Depot or certainly sometimes lots of — could even have food store. If you’re in a, what’s called a, small market, I mean, that is a very dominant thing. Like, there’s no target. There’s no Kmart. I mean, there’s no Zellers. I mean the Walmart in those markets is the go-to along with a lot of the other staples.
So we do very well in those markets. We have very good market share. We have a large role to play in those markets. I’ve mentioned before, it has led to having good relations in those communities in terms of rezonings.
So in terms of what those are worth, I guess, there’s not a lot of trades, but we see them as being — we’re not looking to dispose of that part of our portfolio. Having said that, we have had inquiries from third parties to acquire portfolios — within our portfolio of smaller market, Walmart anchor centers and we’ve had inquiries of others to acquire a mixed portfolio within our portfolio of Walmart anchored centers, even up to now. Completely out of — there are third-party inquiries not — we’re not open marketing that.
But we haven’t gotten to a point of establishing what that cap rate would be. But we certainly value them well. We’re not running away from those regardless of what the lay person might think about or try to sort of — try to generalize small market big market cap rates. I mean, there’s more redevelopment potential in the big markets. That’s for sure.
But in terms of the retail and the health of those centers we have virtually — I mean, we have 99% or close to 100% occupancy in our smaller market centers. Oh, and Peter Sweeney would like to add.
Peter Sweeney
Listen, Johann, and its Peter Sweeney listen, keep in mind as well two things. First of all, our portfolio of shopping centers and other increasing assets is valued by third-party appraisers and has been now for I guess approximately 10 or 11 years since IFRS first came around.
And so we defer to those appraisers to give us their sage and professional perspective on value. And there’s obviously going to be some variance in a cap rate used to value a smaller market center versus perhaps a larger market.
But at the same time, these as Mitch mentioned, these assets are all dominated by a Walmart in these various markets. And so Walmart will continue to attract traffic to these centers. Obviously, and therefore continue to persuade other tenants to be around Walmart to participate in those higher traffic counts.
And obviously that buoyancy creates some lift in value relative to maybe a lesser or lower level of operating performance by a neighborhood shopping center in a smaller market. So just keep that in mind.
And I guess the second item is that, as Mitch mentioned, these shopping centers, provide regardless of their market provide all sorts of incentive to an opportunity to intensify and improve overtime.
But with almost no exception the REIT has continued to value these centers and these shopping centers at their income in place levels and capping that income what our appraisers tell us as an appropriate level. So always keep that in mind when you’re thinking about how we valued assets historically.
Johann Rodrigues
Yeah. Okay. Yeah. No — I like all my fellow analysts are just trying to figure out what cap rates are doing, obviously being a few steps away from transacting direct real estate ourselves. So I was just looking for color, I appreciate it. And yeah, congrats to Peter and Peter Mitch must be a big fan of Peter.
Mitchell Goldhar
We try to make it easy for everyone. I mean, — I’m just really only we’re searching for a CFO with named Peter and ideally with the last name starting with S just to save on certain things just some internal cost overheads.
Operator
All right. Next question comes from Tal Woolley from National Bank Financial. Please go ahead.
Tal Woolley
Hi. Good afternoon everyone.
Mitchell Goldhar
Good afternoon, Tal.
Tal Woolley
Just wondering you made reference a couple of times to sort of traffic being up at your Walmart-anchored centers. Can you quantify that?
Rudy Gobin
Yeah. I’ll take Tal, its Rudy. Yes, that’s the feedback. By the way we’re getting from our tenants. Some of our tenants are smaller tenants report sales. So we have that. And then the — obviously larger tenants we get that feedback from them. So we just know that through their feedback.
And just looking at the parking lot and our tenants who by the way are asking for pickup spots and click-and-collect spots way more than what it would have been at the start of the pandemic where it’s becoming a lot more commonplace now. So — just looking at the parking lots we can — you can also see that too.
Tal Woolley
Okay. Yeah, I was just trying to establish whether I didn’t know whether it was like — like you guys have?
Mitchell Goldhar
Yeah, all the tenants count their traffic, okay.
Tal Woolley
Yeah.
Mitchell Goldhar
They all have customer counts counters at their doors which I don’t know whether you guys know that or not, but — so that’s — we are the best — the best evidence is and from our major tenants and a couple of other tenants that we have close relations with.
They’re telling us that their customer counts are up. And it’s obviously part of the evidence period. And then of course, their interest in renewals and expansions in new stores is also kind of support — complements like supports that as well.
Tal Woolley
Okay. And then just earlier in your preamble, you had made reference to maybe higher interest rates being a benefit to the portfolio. I’m wondering, if you can just expand on that?
Mitchell Goldhar
Yeah, I mean, obviously with higher interest rates, it’s having all kinds of knock-on effects. First of all, even with respect to recruitment and retention. I mean, when money was free and stocks were flying. It had a lot of effects on people’s value of their — even their jobs. I’m not saying — where we were 10 years ago, but there’s a movement towards — more interest in our postings for jobs for example.
It also has seems to have slowly seems to be having the effect of companies being looked at from the point of view of their earnings. Like we’re getting back to assets are being valued as opposed to narratives. It was where money was free and it didn’t matter what the earnings of the company was. The general public were jumping on the bandwagon of celebrity companies, and ignoring the earnings or priced earnings multiples.
It seems like there’s a movement towards valuing companies again on their actual assets, their potential growth, their quality of their management, their network versus a narrative and a story. And so a lot of that is related back to rates increasing. And those are all good things I think for all of us. And then, of course, the price of real estate should appropriately be affected and come down. It’s not that we’re really in the market to buy. We’ve got plenty to develop, but still that may come to us. So we think that those are all things that are far away, the cost of our variable debt here at SmartCentres.
Tal Woolley
And when you’re looking forward to greenlighting new residential stuff, do you see much change in the mix between condos versus apartments going forward, or I think maybe you wonder whether the condo buying market will be as deep as it has been over the last five years and then there’s such strong demand for rental. Like is that influencing how you’re looking at some of the ways you’re going to redevelop some of your sites?
Mitchell Goldhar
The condo will be the condo. We’re not — at the moment, we’re not thinking of just buying sales like some condo developers and some statistics that you may read about. We’re still — we’re going to keep it real. That is that we’re for now planning on requiring deposits that we think are meaningful and that will determine whether it’s go no go. And so really the market will decide whether we go or don’t go.
We think it’s a very good bang for our buck to get approvals and maybe even go to market and see. But we do want to have a healthy mix of condos in there. But, yes, we know that the rental market is very deep and that in the absence of there being a condo market, or a deep one there’s a deep rental market. But we’re going to be very conservative in just tapping that deep residential — realty res market simply because we’re going to want to manage our debt levels.
So — and just so you understand also we do get maybe more — we may slope a little bit more towards multi-res in some cases because some of the institutional capital out there wants multi-res. And so to the extent they want to partner with us and buy in — at a price that’s interesting to us it may accelerate some multi-res.
But as I said, we’ll be at all times keeping the big picture in mind being what it does to our overall debt level. So yes, I think, we’re going to just keep forging ahead with both and the market will determine first and foremost the much condo can really go forward safely. And secondly, of course, the highest tier and the hierarchy is just to manage our debt levels.
Tal Woolley
That actually leads into my next question. You guys have spoken in prior quarters about maybe trying to establish some, sort of, financial partnership with some institutional capital. Given the market upheaval, I could perfectly understand that maybe some of that gets — some of that gets deferred or reevaluated right now. Can you give us an update on where you stand with that?
Mitchell Goldhar
Yes I mean that’s exactly bang on. I mean, we actually had a bunch of deals about to be done. And then REITs rates moved up rapidly. So the interest is still there. This was never like heavy pressure, kind of, negotiations. It was a long — it was a strategy to build long-term relationships. And really we have had and have — who talk about had we had a lot of interest in partnering on a bunch of our multi-res.
But — and the interest is still there but because of rate changes. Of course that rightly changes the — their pro forma. And the interest is still there. I mean, the way we’re treating each other is just we’re like let’s just wait and see what goes on. We keep the relationship healthy and strong their long-term thinking as well. But for now I mean we don’t see any of that closing imminently like you said, but I do see that very much being in future — in the months or years ahead that will certainly be a part of our program.
Tal Woolley
Okay. And just on the Provincial announcement at least here in Ontario regarding the new housing plan, can you just provide your thoughts on how you think it helps and what does it change anything, sort of, about how you approach certain types of projects going forward?
Mitchell Goldhar
I mean nothing — we’re forging ahead with everything that we were doing a year ago and two years ago because we’re going to obviously — the big go-no-go is at basically construction. And that’s where it really, really counts in terms of financially. But these changes are good for SmartCentres. They in some cases accelerate the approval process. In other cases clarify and actually make it a little bit less costly to develop.
So it was getting a little bit out of hand what was being laid on developers to provide for getting approval. So the province took a bunch of things away and also clarified some things. So it’s just good for what we’re doing. It’s not going to result in us saying, okay, well now let’s develop this property or that property it will just accelerate it and make it probably a little bit better financially.
We were already looking at things like everything and moving on most everything that makes sense in terms of getting approvals. But it is a big deal just generally speaking as in Ontario. Those changes in legislation are huge just so everyone understands how intimately familiar this province is with municipal and regional politics.
And historically that has not necessarily been the strength of eventual government even though in planning terms they are a big brother but this is really nitty-gritty and a big message to the municipalities.
Tal Woolley
Okay. And then just lastly, I’m wondering as you guys have said before one of the few — one of the retailers who did not adjust your distribution, sort of, going through COVID. You do have big plans ahead. The cost of debt has changed. And I wonder like not that I’m trying to suggest that a distribution adjustment is needed, but certainly the calculus of retaining your internal cash flow is a little bit different than where it has been? And I’m wondering it seems like you’re sort of leaning more towards, hey, we’ll rely on capital recycling or excess land sales kind of fund things going forward? Is that how we should sort of be thinking about things for the foreseeable future or do you think other steps might be worth taking just given that the numbers have all changed in the last little bit?
Mitchell Goldhar
Yes. Well, we don’t feel we have to do anything, right? So, I mean, our — well, I don’t know what our company is valued at. Actually because according to the market we’re neither the sum of our parts, nor the synergies of our network. So I don’t know what we are in that respect. But that notwithstanding, we certainly aren’t anything more than our recurring income in the eyes of the market at the moment and for basically at any time.
I mean — so we will continue to be a value-oriented owner of value-oriented Walmart-anchored shopping centers. She’s got a very strong tenant base, and of course, one of the levers that REITs have as an option is cutting distributions, but we’re very confident in our collections. And we think that — we think that distributions are very important to our shareholders and things would have to be different.
I think, I mean, it’s obviously up to the Board, but our history has been that we’d probably do everything else that’s prudent before we would do that. But obviously, yes, I mean, there’s always scenarios, but I don’t foresee those scenarios, but you never know. And we’re comfortable just playing it safe with development initiatives and making sure our shopping centers operate at their absolute maximum — and we do have growth in our retail as well, and again, a bit of a tailwind. So I’d say, distributions are probably last on the list.
Tal Woolley
Okay. Great. Thanks very much, gentlemen.
Operator
All right. And the last question we have in the queue comes from Dean Wilkinson from CIBC World Markets. Please go ahead.
Dean Wilkinson
Yes. Thanks. On your condo presales, if you were to get back a handful or larger than that on failure to close, what would the pricing differential be between when you put them into presale and if you got them back trying to get sort of how much in the money could you be if things went sideways on you?
Mitchell Goldhar
Yes, that’s not what we want, because as I say everything we’re doing here is about long-term. We want to build a company with a great reputation smart living. So the last thing in the world, we want to do is take back condos though you are correct that if that was to happen we would be in the money.
So after every possible effort to ensure everybody closes on the sold 4 and 5, which are the ones under construction, of course, we would be in the money. They were sold at. I think the 4 and 5 were sold at an average of eight or 68 or something I can’t remember even giving you too much detail.
Like we’d be so in the money, we sold — yes, we’ve got 20% deposits. So 20% of eight whatever, 870, 865, he’s got 20% of that. And then you got Park Place, we’re selling at close to $1,200 and ArtWalk was sold out $1,175. So we’d be well in the money even if you were to kind of — want to blow it out and lower from market. But I don’t think — just so you know we probably — I mean we would also look at renting. If we got those back, I mean it’s possible we would see could also — we’ve got scenarios where we would rent some of those units if we got them back.
Dean Wilkinson
Okay. So there’s a lot of slacking in if things do sort of push, that’s really the point?
Mitchell Goldhar
We got a lot of flexibility. I should take the opportunity to say we are not exposed, this is — I don’t want to get is like famous last words here. But we really have — we do not have exposure anywhere to the sudden weakness or a weakening of the condo market. And all of our developments are funded that we are — that have commenced and we’re locked into construction prices that are actually yesterday’s construction prices on everything that was under construction.
The only thing we’re exposed to variable interest rates, so be it between our rental and our condo construction programs. They have financing and yesterday’s construction prices. And anything else, we just haven’t started ArtWalk, Park Place, Laval, Mascouche Kincardine, Carleton Place, Alliston, 1900 Eglinton Westside, Pickering. I mean all of these and there’s many more, which are — most of which I just seemed are approved. We are slicing and dicing all the variations of commencing those and working with various contractors to make sure that those will be profitable.
Dean Wilkinson
Got it. That’s it. Thanks, Mitchell.
Mitchell Goldhar
Thank you.
Operator
And that was the last question we currently had in the queue.
Mitchell Goldhar
Okay. Well, thank you for participating in our Q3 Analyst call. And once again, I would like to thank Peter Sweeney, for his fantastic dedicated loyal eight years, and welcome Peter Slan as our new CFO. And to all of you, we look forward to meeting you again next quarter. Have a good day.
Operator
This concludes the SmartCentres REIT Q3 2022 conference call. Thank you for your participation and have a nice day.
Be the first to comment