Primaris Real Estate Investment Trust (PMZUN) Earnings Call Transcript & Summary

Good morning and welcome to Primaris REIT's Third Quarter 2022 Results Conference Call. [Operator Instructions] And I'll now turn the call over to [ Claire Mahaney Lyon ], Investor Relations. Please go ahead.

Thank you, Emily. During this call, management of Primaris REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Primaris REIT's control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions, risks and uncertainties are contained in Primaris REIT's filings with securities regulators. These filings are also available on Primaris REIT's website at www.primarisreit.com. I'll now turn the call over to Alex Avery, Primaris' Chief Executive Officer.

Good morning, and thank you for joining us today to discuss Primaris REIT's third quarter 2022 results. On the call with me are Patrick Sullivan, President and Chief Operating Officer; Rag Davloor, Chief Financial Officer; Leslie Buist, Senior Vice President, Finance; and Graham Procter, Senior Vice President, Asset Management. Our Q3 results marked 9 months since we completed the spin-out of Primaris REIT. As with the prior 2 quarters, Q3 was very strong, featuring double-digit same-property NOI growth, rising occupancy, above consensus FFO per unit and a 5% upward revision to our 2022 NOI guidance. With 60 days left in the year, we are feeling pretty good about how 2022 will finish. 3 weeks ago, we attended ICSC in Toronto, meeting with dozens of retailers. The mood was optimistic with retailers rolling out expansion plans that had been delayed by pandemic circumstances in 2021 and earlier in 2022. Many retailers are benefiting from easing of supply chain issues that were common earlier this year, while acknowledging that rising interest rates may temper sales growth. With retail sales now above 2019 levels, in the past 2 quarters, retailers are doing well. This strength among the retailers has allowed us to deliver faster-than-anticipated recovery in NOI as reflected in our results and our forecast. Beyond this strong performance to date, there remains substantial further opportunity to drive NOI growth as we recapture economics on retail sales performance. Demonstrating disciplined capital allocation is a cornerstone of our strategy. We continue to actively explore both acquisitions and dispositions. As is abundantly clear, the capital markets are disorganized and dynamic. We see opportunity in this environment. Our measurement of success is growth in value per unit and cash flow per unit while maintaining the defensive integrity of our balance sheet. In 2022 to-date, our primary choice for capital allocation has been our normal course issuer bid. As detailed in our disclosure, our leverage-neutral NCIB purchases completed in the first 9 months of 2022, have added $0.57 per unit to our NAV and contributed more than $0.04 to our annualized FFO run rate. With this quarter's results, we have also announced our inaugural distribution increase effective with the December distribution payable in January. Our Board approved the 2.5% increase or $0.02 per unit annually in the first of what we plan to be a program of regular annual distribution increases. Our plan to increase distributions every year is a direct result of our differentiated financial model. Our low leverage and low payout ratio provides substantial flexibility to grow the business with retained free cash flow. The $0.04 of growth in our annualized FFO run rate contributed by our NCIB activity in the first 9 months fully covers the distribution increase within our target payout ratio. While per unit growth from the NCIB is very helpful. We continue to see significant internal growth potential, bringing our occupancy back to more stabilized levels in the low to mid-90s percentage range over the next few years. This is consistent with our 4.9% increase to 2022 NOI guidance. Now I'll turn the call over to Pat to discuss our platform, operating and leasing results, followed by Rags who will discuss our financial results and provide you with an update on our disclosure package.

Thank you, Alex, and good morning. Through 2022 and closed malls across our portfolio experienced a significant rebound in tenant sales, with Q2 and Q3 sales exceeding 2019 comparable levels. Our team is working hard to deliver on our business plan and our strong operating results reflect normalized shopping behavior, recovering tenant sales productivity and the strength of our team. We continue to experience exceptional growth in our net operating income that exceeds our initial forecast. Our outperformance on NOI growth is coming from a number of sources, rising occupancy, rising sales for those tenants on preferred rent deals, which include percentage rents, strong tenant sales have pushed many tenants on net leases past their sales breakpoints and our percentage rental income is increasing. Specialized leasing income is returning to pre-pandemic normals. Non-recoverable expenses are falling due to lower bad debt, along with increased occupancy, specifically related to former vacant anchor premises, and our recovery ratios are improving as we convert tenants on preferred rental terms provided to maintain occupancy during COVID back to net leases. During the third quarter, sales averaged 109% compared to the same period in 2019, with rolling 12-month sales averaging 99% of comparable pre-pandemic figures. Food courts, typically a barometer for mall traffic, continue to show rising sales activity with third quarter sales being 100% as compared to pre-pandemic figures. Q1 portfolio food court sales were 74% and Q2 was 93% by way of comparison. We saw a strong back-to-school sales season in August and September and anticipate sales growth in December 2022 as compared to December 2021 as sales and shopping behaviors continue to normalize. Categories including food courts, personal care services, footwear and fashion related to work apparel continue to show strength and we expect this trend to continue. Several of our malls are reporting all-time highs in sales productivity with Orchard Park and Kelowna, Peter Pond Mall in Fort McMurray and New Sudbury Center in Sudbury now producing at more than $700 per square foot. Total committed portfolio occupancy was 91.7%, up 430 bps from Q2 2022 due to leasing and remerchandising activities. Same property occupancy was 92.5% at the quarter end, and the acquisition properties were 89.7%. The acquisition properties in-place occupancy grew by 5% from the second quarter. 3.7% of that is related to demolition of 60,000 square feet of Sears space at Quinte Mall and the removal of 70,000 square feet on the second-floor space at New Sudbury Center, which is now leasable. The remaining 1.3% increase in occupancy is the result of our leasing team executing on the strategic plan for the portfolio we developed at the start of 2022 when the properties were first integrated into the portfolio. Leasing activity is strong, continuing the trend from prior quarters, including transactions with structured variable rents or gross rents year-to-date, we have completed 69 new CRU transactions, including 23 in the third quarter encompassing just over 172,000 square feet. We continue to realize normalized leasing activity in the market. By way of comparison, our leasing team completed 79 new CRU deals equating to 161,000 square feet through the first 3 quarters of 2019. Overall, renewal rents were up 2.5% for the quarter. If we exclude 4 CRU tenants totaling more 14,400 square feet renewed during the quarter at lower rents and on a short-term basis, renewal rents would have increased by 4.3%. With sales increasing and positive absorption, we expect metrics to continue to improve. And closed malls have evolved over the past decade to include more necessity-based tenants with the percentage of space allocated to small shop fashion diminishing. Within the Primaris' portfolio, our top 5 tenants contributing just over 19% of our annual minimum rent, our Canadian Tire, Walmart, Loblaws, TJX and Bell Canada. These top 5 tenants are all investment-grade rated. Grocery and pharmacy have become an integral part of our overall tenant base with contributions from these tenants representing 11% of our annual minimum rent. During the third quarter, we successfully negotiated a lease extension with Red River Coop grocery store at Grand Park in Winnipeg. Red River occupies approximately 57,000 square feet and renewed for an additional 15 years. Fashion tenants continue to be important to the merchandise mix, and we are pleased to have completed 2 transactions during the quarter with Lululemon at both Regent Mall in Frederickson and Highstreet, Abbotsford. During the third quarter, we completed 5 transactions with Specsavers and the international optical chain with revenue exceeding $5 billion. Specsavers is now committed to open 9 stores within the Primaris portfolio encompassing over 17,000 square feet. In addition, Sephora, an international company owned by LVMH, opened 3 new stores in our portfolio during the quarter located at Place De Royaume, Stone Road Mall and McAllister Place in St. John, New Brunswick. Primaris now has 11 Sephora locations in our portfolio and we anticipate to expand on this relationship further. The new deals with Lululemon and the expansion of both Specsavers and Sephora in our portfolio demonstrate the benefit of having an internalized management team with a nationwide portfolio, enabling us to enhance merchandise mix, drive traffic and rents and further diversify our tenant base with creditworthy tenants. And lastly, on August 10, Dufferin Mall received final approval from the City of Toronto with regard to the development of 4 acres of land known as Dufferin Grove. And with that, I'll turn over the call to Rags to discuss our financial results.

Thanks, Pat and good morning, everyone. Our differentiated financial model, including very low leverage, a low payout ratio and significant retained free cash flow is a significant strategic advantage for Primaris REIT. During the quarter, we entered into a $200 million unsecured 3.5-year non-revolving delayed draw term loan. As of today, we've hedged $100 million of the underlying BA at 3.77% over a 5-year term. This would lock the rate on the $100 million and has been hedged at 5.27%. The facility is now fully drawn with all proceeds used to repay maturing mortgages. This facility, along with our existing revolving $400 million facility provides us with the funds to refinance the majority of expiring mortgage debt for the current year. We have a stated secured debt as a percentage of total debt target of 40% or under 40%. As at Q3, this ratio stands at 36.7%. With the new facility now fully drawn and another mortgage repaid subsequent to quarter end as of today, this increases our unencumbered asset portfolio to $2.8 billion in our secured debt to unsecured debt to 27.6%. 90% of our asset base is currently unencumbered. By disconnecting assets from secured debt, we enable the active management of our property portfolio while providing maximum flexibility to produce a well-laddered debt maturity profile. At present, our most attractive use of capital is buying back units at a deep discount to net asset value per unit on a leverage-neutral basis. Our NCIB has been in place and we are buying back units and cancelling units daily. As of yesterday, we had bought and canceled approximately 3.2 million units at an average price of $13.65 per unit, translating to a 38% discount to our NAV per unit. This activity has positively impacted NAV per unit as Alex indicated by $0.57 per unit and $0.043 per unit of FFO growth on an annualized run rate basis. This program is very accretive to [indiscernible]. Our Board approved the 2.5% increase or $0.02 per unit annually. And first of all, we planned to be a program of regular annual distribution increases. We continue to expand and refine our disclosure package and intend to have a best-in-class reporting with the goal of creating useful and insightful financial and operational information to help you understand and evaluate our business. New disclosure additions for this quarter include tenant allowances on recent cost across our tenant types and changes in NAV quarter-over-quarter on a total dollar and per unit basis. Our financial forecast can be found in Section 14 of the MD&A. There has been a significant amount of unpredictable change and volatility in the past 10 months. Tenants are performing very well with a strong rebound in sales. We updated our financial forecast for the current year based on our outperformance this quarter and our outlook for the balance of the year. To summarize, we have increased our forecasted net operating income by $9.9 million to $211.6 million. In order to give additional clarity and information on the total portfolio results, we have produced a supplemental package where we benchmark Q3's actual results versus the 2021 pro forma for the combined property portfolio and provide tenant sales and productivity data by mall and compare sales by province as a percentage of pre-pandemic sales produced in 2019. ESG is an essential component of responsible governance. Primaris is in the process of transitioning beyond its current CSR initiatives to establishing an ESG framework that aligns to and enhances our strategy and responsiveness to the evolving needs of Primaris stakeholders. We are making great progress in the development of a robust Board-led ESG strategy. Our ESG committee led by Board member, Anne Fitzgerald, and myself, completed our materiality assessment in Q3 and we have identified the most materialistic ESG factors that affect our business. These factors were approved by the Board that we are now integrating these factors into our corporate strategy, defining metrics and also targets. By integrating ESG into our corporate strategy, we will be in a position to better identify risks and opportunities. Now to our financial results. Same-property net operating income was up 10.3% in the quarter, driven by strong rental growth and effective cost management at the property level, primarily in connection with the portfolio. Our enclosed malls across the portfolio have experienced a significant rebound in sales growth and many of our operating metrics are improving substantially. FFO and AFFO per unit average diluted was $0.41 and $0.32 per unit, respectively. Primaris' FFO and AFFO payout ratios were 48.6% and 62.7%, respectively, within our FFO payout target of 45% to 50%. Given our outlook and excess free cash flow available after paying distributions, operating capital expenditures and leasing costs, we presently intend to allocate capital to future share buybacks. Primaris' share value of investment properties was $3.1 billion with external valuations received with 3 properties in the quarter with fair values totaling $830 million or 27% of the portfolio. On a portfolio basis, we incurred an unfavorable fair value adjustment of $60 million, mainly driven by increases in the discount rate and terminal cap rates used in our valuation models, capital spending and straight-line rent. The fair value decline was partially offset by value increases driven by strong NOI. The cap rate on the portfolio increased 25 basis points to 6.77% in Q3. Based on the appraised value of our assets, we ended the quarter with a NAV of $21.86 per unit and debt to total assets of 29.6%. Average debt to adjusted EBITDA for the first 9 months was 5x. Primaris REIT's scale and a highly differentiated financial model acknowledges both the clear preference public investor for REIT with conservative financial models and the advantages of having that lowest leverage among Canadian REITs. We are committed to our differentiated financial model enabling Primaris' to self-fund its internal growth. We are very happy with our financial and operating results for the first 9 months. Our KPIs are including our leverage metrics even throughout the buyback program. Our capital structure was previously designed to weather market turmoil, and we're in excellent position to pursue our growth strategy. In conclusion, we have a wide breadth of attractive investment opportunities. Our excess retained free cash flow allows for internally funded growth and reduces our reliance on external capital sources. We believe the structure should support a reasonable cost and access to capital. As we move through the balance of the year, we will continue to build out our financial and operating disclosures and welcome your feedback. We endeavor to provide you with the information you require to assess and value our business and progress. With that, I'll turn the call back to Alex.

Thank you, Rags. Our third consecutive quarter of strong results, third consecutive and most significant guidance increase to date and our inaugural distribution increase reflect the strong recovery and outlook in our business and our team's ability to capitalize on that opportunity faster than previously expected. We have multiple drivers of growth ahead of us, spanning occupancy improvement, converting modified leases back to conventional net lease structures, compounding excess free cash flow to drive per unit cash flow and NAV and capital recycling opportunities. We continue to prioritize raising awareness about Primaris REIT, communicating our strategy, building a public track record of strong results with each quarter that goes by and demonstrating disciplined capital allocation are all key to building institutional support. Over the next several months, we plan to initiate a Board outreach program, connecting members of our Board directly with the investment community. This is considered a governance best practice, but it is rarely adopted. We also plan to raise awareness about our properties by hosting property tours. Our properties look great and are performing very well to see them is to appreciate why our results have been as strong as they have been. We expect the time that we are investing in raising awareness will be rewarded over time with more research coverage, more investor confidence and more investor confidence in our value proposition. Just this Monday, Mark Rothschild from Canaccord Genuity initiated coverage. He joins Gaurav Mathur from iA Securities, Sumayya Syed from CIBC and Sam Damiani from TD Securities, who all initiated coverage earlier this year. Dean Wilkinson might be standing in for Sumayya on this call as Sumayya now has a 5-day old baby. We'd now be pleased to answer any questions from the call participants. Operator, please open the line for questions.

[Operator Instructions] Our first question today comes from Mark Rothschild with Canaccord Genuity.

Looking at the beat and the guidance, to what extent was this in relation to maybe being a little bit conservative in the guidance or did something change and where things were stronger than you anticipated that led to that? And maybe just connected to that, as you look to 2023, are you seeing any slowdown in leasing or if people taking it being a little more cautious as a potential softening of the economy or do you anticipate further occupancy increases?

Mark, that was multiple questions. We'll try and tackle them all, but I'll start with the, I guess, the beat and the guidance. We've been reflecting on our guidance practices, and they evolved through the spinout. And I think what is in retrospect, unique aspect to our guidance is that we provided a point guidance as in a single number rather than a range. And I think in retrospect, that may have just been more the bottom end of the range, and we probably could have provided better guidance had we provided a range. And so, I guess, to the extent that we were conservative, we were looking to provide a number that we were confident that we could deliver. So there was a little bit of that. But frankly, the business has been performing better than we were expecting. We've been able to capture a lot of the opportunities that we knew were there faster than we had anticipated. And you have to remember that when we were putting this guidance out originally, we were working on it in the summer of 2021 and the early fall. And at the time, the world was a lot different. Sales are now back above 2019 levels, and they clearly were not in Q4 of 2021 and Q1 of 2022. So the business has been evolving. And as noted in some of our comments, we've been working on restoring lease terms and lease structures to more conventional levels, and that's been a big driver of our performance year-to-date. Pat, do you want to address some of the questions about the current retailer environment?

Yes. As Alex mentioned and we've mentioned in our script, the sales have really rebounded strongly, probably faster than anyone anticipated. I was really looking to see how September sales were back-to-school season is always a big part of the year. And we were very pleased to see that back-to-school was as strong as it was. September came in at a very healthy number. And it was generally for tenants across the board. Previously we have just seen a segment of the tenant base responding as people went back to work and set forth -- we are seeing strength across all of the different categories right now. And there's -- it's really created a lot of activity in the leasing market. There's a lot of interest from retailers and in expanding their store count and growing their footprint, getting into the markets across Canada further. The one thing that came out of the pandemic is retailers really learned the malls where they were able to make money and where they weren't. And I think there's a lot of focus right now on where can I open a profitable store, which is good news for us because we tend to have very strong malls in markets where our cost side is not so significant.

So from those comments, is it fair to assume that you are not seeing any slowdown in leasing and that you can improve occupancy further over the next coming quarters?

Agreed. Yes. We're seeing good activity in the leasing market, and we expect occupancy will continue to grow.

Okay. Great. And looking at the next quarter, and I think you have some smaller maybe redevelopment projects that are expected to be completed. Can you just give us little more information on the square foot and maybe an average rent and just timing of that and how we should expect that to impact results in the coming quarters.

Land Stone Mall in Peterborough has a Sport Chek that's going to open up in the next few weeks. It's a relocation from elsewhere in the mall, but it's an increase in square footage. That's going to have an impact in the first quarter next year. Cineplex opens at Kildonan from 35,000 square feet in I think it's the third week of November. That's going to -- that's a pretty substantial benefit NOI wise. They occupy 35,000 square feet. It's a brand-new build. They're relocating from an existing theater at the mall, which was really a very low rent. It was an old dilapidated theater, so that should have an immediate impact next year. Northland Village Redevelopment, it's going to be done in phases, and I think there's some contribution later in the year from tenants moving into a portion of what is retained after we demolished the shopping center. And following that, we have, I think, Winners, Winners is going to open in Q3 at Quinte Mall from 30,000 square feet, that's a relocation. FreshCo and Medicine Hat will be a late 2024 commencement, LL Bean opens up later this year from a portion of the Sears Box in Cataraqui, so that will have an impact early next year. And earlier this year, we had Sport Chek sorry, Planet Fitness and Structube opened from Orchard Park. I think the Plant Fitness opened up in May and Stuctube opened up in July, so that there'll be some benefit to next year's income as well from those tenants. Generally, all of those tenants pay in the mid to upper teens to lower 20s in terms of net rents.

Okay. Great. And maybe just one more question. The comments in regard to the buybacks is that it will be done on a leverage-neutral basis. There are different ways to look at it with NOI EBITDA growing. If you do it on a debt-to-EBITDA basis, you can justify or maybe even more than justify you can buy back units without raising equity or asset sales. Is that the way to look at it, and would that allow you to continue to be active even if you're not using, let's say, retained cash flow or asset sales to fund unit buyback or would it only come from actually raising equity through asset sales, obviously not through the public markets.

Yes. No, Mark, you raised a good point. I mean, the way that, I guess, we've been thinking about it and the way that we've been pacing the cadence of the buyback is based effectively upon our excess retained free cash flow. So basically, the AFFO after we pay our distribution, what's left over. And we've pegged that number at about $60 million a year, which corresponds to the roughly $5 million a month that we've been buying back. But you touched on the point that our debt-to-EBITDA on a 3-month basis was 4.8x. And as the NOI and EBITDA continue to grow, we actually get about $5 of debt capacity for each dollar of NOI that we see rise. And so, we can certainly accelerate that buyback if we so wanted to. There is a certain amount of capital that we need to reinvest into the properties above and beyond sort of ordinary maintenance. And those are investments that we get good returns on. Sometimes it's a bank pad or a repositioning, and we have been investing in that alongside the NCIB. But with our stock price where it is, our NCIB is very clearly the highest and best use of our excess free cash flow and our excess capital. And so, I would expect that we'll continue to be active on the NCIB so long as our unit price discount persists at these levels. And as noted in our disclosure, I mean, $0.57 of NAV contribution in just the first 9 months of this year on a relatively small investment is a huge driver of NAV growth. And to the extent that we wanted to singularly associate our distribution increase with the NCIB activity, it more than fully covers the increase that we delivered, and we've been active on the NCIB ever since September 30 as well. So that number should grow to $0.43.

Our next question today comes from Dean Wilkinson with CIBC.

I'm probably not far away from a 5-day, but I'm not far away from a 5-day baby myself. So Alex.

There's still a long way to go in the earnings season.

Tell me about it. A couple of quick questions. So when I look at and I commend you for probably taking a more realistic view of where cap rates are in this environment. I mean a lot of companies are saying, we haven't seen any transactional volume. We're not adjusting cap rates. We're not taking the marks. How did you come up with sort of where you are on that, call it, a 7% terminal cap rate and just over an 8% on a discount in the absences of any material transactions.

So a big part of it was discussions with JLL, who does our appraisals. So given that there is so activity, we have to look to other sources. And so, we sort of took some of the smaller market stuff and adjusted that more aggressively. And then overall, we try and give JLL a cross section of the portfolio by region and by asset type and then look for the feedback from them, and we also look at the surveys and talk to other appraisal firms. So it's really driven by that because you're right, looking -- trying to look at external transactions and comps, there aren't any. So it's just -- it's a bit of a gut feel and an adjustment is appropriate. And so, we made the sort of 25 basis point adjustment.

Yes. No, again, I commend you for doing it. Alex, around the distribution, I think that your plan here is to just sort of get on that virtuous cycle of being able to increase that on an annual or if not more frequent basis. When you're looking at that, is it just a straight up shot at a payout ratio relative to the AFFO or are you also looking at it just in terms of a dividend yield relative to the underlying unit value and what the competitive set sits at?

Yes. Interesting question, Dean. It is a topic that is an interesting one to be talking about in this current market environment. As we were discussing it with the Board, there was an acknowledgment that in a market like this, you're probably not going to get a whole lot of credit for it. But that really wasn't why we're doing it, and we're not thinking about a target distribution yield on our units or on our NAV or anything else like that. It's really part and parcel of our differentiated financial model. When you have a leverage as low as we do and a payout ratio as low as we do, we've got that $60 million a year that we can reinvest in the business. And as you noted, the markets over longer periods of time tend to reflect well on companies or REITs that increase distributions on a regular basis. And that's a process to earn that reputation and that support in the market takes years. And as we were thinking about that, we thought it was prudent. We had ample cover to do so given the accretion from our NCIB. But as Mark asked earlier or noted earlier, our debt-to-EBITDA is below target. So we have ample capital investment opportunity to drive our FFO and our NOI higher through investing further capital. So we're quite confident that, that level of distribution increase was prudent. You could make an argument for a higher level. But as with everything that we're doing, we're trying to do it in a conservative and prudent manner to deliver in the long term. Yes.

No, we've seen that before. I think the answer to this question is no, but I'll just make sure, given the wide discount and you and I have talked about wide discounts in the past and where your leverage is, would you consider taking the leverage up a bit to do something more significant in forms of an SIB or just the NCIB activity is enough for you?

Yes. The answer is no. In fact, our executive compensation structure includes keeping the leverage within the target range. We're incentivized on that basis. And that, again, is a view to the long term rather than the short term. We do have this excess free cash flow that is funding our NCIB activity, and we're quite happy with the rather outsized impact that it has had so far. So I think we're going to continue on the path that we're on. The payout ratio is also a factor in our compensation and keeping it in that 45% to 50% of FFO is another one of our metrics. So we're pretty keen to stay the course. But I guess that would be the position.

Our next question comes from Sam Damiani with TD Securities.

Just wanted to touch on the payout ratio with the distribution increase. Given the high end of your payout ratio target is 50% of FFO, does that basically mean for 2023, you're comfortable or expecting FFO in the $1.64 range or better?

That's a good question. We have not provided guidance for 2023 as of yet. I would say, without getting too specific the growth that we've seen throughout the year, if you look at Q1 versus Q2 versus Q3 and where we're expecting to go in Q4, there's been a trajectory of growth. But I think there are some things in the future that we can do that have a more material impact to drive FFO per unit growth, including continued NCIB activity, but also recycling some capital out of our non-income-producing land holdings. Is it possible that our payout ratio could be at the top end of our target range next year? Absolutely. Could it be slightly over, possibly. Maybe it will come in under. But at current and based on the long-term plan and the trajectory, that was more of the thinking around the distribution increase.

I hear you. And on the sort of capital recycling topic, I don't know if it's for everybody, but for me, when you made your opening remarks, Alex, right after you said capital markets are volatile and we see opportunities in this environment. My line went muted for about 10 seconds. So I felt like I might have missed the big zinger. So if there's any more color you can share in terms of what you're seeing in terms of opportunity and your desire and ability to both acquire and dispose in the near term would be of interest.

Sam, your line didn't go mute, when I was printing out my notes for the conference call, the printer printed the first 5 or 6 pages and then glitched and started again. So I needed to find my spot. So -- big zinger. No there was no zinger, and to your question, really, I mean, it's interesting on the acquisition and disposition front. We have discussions with multiple prospective vendors generally in the institutional class of investors. We're looking at larger assets. And on the disposition side, the things that we've been exploring tend to be smaller assets, looking at private buyers and some of those are higher cap rates than our average. And that market continues to be a lot more active. And so, we're optimistic that we can be active on both acquisitions and dispositions in what is really a volatile and dynamic market.

Okay. And last question from me. Just on, as you say, the third consecutive quarter with a sizable beat and guidance increase, I mean, part of the issue with a company like Primaris is the unique asset class with respect to other REITs and a little bit different seasonality. And so, it was a little bit difficult to sort of nail down with precision, what the seasonality would look like financially for Primaris. So just in hindsight now with 3 quarters under the belt, how should we think about seasonality going forward as it relates to what we've experienced in 2022? Do you expect it to be any different in any way in terms of revenue and NOI versus what we see.

I think we've had great sales this year that we didn't expect. The seasonality component is returned back to normal. Our specialty leasing, which has always been an integral part of our income as really dipped in the 2 years, 2020 and 2021, and it was uncertain coming into this year, but we very much have gone back to normal. So I think that aspect of the business has stabilized. I think the one issue we have in kind of predict the future is the timing of converting the tenants back from variable run leases to regular leases. We started that process, there's a lot more that are happening. And because they were on a percentage of sales or gross rents and our additional rents are they're just being set now for next year. It's hard to put an exact number around it, but with the ones we have converted are actually contributed quite a bit more rental revenue than under the old structure. And I think that's going to continue, but it's hard to put a pin in exactly where that number is going to be. So there's going to be some fluctuation around that in the next 12 months. But the rest of our business, I think, has gone back to a more normalized business.

Yes. And Sam, if you're up for the exercise, I think if you were to try and reconstruct the 2021 seasonality, there was a lot of noise that went through, particularly the Q4 from last year, but the seasonality to Pat's point would have been amplified in 2020 and 2021, certainly, and that progress to move the leases back to a more conventional structure would suggest a lower level of Q4 seasonality.

Our next question comes from Gaurav Mathur with Industrial Alliance.

So just staying on the acquisition line. How has the opportunity set sort of changed, if at all, when you've been looking at it over the last 6 months.

I'm not sure how much the opportunity has changed or the opportunity set may have changed. There remains a large universe of and enclosed retail properties in Canada with owners that are for a variety of reasons, looking to reduce their exposure and their weightings. I think what has probably changed over the last 6 months is people are getting a better opportunity to evaluate the Primaris performance and understand what transactions can look like, and we continue to be active on discussions on a number of fronts and we are optimistic that we'll be able to get some things done.

Yes I would say it is a bit exciting it is like there is no pressing need like there is no distress in the market as far as people needing to sell. So they're very deliberate and it just -- it's a long lead time involved. And that's the big change, I would say, today versus prior years where things are put out broadly marketed and with bid deadlines. Well today, it's a longer process, and it's more private.

Okay. Great. And just staying on that line of questioning, from an FFO growth perspective, as you're looking at these opportunities, how are you also trying to ensure that you're not just growing for the sake of growth.

Yes. No, you've raised a good point, and we mentioned it a lot. We talk about it a lot capital discipline. So the way we're really looking at it is we want to make sure that transactions that we do are neutral or better to our NAV. And generally speaking, we want to see them increase the average quality of our portfolio. There are some benefits to scale, particularly in the enclosed shopping center business. But really, we're looking at the potential acquisitions that we're evaluating and asking ourselves the questions of, does it contribute to a higher same-property NOI growth trajectory in the future? Will it be additive to the FFO per unit and those are a couple of the screens that we're using. And then we looked at other things like what is the long-term potential from excess land and transit-oriented properties. There's a whole broad spectrum of things that we're looking at, but we're absolutely not looking to grow just to grow.

Okay. Fantastic. And just my last question on switching gears here. When you're looking at different tenant types across the portfolio and over the next 12 to 18 months and just beating the recession drum, any concerns on a decrease in net new store openings across the portfolio?

Not necessarily. I think with sales rebounding, there's an enthusiasm from retailers to open stores. I haven't heard of any pullback because they're concerned about where things are going because things are so buoyant right now. In terms of potential failures and such forth, there was such a cleanout in 2020 of all the marginal retailers that I would have had on the list for the next probably 2 to 3 years. They were basically flushed out or they were able to file CCAA bankruptcy protection and restructured the business. So I think for the next 18 months, it's going to be a fairly stable market, and we're going to see the good leasing activity continue.

Thank you. We currently have no further questions. So I will hand the call back to Alex to conclude.

Thank you, operator. With no further questions, we will close today's call. On behalf of the Primaris team, we thank you all for participating in the call. We look forward to speaking with you again. And I guess thank you and goodbye for now.

Thank you, everyone, for joining us today. This concludes our call. You may now disconnect your lines.