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

Good morning, and welcome to Primaris REIT's Fourth Quarter and Annual 2022 Results Conference Call. [Operator Instructions] After the prepared remarks, there will be a question-and-answer session. I will now turn the call over to Leslie Buist, Senior Vice President. Please go ahead.

Thank you, operator. 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 is contained in Primaris REIT's filings with securities regulators. These filings are also available on Primaris REIT's website at www.primerisreit.com. I'll now turn the call over to Alex Avery, Primaris' Chief Executive Officer. Alex?

Thanks, Leslie. Good morning, and thank you for joining us today to discuss Primaris REIT's Fourth Quarter and Annual 2022 Results. On the call today with me are Patrick Sullivan, President and Chief Operating Officer; Rags Davloor, Chief Financial Officer; Leslie Buist, Senior Vice President, Finance; and Graham Procter, Senior Vice President, Asset Management. Our first full year as a stand-alone REIT was filled with notable firsts and significant accomplishments. It started with a bang with the spin-out and our first acquisition, an $800 million 6 shopping center portfolio, both of which closed December 31, 2021. The acquisition entailed onboarding about 100 employees and further hires to build out our public company financial analysis and reporting group. Under the advice and oversight of our best-in-class Board of Trustees, we got off to a strong start in the first half of 2022, reporting our first set of statements being awarded a strong BBB investment-grade credit rating from DBRS Morningstar, completing our inaugural $350 million 2 tranche unsecured debenture offering and our first AGM and strategy session with the Board. By the fall, our financial and operating results have begun to demonstrate a discernible trend of growth with average same-property cash NOI growth trending above 10%, occupancy rising and positive leasing spreads. This demonstrated the resiliency and enduring value proposition of our business in the face of skepticism about the mall property type. To close out the year, we announced an increase to our distributions of 2.5%, establishing an annual distribution increase policy supported by the REIT's differentiated financial model of low leverage and a low payout ratio, supported by robust growth throughout 2022. Throughout the year and in 2023, we continue to prioritize our awareness campaign designed to educate investors and analysts about the opportunity at Primaris REIT. Our efforts proved fruitful last year, delivering a 22% total return to unitholders, dramatically stronger than any of our Canadian REIT peers, while the S&P TSX REIT Index delivered a negative 17% total return. As we embark on our second year, we're excited by -- about the opportunities ahead. We see significant NOI growth potential through increasing occupancy to stabilized levels. In 2022, we made material progress, but the vast majority of this opportunity remains to be captured over the next few years. We're also focused on continuing to convert pandemic lease concessions to market rents. While tenant sales in our portfolio have reached all-time highs over the last 12 months, 2019 NOI was more than 10% higher than the NOI delivered in 2022, while 2019 average in-place occupancy was approximately 83% suggesting substantial growth over the next few years, supported by our tenants' success. We enjoy several competitive advantages that should enhance our ability to capitalize on market opportunities. Our business is performing very well with significant runway for internal growth over the next few years. Our scale provides us with a competitive advantage as we partner with retailers on multiple location leasing plans, building deeper and more collaborative relationships. Our differentiated low leverage, low payout ratio financial model provides us with excellent access to capital and the financial flexibility to deliver growth per unit to our investors in the face of higher borrowing costs and many peers pursuing leverage reduction. Our best-in-class governance profile and high-quality independent Board provide excellent oversight for our business and make us a preferred partner for institutions, institutional investors and retailer partners alike. Our fully internal comprehensive full-scale management platform with a 20-year track record of success provides a particularly strong competitive advantage with very few competitive peers in Canada with comparable platforms and capabilities. Our goals for 2023 include the following: number one, continuing to raise the awareness about Primaris REIT with investors through expanded research coverage, investor meetings and conferences, property tours and Investor days; number two, demonstrate Primaris' ability to transact on acquisitions and dispositions that are consistent with the REIT's strategy and enhance the value of Primaris REIT units; number three, continue to execute on capturing the internal NOI growth opportunity through active management of our portfolio to increase occupancy, restore standard leasing terms among remaining pandemic commended leases and through driving rental rates higher over time; and number four, achieve all of the above while acting in a manner consistent with the best-in-class profile we have created at Primaris, including ESG commitments, being a respected and sought-after partner and transaction counterparty and a preferred place for employees to work. Primaris REIT completes its first year as a public company, Primaris' underlying operating business celebrates 20 years of operating history. Although I myself joined the company much more recently, Pat Sullivan, the REIT's President and Chief Operating Officer, along with many, many other long-tenured employees, have built a team of professionals who possess a unique and scarce management capability tailored specifically to enclosed shopping centers. This was evident to me upon joining the team -- it was evident to me upon joining the team that this was a specialized hard-working and fun group of people. Now I'll turn the call over to Pat to continue to discuss our platform, operating and leasing results, followed by Rags who will discuss our financing, financial results and provide you with an update on our ESG strategy and disclosure package.

Thank you, Alex, and good morning, everyone. In July of 2023, Primaris as an operating company turns 20 years old, originally created by one of Canada's largest pension funds, Owners, with 6 properties, including Dufferin Mall and Orchard Park being included in the original public offering. Primaris has assembled a highly specialized team focused on the acquisition, integration and operation of enclosed malls. Primaris is one of the largest owners and managers of enclosed malls in Canada with a fully internalized management platform. Given the challenges in owning and operating enclosed malls, we recognize our team members as a core strength of the company and take great pride in the average tenure of almost 50% of our employees in excess of 6 years. It is the people in this organization that produce our strong operating and financial results. Our NOI growth outperformance in the fourth quarter and through 2022 is coming from a number of sources: rising occupancy, completion of re-merchandise -- completion of remerchandising the former anchor tenant premises, increasing tenant sales, partially due to rising inflation, driving percentage rental income higher, specialty leasing income is returning to pre-pandemic levels and our recovery ratios are improving as we convert tenants on preferred rental terms provided to maintain occupancy during the pandemic back to net leases. During the fourth quarter, tenant sales averaged 109% as compared to the same period in 2019, with rolling 12-month sales averaging 104% of comparable pre-pandemic figures, which is an improvement from the 99% figure reported at the end of the third quarter. Food courts, typically a barometer for mall traffic, continue to show rise in sales activity, with fourth quarter sales being 101% compared to pre-pandemic figures with 12-month tenant sales now averaging 93% as compared to 86% at the end of Q3. Our malls experienced strong tenant sales in the important holiday period in December, which -- sorry, December, which typically represents approximately 15% of total annual sales. Tenant sales in December were 108% as compared to December of 2019. Western provinces and [indiscernible] continue to show the strongest growth in sales. We expect Q1 2023 sales to remain robust compared to 2021, 2022, which was negatively impacted by mall restrictions related to the Omicron variant of COVID-19. We ended the year with committed occupancy of 91.5%, up 400 basis points from 2021 due to leasing and re-merchandising -- redemising activities. Same-property committed occupancy was 92.6% at the -- at quarter end, and the acquisition properties were 89.2%. The acquisition properties in-place occupancy at the end of Q4 2022 grew by 5.2% from December 31, 2021. 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 of second floor space at New Sudbury Center, which is not leasable. The remaining 1.5% increase in occupancy is the result of our leasing team executing on the strategic plan for the portfolio that 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. During 2022, our leasing team completed 88 new transactions comprising 239,600 square feet and 538 total deals encompassing more than 1.8 million square feet. The redevelopment program for space vacated by former anchor tenants is nearing completion. In 2022, projects were completed at 4 properties. Cineplex opened a 35,000 square foot theater in December 2022 at Kildonan Place in Winnipeg, Manitoba. At Orchard Park in Kelowna, Planet Fitness opened from 22,400 square feet in May of 2022 and struck to open 9,400 square feet in July 2022. Holobeam opened a 15,100 square foot store in November 2022 at Cataraqui Center in Kingston, Ontario. And Sport Chek opened a 24,800 square foot store in November 2022 at Landsdowne Place in Peterborough, Ontario. These 5 large-format stores comprising just over 106,000 square feet will contribute significant income towards our 2023 NOI. Overall renewal rents were up 3.5% for the quarter and 1.8% for the year. With tenant sales continuing to rise, positive absorption and mall closures and restrictions behind us, we anticipate continued positive momentum in rental growth. Not included in our renewal rent change is the increase in rent derived from converting tenants on preferred rental terms provided to maintain occupancy during COVID back to net leases. As at year-end, there were 335 tenants representing 15% of our tenant base on preferred rental structures. These leases are generally short term in nature, and we expect to reduce this figure closer to 10% or more -- or lower during 2023, which will have a significant positive impact on our NOI for 2023 and beyond. Redevelopment projects underway include Quinte Mall in Belleville, where 60,000 square feet of the former Sears space was demolished in favor of future intensification opportunities and the remaining 30,000 square feet will be converted to a winter store with an anticipated opening of spring 2023. Projects also include finalizing the construction of a 35,000 square foot FreshCo grocery store at Medicine Hat Mall in Medicine Hat, Alberta, which is expected to open in November of 2023, as well as the commencement of construction on a 16,000 square-foot [indiscernible] at Landsdowne Place in Peterborough and a 5,300 square foot [indiscernible] at Kildonan Place in Winnipeg, Manitoba. Two former Sears spaces remain to be addressed. Our place in Lethbridge, Alberta, where we were using various options; and Devonshire Mall in Windsor, Ontario. At Devonshire with the vacated Sears space plus the adjoining lands comprise approximately 18 acres. We are designing plans for the entire area, which will likely include the demolition of the former Sears space. And with that, I'll turn the call over to Rags to discuss our financial results.

Thanks, Pat, and good morning, everyone. Our differentiated financial model, including very low leverage and low payout ratio and significant retained cash flow is a major strategic advantage for Primaris REIT. Keeping in line with the best practices and transparency, we are reiterating our target balance sheet metrics for the upcoming year and announce our financial outlook for 2023, which can be found in Section 4 of our MD&A. We anticipate modest portfolio occupancy improvement of 0.8% to 1% with contractual rent steps of approximately $2.1 million or approximately 1% of base rent. Straight-line rent is estimated to range between $1.8 million to $2.2 million. Growth in same properties cash NOI is anticipated to be between 3% to 5% with G&A estimated to be approximately $30 million. Based on historic performance, normalized average operating capital costs per square foot are anticipated to be approximately $2 per square foot per year. Due to increased leasing activity, 2023 operating CapEx is anticipated to be in the range of $27.7 million to $31.7 million or $2.55 to $2.90 per square foot, with redevelopment CapEx ranging from $30 million to $40 million. We also plan to renew the NCIB subject to TSX review and approval. At present, our most attractive use of capital is buying back units at a deep discount to net asset value per unit on an average neutral basis. As of yesterday, we have bought and canceled approximately 4.7 million units at an average price of $14.10, translating to a 34.4% discount to our NAV per unit. NCIB activity in 2022 positively impacted NAV per unit outstanding by $0.82 per unit. The program is very accretive to unitholders. We announced a 2.5% distribution increase in the fall with the intend to increase distributions annually. Unsecured debt continued to grow as a percentage of total debt, and we finished the year at 78.6% with unencumbered assets of $2.9 billion or 92% of our total assets. Post year-end, we entered into an $85 million mortgage at Stone Road Mall at a rate of 5.516%. The mortgage is interest only and has a term of 8 years. This increases our liquidity and improves our debt maturity profile while keeping secured debt well under 40%. Looking ahead, we do not have any debt maturing in 2023, reducing refinancing risk and freeing up valuable resources to focus on managing the business and growth opportunities. We started the year with a weighted average term to maturity on our debt of 1.7 years. On a pro forma basis, after taking into account the recent mortgage refinancing, our weighted average term to maturity has been extended to 3.6 years. With regards to our disclosure package, we decided to place information with regards to 2022 tenant sales as a percentage of 2019 sales and Section 4 of the MD&A, and they've included total sales volume and sales productivity steps by mall in Section 8. ESG is an essential component of responsible governance. Earlier this year, Primaris completed Board-led ESG strategic plan that aligns with our mission, vision and strategy and supports long-term value creation. Our ESG Committee, led by Anne Fitzgerald and myself, identified Primaris' key ESG priorities, goals, actions and performance measures. Supported by the materiality assessment completed in the fall, the plan aligns with the current investor-focused ESG standards and frameworks. Additional disclosure on our ESG strategy can be found in Section 5 of the MD&A. On to the financial results. Same-property NOI was up 10.7% at the end of 2022, driven by strong rental growth, effective cost management at the property level and recovery from prior year's property tax. Enclosed malls across our portfolio have experienced a significant rebound in sales growth, and many operating metrics are improving substantially. FFO and AFFO per unit diluted for the quarter was $0.39 and $0.27 per unit, respectively, $1.58 and $1.23 per unit for the year. For the quarter, the AFFO and -- the FFO and AFFO payout ratios were 52.1% and 74.5%, respectively. And we ended the year at 50.7% and 65.4%, respectively. We are marginally above our payout ratio target of 45% to 50% on FFO, but expect this to come back within the range June 2023. In our outlook, in excess free cash flow available after paying distributions, CapEx and leasing costs, we intend to continue to allocate capital to future share buybacks. Primaris' fair value of investment properties was $3.1 billion with external valuations received for 10 properties with fair values totaling $866 million during the quarter. On a portfolio basis, we incurred an unfavorable fair value adjustment of $61.3 million for the quarter, driven mainly by the increase in the discount rate and terminal cap rate used in our valuation models and capital spending. During the quarter, our going-in cap rate increased 14 basis points to 6.91%. The fair value decline was partially offset by cash flow increases due to improving NOI, which positively impacted the values by approximately $55 million. Based on the value of our assets, we ended the year with a NAV of 41 -- sorry, $21.49 per unit and debt to total assets, 31.5%. Average debt to EBITDA for the year was 5x. Primaris REIT's scale and highly differentiated financial model acknowledges both the clear preference public investors have for REITs with conservative financial models and the advantages of having one of the lowest leverages among Canadian REITs. We are committed to our differentiated financial model, enabling Primaris to self-fit its growth. We are very happy with our financial and operating results for 2022. Our KPIs are improving, including our leverage metrics. Our capital structure was purposely designed to weather market turmoil, and we are in excellent position to pursue our growth strategy. With that, I'll turn the call back to Alex.

Thank you, Rags. Our fourth consecutive quarter of strong results, reaffirmation of our capital structure targets, annual distribution increase policy and 2023 guidance reflect the strong recovery and outlook in our business and our team's ability to capitalize on that opportunity. We continue to prioritize raising awareness around 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 key to building institutional support. Today, we initiated a Board outreach program, connecting members of our Board directly with the investment community, which is considered a governance best practice that is rarely adopted. We are planning to raise awareness about our properties by hosting property tours in 2023 and beyond. Our properties look great and are performing well. To see them is to appreciate why our results have been as strong as they have been this year. We see a long runway of growth opportunities spanning occupancy improvement, increasing rental rates, reinvesting to enhance select shopping centers, recycling capital, growing our portfolio through acquisitions and compounding excess free cash flow to drive per unit cash flow and NAV. We'd be now pleased to answer any questions from call participants. Operator, please open the line for questions.

[Operator Instructions] Our first question for today comes from Sam Damiani from TD Securities.

Congratulations on year #1 under your belt.

Thanks, Sam.

First question, just on the bad debt expense in the fourth quarter, which I think was around $1 million, any context behind that? Why that was booked in the fourth quarter, not earlier in the year? And was it any sign of some stress that maybe some of your tenants might be feeling in the current environment?

No -- sorry, go ahead, Rags.

Yes. No, part of it was just sort of a complete scrub of the acquisition portfolio and just sort of cleaning up some of the bad debt that we felt we should book during -- as we tried to work with tenants during the course of the year and felt prudent. Also, given the softness in the economy and a lot of predictions, we sort of bumped our ECL, estimated credit losses a little bit just to take into account sort of the views in the market. So far, we're not seeing that softness, but we just felt it made sense to take a little bit of the provision to factor in economic conditions. So nothing specific.

Okay. And in your '23 guidance, the same property NOI growth, does that include any bad debt or reversals?

No, not at this point.

Okay. Okay. Just switching over to Dufferin Grove Village, how do you look at that today as an asset that could be monetized or executed upon? Any thoughts on how -- what -- I guess, what you might do with that in the near term?

The asset is a fabulous asset. We are thrilled to own it. We had a lot of conversations in the first half of last year with potential suitors. And we love the asset. We think there are partners that will love the asset as much as we do. But right now, the market for density and development sites is reflecting a fairly wide bid-ask spread. And given the quality and scale of that property, we're more inclined to wait for an ideal market to transact on that. That's not something that we'll be developing ourselves. And so we'll be looking for a partner, but we have a fabulous balance sheet. We're under no pressure to do anything. And so we're going to try to optimize pricing when we do transact on that. And yes, I mean, that's -- I guess, that's where it stands.

That makes sense. I appreciate that. Last question from me. Just on the leverage, obviously, a very conservative balance sheet today. The target range of debt to EBITDA goes up to 6x. Is that a level you'd be comfortable or near that staying for a while? Or is that a number you'd be comfortable going to very temporarily and then quickly going back down to 5x?

Yes, I think the latter. We provided the range, so we had some flexibility. We just didn't want to have a hard number, but that's the 4 to the 6, the 6 would sort of be the upper end, and then we wanted to give us also room to maneuver and then we would look to bring it back down.

Our next question comes from Mark Rothschild from Canaccord.

Maybe just starting with IFRS values and cap rates. Obviously, it's difficult in many property types right now, and your assets generally not many that trade in your markets, if at all. So can you just maybe give a little more color on how you feel comfortable with the cap rates you're using now or if you are at all? And how would you look at it? And maybe if you can even add on if there are any properties that are for sale that are trading that you have some greater context with?

Mark, we're very comfortable with the numbers that we've published. It is, as you've observed, a challenging exercise to go through valuing assets where there's less transaction evidence to support values, but there have been transactions over the last 12 and 24 and 36 months. And I think as we go through the process, we're always keeping in mind that for IFRS fair value to be meaningful, it needs to be objective. So we rely heavily on third-party appraisals and support for our valuations from independent appraisers. And I think for IFRS NAV to be meaningful, it also needs to be dynamic and reflective of changes in the market. I mean, there's, I think, a general hesitancy to change valuations, which is not something that we have a resistance to do because we have the opportunity to change it every 90 days. So each 90 days, we try to come up with our best understanding of market dynamics and pricing. And you should expect to continue to see our NAV be reflective of the most up-to-date and best understanding of market pricing.

So just to add to that, Mark, there's nothing specific that we can point to. As you mentioned, there isn't a lot of transaction activity. So it really is driven from our conversations with the appraisers. We will obviously do a lot of appraisals for the pension funds, and they're doing the year-end process. So they're doing a hard scrub, so to speak. And so that's really where the adjustment came from. It's just sizing up the tone of the market and our view of the market, but it is very difficult right now to sort of pin that down.

Understood. And maybe just one more, and maybe this is for Pat. There's definitely concern and some have strong views on the economy slowing. To what extent are you seeing any shift in the way some of the different types of retailers are looking at space, whether it's negotiating terms or looking to open new stores? And maybe just comment a little bit more on the trends you're seeing for the future.

I think right now, there is a differentiation between the U.S. retailers and the Canadian retailers. The Canadian retailers are a lot more bullish and optimistic and really looking at expanding their store count. The Americans are acting much like they did back in 2008, like there's issues on the horizon and they're pushing back. The problem in Canada is there isn't actually a glut of space. We don't have an oversaturation of shopping centers. And so they're finding the landlords up here to be quite sticky. And it's supported by their sales levels which are still very strong. So U.S. guys are grinding away a lot more than the Canadian guys. But I think at the end of the day, they're not getting any further than the Canadian retailers. So the Canadian retailers, in general, are performing very, very well as our most retailers in general. It's been an interesting sales market to watch over the last 18 months as some tenants have driven in peaks and valleys. But generally, overall, our sales reports are still showing positive growth.

Our next question comes from Dean Wilkinson of CIBC.

Rags, you said that you expect that payout ratio to fall back within that target range. Can we take that to mean like materially sub-50%, 50%? What's your thinking on where that's going to sort of land on?

Yes. We're looking more out to Q3, Q4. We expect to drop back whether it happens in Q3 or more likely Q4, that's sort of how we look at it. So for the year, we would expect -- we're hoping to come in at 50%, but our expectation is we would drop below the 50% by end of Q3, early Q4. And so that's kind of how we look at it. Are we expecting it to drop down to like 45%? No.

Okay, that helps. And then maybe just for Pat. Just when you're looking at retailer affordability and all of those great metrics, you had a target GROC ratio of sub-15%. What would that be sort of right now? And will the move to having less percent rent tenants change that?

It's a good question. I think we're still in that same kind of zone. Converting the tenants back to net leases from their preferred rent leases isn't going to materially impact our GROC ratio simply because a lot of those guys who are on the preferred deals are actually doing very, very well right now. So we really haven't done a lot of analysis around our target GROC in the last 12 months simply because there's been so much volatility in our sales and our rent roll with the preferred rentals. But our sense is that we stabilize that we're going to stick in the sub-15%. We've managed to keep a lid on our op costs despite rising inflation, and we are seeing the benefit of our taxes falling in a lot of our shopping centers as the enclosed malls are reassessed by the cities at lower valuations.

Our next question comes from Gaurav Mathur from iA Capital Markets.

So I noticed the uptick in G&A expense this quarter. And I'm just wondering if you could provide some color there and if that run rate has been baked into your G&A guidance for 2023?

Yes. It has been -- I mean, part of it is we have staffed up a bit during the course of the year, so we're reflecting the full impact. And there was a bit of a true-up on the bonuses, year-end bonuses. So that had a small -- had an impact and caused the bump in Q4. And so we've sort of normalized that. We think we're pretty close to having a clean run rate going forward. We may still have to add 1 or 2 bodies here or there. But for the most part, we're sort of staffed up where we want to be. And as we go through our first year and trying to nail down all our operating costs, there was some accruals made in Q4 just to sort of [chew] everything up.

Okay. Great. And then just to -- yes, please go ahead.

I was just going to say that we started a new unit-based compensation program this year. It takes 3 years for it to mature into a run rate. So that's one of the key drivers of growth in G&A. It's a noncash expense.

Okay. Okay, great. And just switching gears here, on your same property cash NOI guidance, we understand it's lower than 2022, but I'm just wondering what those factors are that gets you to beat that guidance?

Well, I think the growth in sales has been strong. So I think the main issue here is, will that sustain? And so far this year, we see no pullback in sales. So that's been strong. The conversion of the leases to net leases is a factor and, obviously, the take up of vacant space. Now there, there's a bit of a lag sort of in the Q3, Q4 where you'll get the impact of that and just pushing through the redevelopment plans and making sure that's done on a timely basis. So those would be the main factors.

Okay. Right. And just lastly, on capital allocation, any change in how you're thinking about the NCIB versus acquisitions versus the development pipeline?

Yes. I mean, we spent a lot of time looking at capital allocation. We want to make sure that we're very thoughtful as we go through that process. The NCIB certainly during 2022 was, without question, the best use of capital. There were times during the year when every dollar that we invested generated a $0.90 return immediately, which is pretty difficult to replicate in other investments. Currently, at around $15, the return is in the neighborhood of 40% to 45%. And in terms of an immediate return, it's fairly low risk. And we're quite confident that, that continues to be the most attractive return from a quantitative perspective. We do have investments that we've been making, Northland Malls redevelopment is one. We're hopeful that 2023 will be a busy year on transactions, both on the buy and sell side. And as Rags noted, our ambition is to stay close to the center of our 4 to 6x debt-to-EBITDA level. And so we'll monitor the use of the NCIB in the context of other activities that we undertake. But ultimately, for excess free cash flow, which is how we've been funding the NCIB, we haven't come across anything that delivers those type of returns. And so I think you should expect us to continue to utilize the NCIB and until further investment opportunities present themselves, that continues to be our preferred opportunity.

[Operator Instructions] Our next question comes from Manish Garg from Laurentian Bank.

Congratulations on the great results. Just on the redevelopment projects, just a quick question on the target keys. So are they sort of still in the same range? Or are you seeing any sort of pressure over there due to impacts of cost inflation?

The redevelopment costs are somewhat dependent at Northland. Northland is a fairly large project, and it's driven in some respects by leasing. So we might see the higher end of our redevelopment number if we progress leasing along, which is looking like it's probably the case. We're making actually really good headwind leasing. As far as cost increases, we are seeing cost increases on the larger projects, we built in contingencies into our pro formas. I suspect we're going to be pushing the envelope of our contingencies as costs have gone up. What we've seen is that the price of materials is starting to level off. And in fact, some of them are coming -- starting to come down. The price of labor is really the issue these days, and it has gone up quite a bit in the last 6 months. It too seems to be leveling off, but we'll see as we get -- go through the year where the escalations continue. But we expect to be more or less on track at the moment in terms of where we're at, where we're headed.

Great. And just you guys talked a little bit on the same-store NOI cash growth guidance, but a bit more color on the occupancy. Any particular strong contributors? You guys have guided for a 0.8% to 1% increase, but any particular strong contributors in terms of assets or geographies?

We've seen really good strong growth out of our properties in British Columbia. I think Orchard Park has always been a really strong asset. Highstreet is just one that we got from HOOPP, had a significant amount of vacancy, and part of that was driven well above-market operating costs, which we've brought down considerably, which is a great job to our asset management team led by Graham in terms of reducing our op costs there, and that's led to us getting a lot of traction on new deals. Devonshire Mall has a tremendous growth opportunity. There's more vacancy in the mall of that caliber than there should be. And we see tremendous runway. We're going to get going on the Sears redevelopment this year, and that will lead to a significant absorption of space over the next 24 months. So there's a number of positives in our portfolio. A lot of the group portfolio had much lower occupancy than the Primaris portfolio, and our leasing team has been working over the last 12 months to make progress on those properties. But there is a time factor that -- we just started working on them at the start of 2022. So it's taken us time to transact, and I'm very optimistic the deals we did in the second half of last year will start to materialize in terms of NOI growth this year and into next year.

One point of clarity on that -- sorry, just one point of clarity on that. The 80 basis points to 100 basis points of occupancy growth that we're guiding for is lease up rather than demolition of space because we did see a lift last year on the basis of demolition of space. So if we do demolish space in 2023, that would be above and beyond that 0.8% to 1%.

Got it. And the last one from me. Maybe I missed it, my line got cut out before. But just a quick update on the plans on the excess land on the balance sheet, and any sort of time lines that you could provide over there?

Yes. I mean, we did touch a little bit on that as it relates to Dufferin Grove, certainly a trophy development site. And we look at the market right now and the bid-ask spread on prime development sites is wider than ideal. We're not in a rush. We have a fabulous balance sheet. And in addition to Dufferin Grove, we have numerous other sites. We have been pursuing the proper zoning and entitlements for those sites to make sure that we're maximizing value. Those are a source of capital for us, and it's a fabulous source of capital in the sense that it doesn't generate any EBITDA at current for the excess lands. And to the extent that we find uses for that capital, we'll pursue those sales. But as it is right now, we don't have any land parcels on the market and are not gearing up for those sales in the immediate term.

There are no further questions at this time. Mr. Avery, I turn the call back over to you.

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 today's call, and we look forward to speaking with you again on our next call. Thank you, and goodbye for now.

Thank you for joining today's call. You may now disconnect your lines.