RioCan Real Estate Investment Trust (REIUN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust Second Quarter 2022 Conference Call and Webcast. [Operator Instructions] I would like to turn the conference over to Ms. Jennifer Suess, Senior Vice President, General Counsel and Corporate Secretary. Ms. Suess, you may begin.

Thank you, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel and Corporate Secretary for RioCan. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website yesterday evening. Before turning the call over, I am required to read the following cautionary statement. In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements with respect to management's, excuse me, similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. In discussing our financial and operating performance and in responding to your questions, we will also be referencing certain financial measures that are not generally accepted accounting principle measures, GAAP, under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance, liquidity, cash flows and profitability. RioCan's management uses these measures to aid in assessing the Trust's underlying core performance and provides these additional measures so that investors may do the same. Additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward-looking statements, together with details on our use of non-GAAP financial measures can be found in the financial statements for the period ended June 30, 2022, and management's discussion and analysis related thereto as applicable, together with RioCan's most recent annual information forms that are all available on our website and at www.sedar.com. I will now turn the call over to our CEO, Jonathan Gitlin.

Well, thanks so much, Jennifer, and thanks, as always, to everyone for taking the time to join us today. I hope you are enjoying the summer. As usual, I'm surrounded by the exceptional senior management team here at RioCan. Through the second quarter, we and the 600 others who make up this great organization demonstrated RioCan's ability to succeed in any environment. The team is united and concentrating on the critical pillars that support the 5-year plan we shared earlier this year at our Investor Day. Our second quarter results reflect this continued and acute focus on reimagining retail, customer centrism, intelligent diversification and responsible growth. Based on the quality and positioning of our portfolio and the strength of our balance sheet, my confidence in our performance remains unwavering despite the obvious unpredictability in the economic background. The underlying macro level factors obviously necessitate language such a cautiously optimistic. And I'll address these factors in a moment. But before doing so, I want to highlight the portfolio's performance in this last quarter. The best way to summarize our operating results is to say it was a tremendously successful quarter, and we're achieving results that are in line with where we stood before COVID. Occupancy is at 97.2%, bolstered by our retail occupancy, which is now at 97.6%. FFO per unit is 7% higher than it was in this quarter in 2021. Leasing results, which are, I would say, the purest indicator of the overall health of a commercial portfolio, they're very strong. Blended leasing spreads were 10.5% for the quarter. Same property NOI grew by 6.2%. Tenant retention was over 93%. Now this number tends to bounce around a little -- while it tends to bounce around a little, the prevailing trends confirms the tenants value the space and the service that RioCan provide, and they really don't like to give it up. The 11.2% spread achieved on renewal rents in the quarter highlights how aggressively tenants are pushing to maintain existing space. As most view the time leading up to March of 2020 as a stabilized environment, there's much emphasis on comparing current results with those achieved pre-COVID. We're proud to deliver results in line with our pre-pandemic metrics, but there's underlying context that further enhances my confidence in our growth trajectory. You're well aware that RioCan's commitment to enhance the quality of our offerings started long before the pandemic and, in fact, accelerated during the pandemic environment. We continued to sell low-growth assets and advance our major market presence. Over 92% of our income is now generated in the VETCOM market. On average, the people shopping at RioCan's properties have a household income of $129,000 and come from a population base of over 206,000 people within a 5-kilometer radius of our centers. We also invested in our physical properties, technology, ESG and the dynamic team here at RioCan. Those improvements and investments are now paying significant dividends. Since 2020, we've delivered a combined total of 1.1 million square feet of successful development, mainly in Toronto. That number is expected to increase to 2.5 million square feet of new development completions by the end of 2023, including our iconic Toronto development, The Well. We now have 2,005 residential rental units in the portfolio with another 1,134 under construction. Demand for these units has continued to demonstrate the desirability of the RioCan Living offering. The resilience and diversity of our tenant mix is markedly enhanced with over 95% of our tenants classified as strong, stable or compelling traffic drivers. Our standing as an ESG leader in the commercial real estate sector has only improved. Simply put, our efforts over the years are yielding results now, and we'll continue to bolster our success despite market volatility. The scarcity of quality retail space further enhances our competitive advantages. It's safe to say that a major Canadian market's very little new retail supply has been created in the past decade. Replacement costs for well-located retail are now well above market values. Now I'm going to illustrate that with some numbers. The implied value of our income-producing properties and our current unit price is about $330 per square foot. Now if you compare that to the cost of constructing new retail, it's quite illuminating. In the GTA, with the high construction cost and market value of land included, the cost to construct new retail is in the range of the mid $600 per square foot. This tells us a couple of things. First, there's a clear gap between valuations and replacement cost. Second, it's virtually impossible to buy land and construct new retail without a substantial increase in market rents. It's only feasible to build new retail on land that's already owned or as part of a high-density mixed-use development. This means the quality retail space, the kind that we at RioCan offer is and will continue to be in short supply. Meanwhile, particularly in the GTA, the population continues to grow, driving demand further upward. These conditions are entrenched and reinforced our confidence in the sustainability of solid operational performance well into the future. Yet, as I mentioned a moment ago, there are numerous unknowns that linger in the environment. And our stakeholders have voiced their concerns about how these factors impact RioCan, and I'd like to address these questions. First, I'll talk about the recessionary environment, specifically the viability of retail during a prolonged economic slowdown if, in fact, that arises. 86% of RioCan's tenants are categorized as strong and stable. These businesses have stable rent paying ability, strong covenants and reliable foot traffic. They provide the day-to-day essentials consumers require in any economic climate. I'll pause here for a moment to reflect on our performance in Alberta over the last 10 years. Now I use our performance in Alberta as a logical barometer as our portfolio composition in that province mirrors that of our national portfolio. They comprise of largely open air, necessity-based retail and has exceptional demographic profiles. The Alberta market has been in the throes of a resource-based economic slowdown for the better part of a decade. And within those 10 years, the operational metrics for our assets in Alberta were equal to or better than our national portfolio. And as much as anyone can draw any conclusions in this uncertain environment, we feel that our consistent performance in Alberta in the face of an economic downturn is indicative of our portfolio's resilience and viability in any market conditions. Our leasing results support that conclusion as demand for our space continues to be high driven by national grocers, discount retailers, beauty, medical and pharmacy uses. Next I'll address concerns about rising interest rates. And we're fortunate to have a debt ladder as we always have, that helps us to shield the impact of bounce bites in interest rates. We have $411 million of debt due for the remainder of 2022. Now as Dennis is going to tell you, we will benefit from our $250 million hedge with the underlying [ GOC ] bonds, which will drive down the actual cost of the remaining financings for this year. In 2023, we won't have the benefit of those hedges on new financing, and there will be an impact on our FFO results. But due to the timing of 2023 debt maturities, the FFO impact will be weighted more to the second half of the year. It's also important to note that the overall impact, even if rates continue to increase, will be offset by numerous positive FFO factors, including gains in the scheduled sale of condo units and increasing NOI from development deliveries and organic growth from our existing income-producing portfolio. Finally, there's inflation. This impacts us in several ways, including an impact on consumer spending and increases in construction costs. As I already mentioned, much of our tenant base provide necessity-based goods that consumers need in any economic cycle. Many of our tenants have the ability to pass through inflation to their customers. That said, some of our prominent retailers, including Walmart, who -- sorry, have indicated that inflation drives the shoppers to avoid high-margin discretionary items in favor of lower-margin necessity items. This is a concern, but will not, in our view, impact the long-term viability of our largest tenants as they have a long and strong track record and sizable balance sheet. With respect to construction costs, well, they've been impacted by sustained year-over-year inflation for many years now. The vast majority of RioCan's in-the-ground construction projects have fixed contracts, which provide a high degree of cost certainty. When it comes to new project starts, RioCan will continue to exercise a high degree of discretion, scrutiny and judgment in assessing whether costs and revenue conditions are suitable before we proceed. Our future development sites are typically active retail sites that currently generate high-quality income. As such, when conditions suggest the timing isn't favorable for development, we can simply elect to wait. Now I'm not for a second downplaying the obvious volatility in the macro level environment. But we face these conditions confident that we have strategically and responsibly managed every aspect of our business over which we have control. Our efforts over the years have set RioCan up for success. We're hitting our stride in executing on key growth initiatives. We remain confident in our growth trajectory and the ongoing demand for our scarce and high-quality real estate. The objectives in our 5-year plan were established with purpose and conviction. In concert with RioCan's many differentiating attributes, these objectives are achievable in almost any environment. Alignment with our strategic pillars will continue to grow responsibly and sustainably. We'll continue to support this growth by investing in talent and structuring our team to maximize alignment with our objectives. With this in mind, I'm pleased to announce the recent appointment of Oliver Harrison to the position of Senior Vice President, Leasing and Tenant Experience. This hybrid role was designed to support our commitment to customer centrism by optimizing value to our tenants from lease execution all the way through construction, on-boarding and renewal. I'm also pleased to share that RioCan's Board of Trustees continues to evolve with the recent election of Marie-Josee Lamothe. Ms. Lamothe is well-known for her expertise in global branding and digital transformation. Her experience is especially relevant for RioCan as we continue to support our tenants through the merging of e-commerce and physical retail. With that, I'm delighted to turn the call over to Dennis Blasutti to take you through our balance sheet metrics and provide insight into how an active disposition program has supported them. Dennis, over to you.

Thank you, Jonathan, and good morning to everyone on the call. Despite a very volatile market backdrop, RioCan had a very productive quarter. We have a lot of ground to cover this morning as we discuss the fundamental strength of our business and the attributes that will drive our success in any environment. First, as Jonathan mentioned, we had another strong quarter operationally. This is driven by our best-in-class team and high-quality portfolio, which continues to deliver results. These results and the outlook for our business gave us the confidence to once again reaffirm our FFO guidance for 2022. FFO per unit was $0.43 for the quarter. This year-over-year growth of 7% was driven by the straightforward building blocks that we laid out at our Investor Day, same property NOI growth and development deliveries. SPNOI growth for the quarter was a robust 6.2%. When we adjust this for the impact of the pandemic-related provision as well as legal and property tax settlement gains in the prior year, our high-quality operations posted a solid 3% SPNOI growth. Our development deliveries and ongoing development activities also contributed with growing residential rental income, gains on condo sales and fees we earned as development manager. Altogether, development added -- development activity added $0.03 per unit. FFO in Q2 was also impacted by some restructuring costs. Excluding these costs, FFO per unit was $0.44 or $0.10 -- sorry, 10% growth over the prior year quarter. Our strong operational performance and development progress also provides us confidence in our growth expectations for 2023. From the perspective of our fundamental building blocks, we anticipate SPNOI to remain strong as the robust leasing activity in the current year will translate into full year NOI next year. We expect to deliver an industry-leading 1.7 million square feet of developments over the course of this year and next with the commercial component of The Well expected to meaningfully contribute to FFO in 2023 as the majority of that project will be delivered in earning rent over the second half of this year and the first half of next. We have provided additional information on this timing on Page 43 of our MD&A. We also note that the impacts of the current higher interest rate environment on 2023 FFO have been muted by our financial risk management activities, namely, in 2021, we preemptively refinanced $250 million of debentures and $345 million of mortgages at various traffic rates. Our weighted average interest rate on 2021 financing was 2.6%. That left $448 million of debt due in 2022. We hedged $500 million of the GOC component of the planned 2022 financing at an average rate of 1.56% for 7-year bonds, which has been significantly below the actual rate. In April, we utilized $250 million of the hedge where we raised a 7-year debentures at an effective rate of 3.83%. As Jonathan mentioned, we intend to utilize the remaining hedge for financing activities that we expect to complete in the coming months. As a result, the interest rate impact on 2023 FFO relating to financing activities completing our plan in 2022 has been minimal. Looking at our 2023 refinancing requirements, those are distributed throughout the year, again, reducing the impact of 2023 FFO. To assist with modeling, we have provided a breakdown by quarter on Page 44 of our investor presentation on our website. We continue to evaluate all options for these financing activities to ensure that we optimize the cost of funds and our financial flexibility. Now turning to our development spending. We reduced our guidance for the year by $50 million to a range of $425 million to $475 million. This is a result of minor shifts in timing of projects following strike activity by certain trades in the second quarter that are now resolved. Looking forward, our Phase 3 assumption of annual development spend of about $500 million per year and the 5-year plan that we presented at Investor Day remains unchanged. We continue to believe that our development pipeline, which includes 16 million square feet of zone density is an attractive use of capital. However, we do have the ability to scale this back as the macro environment warrants it. As Jonathan mentioned, we have the ability to pause projects that remain productive retail assets until the market is ready. I would also point out that the projects to continue with FFO in our 5-year projection disclosed at Investor Day are already underway. Any potential deferrals mentioned in our comments today would be related to the start of new projects that would be delivered beyond that 5-year horizon. With that said, we would have the ability to pause projects and reduce spend by approximately 25% in 2023 and 50% in 2024, if required and be prudent. Beyond those years, the spent is virtually all discretionary. The balance of our development spend in the 2 years mentioned is already under construction and substantially contracted, so the exposure escalation is mitigated. Moving now to our valuation. We booked a $46 million fair value loss in the quarter. We took a targeted approach to this, which I will unpack further. Within that number is $108 million of reductions in fair value largely related to enclosed malls and secondary market assets. Given discussions we've been having in the market, we see these types of assets, which comprised of relatively small percentage of our asset value as being at the highest risk of impact in a rising rate environment. This was offset by a $41 million increase in the fair value predominantly related to higher NOI forecast across many of our properties, driven by strong leasing activity in the first half of the year. We also recognized a $21 million gain on development properties, predominantly relating to advancements of our lease side and Shoppers World Brampton projects. On an overall basis, we view our asset value as relatively conservative and the following 2 factors support this assertion. First, we took write-downs as of December 31, 2020, of $527 million as a result of the COVID pandemic, and we did not reverse much of this in spite of strong optimal level performance. Our cumulative fair value movements from that point until now remain in a loss position of $410 million. Second, we have taken a conservative approach to value density. 95% of the value for our properties under development recognized on our balance sheet relates to projects that are currently under construction. We ascribed relatively low value to the remainder of our zone density as we apply strict set of criteria before we recognize that value. We can also look at our valuations from a cap rate perspective. We note that our weighted average cap rate to date of 5.33% compared to 5.28% pre-pandemic at the end of 2019 as far as -- in spite of market evidence of cap rate tightening over the past couple of years. However, it is important to note that this 5 basis point increase is on an absolute basis. On a same property basis, our weighted average cap rate is 18 basis points higher than it was at the end of 2019 as a result of the above-noted write-downs. This increase was partially offset by a 13 basis point decrease in cap rate related to asset mix as the portfolio quality improved through the development deliveries and acquisitions, combined with the disposition of lower quality assets. While rising rates pose a potential risk to our values going forward and we continue to monitor markets closely, we believe these mitigating factors, combined with our income growth in advance of our development pipeline provides extensive attributes. Next, I wanted to add a few comments regarding our capital allocation for the quarter. Our asset sales program has progressed well with $123 million of completed dispositions during the first half of 2022 and a total of $376 million when adding firm and conditional deals. These were at an average cap rate of 6.7% as we have been selling lower quality assets, further improving our overall asset quality and recycling that capital into more productive uses. During Q2, we allocated capital from disposition proceeds and retained earnings to our development program as well as unit buybacks through our NCIB, which totaled $129 million or 6 million units. This is in addition to the 8 million units that we repurchased in Q4 of 2021. We see these buybacks as an attractive use of capital. Our recent unit prices -- these repurchases this quarter reflect an implied cap rate of over 6%. This implies that unit price of these purchases was at a discount for income-producing properties and ascribed effectively no value to our development pipeline. Expressed another way, the price implies a value of approximately $340 per square foot of our income-producing property or $230 per square foot based on our income-producing properties plus the owned development properties. When compared to the replacement cost metrics that Jonathan mentioned earlier, these numbers are quite compelling. To round out my comments, I will briefly highlight some of our balance sheet metrics. Our net debt-to-EBITDA continues to trend downwards and was at 9.4x at the end of the quarter. We finished the quarter with $1.4 billion of available liquidity and unencumbered asset pool of $9.2 billion. These items provide us with substantial financial flexibility. Our unencumbered asset pool has decreased slightly since year-end as we have added construction loans to development projects and sold some unencumbered assets. We expect this to decrease further in the next quarter as we're process upgrading approximately $300 million of -- through secured mortgages. We are doing this tactically given the current disconnect in interest rates spreads between secured and unsecured debt markets. At the same time, we continue to seek opportunities to raise low-cost CMHC secured financing where it makes sense. In the long-term, we are not getting our strategy to move to a greater proportion of unsecured debt and maintaining a large, unencumbered asset pool. We hope the information provided in our materials and on this call helps our unit holders to better understand why we believe that the quality and resilience of our portfolio, combined with our strong balance sheet, position RioCan to perform well in any environment. With that, we have concluded our remarks, and I'll pass the call over for questions.

[Operator Instructions] The first question today comes from the line of Sam Damiani from TD Securities.

Congrats on a great quarter. First question is just on the pace of dispositions and further NCIB activity. I wonder if you could just give us a sense as to how we should expect disposition completions to look in Q3 and Q4 and the resumption of the NCIB.

Sure, I can start and then I'll hand it over to Dennis for any further color. I hope you're doing well, Sam. And I think disposition, as we have suggested coming into the year are largely based this year on qualitative assessments where we can make our portfolio better sort of addition or subtraction. And we've been -- we didn't really rely tremendously on the quantitative elements of dispositions this year as we have more so in years past. So we didn't set dramatically high targets for disposition. And we're well on track to be well within those targets in terms of the dispositions that we're doing. Most importantly, though, some of those dispositions will make our portfolio better and higher performing and higher growth. The disposition market is not dead by any stretch. We are actively in the midst of a few transactions on various types of assets in various geographies within Canada. And I don't think we've disclosed that kind of what our target is for the rest of the year. Dennis?

No, I think you just mentioned that we have the -- about $370 million if we include the firm and conditional to close out.

Yes. So I think that's an accurate sort of gauge on where we're going to be. And then with respect to NCIB, as Dennis mentioned, we've been very active. I mean it really is a compelling use of our capital at this point. And in terms of our plans going forward, it really does depend on where our balance sheet is. We will not partake in NCIB if it comes at the expense of balance sheet metrics. And so if we -- like last year, when we sort of outperformed on dispositions and we've sold a little more than we prognosticated, we utilized those excess proceeds to buy back shares. And I'd say the same thing is in line for this year. So really only if our balance sheet metrics permitted, it's something we would absolutely, I think, be prudent to consider as a logical use of capital. Dennis, anything further to add?

No, I think that's bang on. I think the numbers in terms of the value accretion, replacement cost metrics, et cetera, are very compelling, but we absolutely need to be, I'd say, appropriately cautious in this environment, make sure that we keep -- always have one eye on our balance sheet, on our liquidity and before we make any of those decisions. So we'll continue to monitor the disposition market. We'll actively work to close the dispositions we have in process and presuming that capital arrives, it will be of value.

That makes sense. Next question, just on the widening gap between in-place and committed occupancy, anything going on behind the scenes that drove that in the quarter? And how do you expect that to evolve over the balance of 2022?

So I'll start and then hand it over to John Ballantyne. I think that what we're doing is actually getting closer to historic norms of about 100 basis points separate into 2. And I think it just speaks to the different nature of tenancies that we are putting in place where there is a little more work and a little bit more time involved between the time-to-time, the lease and the time they move in. For instance, The Well is -- these are more complex processes in mixed-use environment where, again, it just takes a little bit longer for the tenant and for the landlord work to be completed and then ultimately the tenant work to be completed. But as I said, I don't think -- I think what was the anomaly was how we tightened that gap so significantly over the last couple of quarters. I think we expect it to be somewhere in this range, not far off it going forward, maybe a little bit lower. But I think it's just generally is in keeping with the nature of tenancies that we're now entering to. But John, over to you.

Yes, I agree with that. I would say the historical norm is probably more like 70 basis points, Sam. So I'd also add that we do have a bunch of office stack sales that we're working through. These are typically slower. And I have to say, probably the permitting especially in the Greater Toronto area has been dramatically slowed over the last couple of years, and we're hoping that, that speeds up a little.

That's great. That's helpful. Last question for me. Just on the leasing pipeline. When you look at sort of the list of all the potential leases and that you're in discussions on, how does that sort of look today versus historically? Are you seeing any sign of slowdown in, I guess, retailers interested in committing to new leasing?

Yes, I'll answer that as well, Sam. It's really the supply/demand dynamics in the market right now. We are very much benefiting from that, especially on the larger box side. We have had some tremendous response from grocery operators over some available space in 3 different markets to the point where we're seeing some competition there for the space. So obviously, that really benefits pricing. If you look at because the list of major retailers in Canada being Loblaws, be it Empire, be it Canadian Tire, be it Metro, they are all looking to expand store count right now. There has not been that much retail built over the last 5 years, and I doubt there will be a time built over the next 3. So we are definitely benefiting from that demand. Where we're seeing a little bit of slowness still again is on the office side. Although the space that we're leasing up specifically in our Yonge Sheppard asset was full for space given back by one of the bigger banks take a little bit longer to buy up and put people in. But for the most part, we're very happy with -- lastly with demand. And with existing tenants wanting to keep their space as well, our retention of 93% is well above our historic norm. It's something that we will definitely see go down as we get a little more picky and choosy over the next 3 or 4 years. But again, demand has been great.

The next question today comes from the line of Mark Rothschild from Canaccord.

Kind of continue on the point you were just addressing that there hasn't been a ton of new retail development and obviously not much near the assets that you own. But are you seeing this slowing down even more to the point that it would impact rental rates? And does rising development costs and rising cost in general impact the rental rates you're getting? And specifically, would this lead to better leasing spreads over the next year or 2?

Yes. Yes. I think that the market dynamics are very favorable for landlords such as RioCan where we own space in high demographic neighborhoods, and we are definitely seeing that the ability to replace and create new space has become very, very, very difficult. And that means that -- and I think couple that, Mark, with I think the reconciliation that occurred during COVID where I believe a lot of retailers, and I say this with a lot of discussions in the background with our retailers, they have recognized the importance of being able to distribute from the store. And so that, along with the supply-demand constraints have, I think, increased the desirability of our shopping centers and that has created upward pricing tension, and we believe that it will continue to do so. And while I can't assure you the leasing spreads will be consistent in this sort of double-digit number, we do stand behind our guidance from our Investor Day presentation where we said it will be in the high single digits over the span of a 5-year period. And of course, it ebbs and flows quarter-to-quarter, but we think over the long run, because of those dynamics, those are sustainable numbers.

I think, Mark, we look at internally, obviously, the economics of any of these new retail development all the time. And even with them, we're building on preexisting lands that carried a very low cost base. And even with that, it becomes challenging to make these projects canceled without pretty good market adjustment. If we layer in the market value of land, if some were to go up and actually buy that land and build new retail, our view is that it'd be virtually impossible to make the numbers work right now at current market rates. So at some point, that pricing dynamic has to give if supply is to come on. But unless it's part of a high-density mixed-use project or on a preexisting land, we really think that the economics are very, very challenged for anyone to develop.

Okay. Then just following up on the numbers that you put, Jonathan, am I understanding that why you expect the leasing spread to be strong, you don't expect it to generally be in the double digits?

Well, again, what I said, Mark, was that our guidance, it's a high single digits over the course of 5 years is something we stand behind.

The next question today comes from the line of Mario Saric from Scotiabank.

I just want to turn to the occupancy, the in-place of 96.2% embedded within your guidance for the year. Can you remind us whether you believe you can maintain or slightly increase occupancy by year-end?

Yes. I think it is certainly something we're comfortable saying that we can maintain and slightly increase. I mean, it's -- as we said, the conditions are very favorable and truthfully, I mean, we believe that the numbers we are at is almost as though we are stabilized. So I think once you start hitting 98% committed, you actually can't really or don't want to go much higher than that, but there's still a little bit of room there.

And then in terms of The Well, it was noted that the kind of lease were in discussions at 81%. That's up 200 basis points quarter-over-quarter given we're approaching completion of construction over the next 12 months. Can you give us a bit of sense in terms of the trajectory and expectations within that 81% up to a stabilized figure?

So we feel that the -- given that the physical plant is now much closer to being completed and some of the retailers that we're trying to get at the -- or that we're confident that we will get The Well are those that really -- they're more local in nature. They're not ones to sign leases 2 or 3 years in advance. We feel that now that we're in that sort of home stretch in the last 12 months, we will be able to start increasing that occupancy number on a consistent basis month-over-month until we do have our grand opening, remembering, too, that our grand opening is just really a day for ceremony. We will be opening tenants in advance of that date. And I think that the leasing velocity just given the momentum of the site, given its aesthetic and given that there's a lot more hype around it right now, we'll continue to, I think, move towards full occupancy at a reasonably consistent pace. So we are not in the least bit concerned about getting the appropriate tenant mix there in the appropriate time before that grand opening day. I can't promise you that it will be 98% occupied within a year. But I think, again, for us, the more important outcome is the tenant mix, and we feel confident that we'll be getting close to that over the course of the next medium to long-term.

Okay. And then in terms of the pretty strong lease spreads that you announced, would the number be notably different on a net effective basis in your view?

Sorry, the numbers of leasing spreads on a net effective basis, I don't think they'll be significantly different. John, is that accurate?

Yes, it's accurate, Jonathan. Cost of deals have not increased over and above what we're seeing. In general, construction cost increases. But as far as dealing with tenants extracting higher rates, we are not paying higher tenant allowance packages.

The last one is just pertaining to the assets that you have on your discussion for dispositions. Would it be fair to say that those are mostly concentrated in the enclosed mall part of the portfolio? And then secondly, what would be kind of mortgage debt attributes associated with those potential dispositions be like a [indiscernible] have leverage on them.

So I would say that there is an emphasis on in the enclosed mall portfolio, but that's not the entirety of it. We are focused just on lower growth assets. And the debt attributes really vary. As you know, I mean, our unencumbered pool of assets is significant, which means that some of the assets we are going to sell will be free and clear, but some of them do have mortgage attached to them. And those rates given today's market, given the fact that most of them have been refinanced over the last 5 years, they're generally favorable mortgages at this point, which makes the salability of them enhanced. And Andrew Duncan, I'm not sure if you have anything to add to that.

No, that's bang on, Jon. It's a mixed bag. There is some enclosed components, but there's also some unenclosed components that are lower growth and some have leverage on them, property level leverage on them and some don't.

Great.

And in terms of expected timing on those dispositions, is it just a Q3 event? Or do you think it can bleed into Q4?

It could bleed into Q4. I mean, I think the number that we've given in terms of properties that are under contract, those are -- those could definitely bleed into Q4.

Yes. I would probably, just looking at it, we kind of spread them pretty evenly over Q3 and Q4 from a conservative perspective.

Maybe one last quick question for me, more of a general question strategically. I think RioCan's been one of the most active in terms of the share buyback and the management team has been pretty responsive to your change in cost of capital maybe relative to some others. You've laid out this 5-year strategy recently, the implied cap rate up about 65 basis points this year. Does the volatility in the public markets that we're seeing, does that change anything on the strategy on the margin?

No. I think what we've said is in the way we raise that capital, we did suggest in our Investor Day that we were going to look to lean more into the unsecured market rather than the secure given the volatility in the unsecured market right now and the pricing difference as Dennis had referenced in his remarks. We are going to tactically start looking at some months -- sorry, some secured debt just given that price difference. But overall, again, if I look at that 5-year plan, I look at our objectives with respect to multi-res with respect to the way we diversify tenants, the way in which we're going to apply capital intelligently to our shopping centers to make them just a better offering, the way in which we're going to invest in technology and ESG and our people here at RioCan, I don't believe that this the current volatility in the market is in any way going to impact those around the margins or otherwise. Those objectives, those pillars that we came up with were intended to be versatile and be in place regardless of the economic backdrop.

And what I would kind of add -- Jon has said exactly right, things like shifting to more of a secured financing in the short-term, that's a tactic, not a strategy. Likewise, I made some comments around our ability to defer development starts if that came to pass, so that would be a short-term capital preservation move. But again, that's a tactic, not a strategy. Everything we're seeing really trying to highlight the ability -- our flexibility to adapt in these volatile times. But in terms of the long-term goals, we're not changing those.