SmartCentres Real Estate Investment Trust (SRUUN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the SmartCentres REIT Q2 2023 Conference Call. I would like to introduce Mr. Peter Slan. Please go ahead.

Thank you, and good afternoon, and welcome to our second quarter 2023 results call. I am Peter Slan, Chief Financial Officer, and I'm joined on today's call by Mitch Goldhar, SmartCentres' Executive Chair and Chief Executive Officer; and by Rudy Gobin, our Executive Vice President of Portfolio Management and Investments. We will begin today's call with some comments from Mitch. Rudy will then cover some operational items, and I will review our financial results. We would then be pleased to take your questions. Just before I turn the call over to Mitch, I would like to refer you specifically to the cautionary language about forward-looking information, which can be found at the front of our MD&A materials. This also applies to comments that any of the speakers make this afternoon. Mitch, over to you.

Thank you, Peter. At SmartCentres, we have 3 basic pillars. We are an owner and operator of Walmart, Canadian Tire, Costco, Home Depot, Loblaws and other grocery-anchored shopping centers strategically located across the country. Two, we are an owner of multi-res, storage, industrial and seniors homes. And three, we are strategic real estate owners with 30 years of development expertise. Expertise, we apply for the development of condos, [indiscernible], seniors, office, retail and storage. And we do all of that on our strategically owned real estate that we already own. In terms of the first category, existing and new retailers continue to be interested in more space. Building on the momentum of last year and Q1, achieving a strong 98.2% occupancy level across our portfolio at the end of the quarter. Renewal rates are up 3.4%. Same property NOI for the 3 months ended June 30, 2023, increased by 3.2% compared to the same period in 2022. Collections of approximately 98% as retailers are back, stronger than ever. With our improved office channel platform and well capitalized and are well capitalized for constant change in innovation necessary to succeed in retail. In fact, we are now seeing renewed interest for new build groceries, grocers and other sub-anchor mid-box retailers from the 20,000 to 40,000 square foot range, which Rudy will speak to shortly. Toronto and Montreal Premium Outlets remain fully leased, with 12 months rolling sales continuing to set new records, moving 2023 EBITDA to record levels. Well-priced luxury brands continue to be in high demand with customers being [ bused ] in from longer distances to take advantage of the great mix of designer names. Toronto Premium is quickly becoming one of the top 3 sales performers in Canada. With regard to the second and third categories, our non-retail income and our mixed-use development portfolios continue to grow and deliver strong results. Currently under construction, we have apartments, condos, industrial, self-storage, townhomes and retirement in the GTA, Ottawa and Montreal areas and all are scheduled for completion in the next 18 months or so, as you can see in our MD&A. Here are a few highlights. Construction of the fourth and fifth Transit City towers at SmartVMC comprising 45 and 50 story, prospectively, is on track and nearing full completion. 452 units closed in the quarter, generating $10.6 million in profits, which Peter will speak to more in a moment. Also within the SmartVMC, The Millway, our 36-story apartment building is completed and turned over a number of units in the podiums of all 3 towers. Recall that some of the rental units are in the podiums of Transit 3, 4and 5 and almost all of those are already fully leased. The release of the balance of the units will come over the next 2 quarters and demand is expected to remain strong given the housing supply and current interest rates. Our apartments in Mascouche, suburb of Montreal, which opened in Q3 2022 is 77% leased with high ongoing interest. Laval's first tower was 99% leased at the end of the quarter, and the second tower is scheduled for completion in Q3 of this year, with over 70% already pre-leased. Construction of our first industrial new build, a 229,000 square foot 40-foot clear building on 16 acres of a 38-acre site on Highway 407 in Pickering was completed in the quarter, with half of the space turned over to the tenant and leasing interest strong on the balance. Construction of our new seniors residence apartment totaling 402 units at Ottawa Laurentian was temporarily delayed due to financial challenges of our JV partner on this project. That being said, during the quarter, we were successful in coming to an agreement with our partner for SmartCentres to take over development and construction management of this profitable project until its completion date, which is now expected to be Q1, Q2 2025. Having completed earthworks and site servicing with our 2 partners, we commenced construction of our 174-unit Vaughan North West Townhouse project shortly after the quarter end. With the recent opening of our eighth self-storage facility, 138,000 square foot project at Brampton, Kingspoint, just north of Brampton downtown. The trust reached a milestone of 1 million square feet of gross floor area with our partners' self-storage. 2 storage facilities are under construction in Markham and Whitby and 2 more will commence construction in the next quarter. We intend to continue executing on this strategy as returns continue to meet - exceed our expectations. Additionally, we continue to build on the stable and growing cash generating platform and continue to develop on the significant and very mixed-use permissions already in place. On land-use permissions so far this year, we achieved residential rezonings in 4 projects, totaling nearly 4 million additional square feet, 3 in Ontario and one in Quebec. We continue to stay focused on getting further permissions, while simultaneously getting ready to launch our next phase in the BMC, consisting of 2 condo towers, potentially a small [indiscernible] based on demand. Recall that in 2022, we achieved over 6.1 million square feet of new mixed-use permissions in urban locations with high demand for housing. So 2023 is off to a great start. Given that development, here is our long-term vision and strategy. We are committed on unlocking the tremendous value deeply embedded in the lands we already own, which, as a reminder, sits in the midst of highly populated communities in nearly every major market across Canada. From a capital recycling and risk management perspective, we are continuing discussions with potential partners and buyers of selected assets within the portfolio, which will assist in funding development, debt reduction and diversification. While only a small part of the portfolio, we see this as a [indiscernible] recycling program, which will not only strengthen our balance sheet, but derisk future cash flow streams. On the financial side, Peter will provide a full update in a minute, but let me just emphasize a few of the more pertinent elements. Maintaining our conservative balance sheet remains a significant priority for us, along with maintaining a significant unencumbered pool of assets, which now sits at $8.8 billion. Our respectable debt level remains at 43.2%, even with the $300 million unsecured debentures issued in the quarter, demonstrating our significant liquidity and a strong support from our lenders' competitors. As we have said before, at SmartCentres, we take the long view. It's not just what we do, but it's what we don't do. For 30 years, we have been building better, more affordable communities across Canada through enhancing access to convenient, affordable retail options. From the beginning, that meant creating lasting value for the towns and cities in which we operate for our tenants, our neighbors and for our unitholders. It meant always doing the right thing in each community. In the coming weeks, we will be issuing our ESG report, and you will get a firsthand look at a great number of initiatives that have been woven into the fabric of our organization, in how we oversee our business, interact with our tenants and engage our associates and communities. Our 3-year action plan is now posted on our website, and I invite you to visit it and see ESG principles applied throughout. They help shape our approach to building design, energy utilization and social interaction with tenants and their customers. These principles apply to our [indiscernible] to facilitate cost savings and convenience to communities, all with the goal of helping Canadians live better lives. On a final note, I would like to once again offer my thanks and appreciation to our great team of associates, partners and contractors for their commitment and dedication to delivering on our long-term vision. And with that, I will pass the call over to Rudy.

Thanks, Mitch, and good afternoon, everyone. The second quarter continues to build momentum with strong interest from new entrants and many of our national retailers who shaped the open-format retail landscape, TJX, Canadian Tire banners, Loblaws, Sobeys, Dollarama, banks, liquor, pet stores and a long list of QSRs, all very active in picking up vacant space in our high-traffic Walmart-anchored centers. And given the residential all around us, we're also getting the experienced discounters, entertainment, gaming, logistics and some light industrial users with showrooms preferring to be in a SmartCentres location in paying market rent rather than being an industrial or design center. As Mitch mentioned, demand for new build retail is on the rise with grocers and mid-box retailers not only in major markets, we have signed deals or near signing deals for places such as [ Carleton ], Alliston, Bracebridge, [indiscernible], Orleans and London. As inflation begins to ease and consumers having significant options in where they live, demand for physical retail, especially open format and value-oriented retail continues to be in demand. Worth reminding everyone again is that for SmartCentres, the strategy is clear. And the results speak for themselves in Q2, our occupancy is 98.2%, near 99% collections and 3.2% same-property NOI and the renewal spread of 3.4% that Mitch mentioned earlier. While the anemic gave retailers good reason to pause, rethink and reshape their strategy, their path is now clearer than ever, get physically close to your customers, offer great value, make it convenient in proximity and access so that customers have one place to do all of their shopping for their daily needs. The strongest retailers are continuing to evolve and reinvest with Walmart, Canadian Tire, Winners, HomeSense, Dollarama and all major grocers reinvesting heavily in their store network and simultaneously growing their footprint. For SmartCentres, this means doing what we've always done, adapting to the needs of our tenants and their customers and maintaining our strong relationships every day. As a reminder, virtually all of the SmartCentres locations across the country includes a full grocery, easy and accessible at grade parking and prices that consumers know they can trust and afford. With that said, there are a few operational highlights. In addition to the larger dominant retailers, a number of smaller-sized tenants are wanting space across the country for personal care, beauty supplies, spas, hair salons and daycares. When combined with entertainment, such as indoor golf, gaming, rocket sports facilities, we see a well-rounded shopping center easily being converted to city centers as part of the utilization of our excess land for residential and other mixed uses, land we already own within our shopping centers. Our first pre-leased industrial new build tenant took occupancy in the quarter and given the modern design, location and current discussions, we expect the balance of the space to be leased shortly. Our premium outlets in Toronto and Montreal continue to exceed our expectations and dominate their markets. Tenant sales in Toronto are above $1,200 per square foot and have exceeded all prior years. All in all, the second quarter's operational results clearly delivered on every metric, and we fully expect a continuation of the same for the balance of the year. With that, I will turn it over to Peter.

Thank you, Rudy. The financial results for the second quarter reflect strong performance in our core retail business with a solid contribution from our mixed-use development portfolio through the continued condo closings at the Transit City 4 project and the initial closings of Transit City 5. For the 3 months ended June 30, 2023, FFO per fully diluted unit was $0.55, an increase of 12% from the comparable quarter last year. These results include $10.6 million or $0.06 per unit of profits from the closing of 452 condominium suites at Transit City 4 and 5. Higher rental income was driven by increases in base rents primarily due to contractual rental step-ups, plus further lease-ups and an increase in percentage rents and rents from self-storage and apartment properties, all partially offset by higher interest expense. Net rental income for the quarter increased by $4.6 million or 3.7% from the same quarter last year. Including our equity accounted investments, however, net rental income increased by $17.1 million or 13.1%, largely due to contractual lease step-ups, new leasing activities and continued strong performance at our Montreal and Toronto Premium Outlet centers. Same property NOI, including equity accounted investments, increased by $4.2 million or 3.2% compared to the same period in 2022. Leasing activity remained strong during the quarter, which is expected to drive continued modest growth in NOI over the balance of the year. Our occupancy level, including committed leases, was 98.2% at the end of the quarter, an increase of 20 basis points from the prior quarter and 60 basis points from a year earlier. In terms of distributions, we maintained our distributions during the quarter at an annualized rate of $1.85 per unit. The payout ratio to AFFO for the 3 months ended June 30, 2023, was 93.8%, an improvement from 101.2% for the same period a year earlier. Total assets, including our proportionate share of equity accounted investments, were $12.2 billion at the end of Q2, a modest increase from the prior quarter. During the quarter, IFRS fair value adjustments in our investment property portfolio, including equity-accounted investments, resulted in modest net gains of approximately $34.2 million principally reflecting additional leasing activity. We did not make any portfolio-wide changes in our capitalization rate assumptions this quarter. During the quarter, we closed on the sale of 452 condominium units in our Transit City 4 and Transit City 5 developments for gross proceeds at the REIT's 25% share of $61.4 million and net profit of $11.3 million. The remaining 380 units at Transit City 4 and 5 are expected to close over the balance of the year, primarily in Q3. Adjusted debt to adjusted EBITDA was 9.9x in Q2, representing continued modest improvement from 10.3x at year end and 10x at Q1. The improvement was a result of both growth in EBITDA and the repayment of approximately $345 million of debt during the quarter, including repayments under equity accounted investments. Our debt to aggregate assets ratio was 43.2% at the end of the quarter, unchanged from Q1. We expect to continue to repay debt over the coming quarters, particularly with the profits from condominium closings. However, as construction commences on some of our larger mixed-use development projects, short-term borrowings will begin to grow. Our unencumbered asset pool stood at $8.8 billion at the end of Q2, a modest increase from Q1. Our unsecured debt of $4.2 billion was virtually unchanged from the prior quarter and represented approximately 80% of our total debt of $5.3 billion. From a liquidity perspective, during the quarter, we issued $300 million of Series Z debentures with a 5-year term and a coupon of 5.35%. We also repaid the $200 million of Series I debentures upon their maturity and extended the term on a $170 million bilateral facility. We are very comfortable with our current liquidity position with more than $586 million of undrawn liquidity as at June 30, 2023, including our share of equity accounted investments and cash on hand, but excluding any accordion features. The weighted average term to maturity of our debt, including debt on equity accounted investments, is 4.1 years, up from 3.9 years last quarter. Our weighted average interest rate was 4.03%, an increase of 14 basis points from the prior quarter. Our debt ladder remains conservatively structured where the most significant aggregate maturities occur in 2025 and 2027. Approximately 83% of our debt is at fixed interest rates, which has been a significant benefit to us during this rising rate environment. Finally, I want to touch briefly on our mixed-use development projects that are underway. Beginning in Q4 of last year, we added some new disclosure in our MD&A focusing on those development projects that are currently under construction. There are currently 10 projects under construction, unchanged from last quarter. The REIT's share of the total capital cost of these projects is approximately $548 million with the estimated cost to complete standing at a relatively modest $202 million. We expect all of them to be completed by the end of 2024 with the exception of the seniors housing project in Ottawa, which Mitch mentioned, which will likely stretch into 2025 as we evaluate various options for a new partner. In the coming quarters, we expect to see Transit City 4 and 5 as well as the Millway come off this list, and we will add other new projects, including the Leaside retail projects and the Ottawa condominium projects once construction commences on those developments. This quarter, we also added new disclosure around our self-storage joint venture. As Mitch mentioned, we were excited to reach the milestone of 1 million square feet of self-storage properties this quarter. The 8 properties are all performing well. Occupancy is strong at approximately 93% for those facilities that have been opened for at least 1 year with gross rental revenue of approximately $3.2 million year-to-date at our share. And with that, we would be pleased to take your questions. Operator, can we have the first question on the line, please?

[Operator Instructions] So our first question will come from Gaurav Mathur of iA Capital Markets.

Just back to your prepared remarks about the strength of the national retailers. I'm wondering from a tenanting perspective, are there any -- is there any part of the talent base that is not as strong and you require some assistance going forward?

I guess, first of all, I'll just say there's always in retail, even if you take the strongest years of retail, there will always be some retail casualties. So with that in mind, we don't actually have really any visibility on something like that happening within our portfolio at the moment. I think part of the reason it might be a little bit anomalous at the moment is that some of that type of thing happened during COVID and accelerated some of the weaknesses that might have taken a little longer to show up. So the whole Darwinian constant process that goes on in retail was somewhat mutated. And I think great at the moment, because famous last words, but we don't see or anticipate any significant bankruptcy or filing with our retailers in our portfolio.

Okay. Great. And I guess that leads into my next question. I take it then that you're not seeing any material nonrenewals coming up either through the rest of the year.

We'll always have a little bit of that. I mean it's not just like related to anything kind of chronic. But yes, there are always going to be some retailers that are not going to renew in certain locations. That can just be that their borderline, they're not doing great or part of the country -- certain provisions, regions in the country, so retailers may not be excelling in or there's a lot of reasons why that can happen, but we don't see any -- look, again, we don't see any pattern here of some wholesale nonrenewal by any one retailer that is in our portfolio.

Okay. Great. And just switching gears here. On the AFFO payout, we've seen the improvement to the 93% level. I'm just wondering if there's a target in mind that you're focusing on or one that you're willing to disclose at this point?

I'm sorry, what was the question?

Just talking about AFFO payout ratio, have you seen any improvement? Just wondering if there's a target range that you're thinking about?

No, there's not a target that we've communicated publicly.

Our next question comes from Sam Damiani of TD Securities.

First question is just on the miscellaneous revenue in the quarter, which took another notable step higher. Just wondering how you think about that line item going forward? Is there an opportunity to convert some of that revenue into base rent, more stable revenue streams? Or do you see meaningful further upside as tenant sales grow? Just how you think about that line item going forward?

It seems like it's reliable. I mean it's the parking, mostly here at the VMC and percentage rents at our other centers, and they're both very strong, steady in both in terms of traffic.

Okay. And the next question is on ArtWalk was mentioned as a potential construction start in the latter half of this year. Just wondering how, I guess, the presale of the overall Phase 1 is going? I know you've presold, I think, fully presold the first release of units, but just wondering how many units are in the first phase in total and what stage you're going to be at when you start construction?

Yes. So we have about 90 units left in that first building that we withheld primarily because we wanted flexibility on design. And we're not anticipating any headwinds for moving those units. The asterisk next to that is there might be some variation in that number, Sam, because suite mix-wise, we might -- they're the higher, higher units, the top of the building and the lower floors. We just did that for flexibility. I'm being told that we have less than 90 just so, but it just depends on our final suite mix and some certain other design decisions. But I mean, you could say, based on the original design, we would have maybe just a few as 60 units left in that tower. And then there's the lower tower sort of a mid-rise building actually, which will go to market on shortly. And we're not anticipating, again, like they were not anticipating any headwinds or challenges in moving those units. And that was the building we were originally going to do as a rental building when we switched it. And then there's the little office building. So we're going to start construction, but we're going to go cautiously step by step. But we do want to get started there. It's been a while since we sold out the release. And so that will start imminently. But we'll be keeping an eye on all those data points as we get further and further on the construction before we commit each step of the way.

Okay. That's very helpful. And just to be clear, are you preselling ArtWalk and Park Place now at the same time? Is that -- did we understand that correctly?

Yes. I mean, yes, there are 2 different projects, 2 different types of projects, 2 different locations. I mean we have 100 acres. It's a long a large property. Park Place is quite a bit away from ArtWalk, very different features. So we are selling both at the same time, I mean better us than our competitor.

Absolutely. Last question for me. One of the things we saw several things on the walking tour of the VMC there a couple of months ago. But one thing I recall being mentioned was an office tower potential that could be fully pre-leased by a single tenant, if I'm not mistaken. Is there any -- I don't know if I got that accurately? Or is there any update on the prospects for a pre-let office tower build?

Yes. So there is progress. I mean, I'd say it was -- I don't know what we would rank it when we did that investment tour Investment Day. Maybe it would have been on the probability scale, maybe it would be 5.5 or 6. I'd say it's a sort of a 6.5, 7. So it's moving forward, not 100% accurate, what you were saying there. It's not necessarily going to be 100% preleased because we might build a little bit extra. But we also might move into it ourselves. So some of these things are part of the process that we're in right now. But we do have a couple of very real companies interested in being tenants and it would be around them that building would get developed and then there's -- we'd be the third preleased space.

[Operator Instructions] At the moment we have 2 other questions. The next one comes from Lorne Kalmar of Desjardins Capital Markets.

Maybe just quickly following up on Sam's question about the office tower. Can you give us maybe an idea of what type of tenant would be looking to take the space?

Absolutely not.

All right. I think I'll switch gears in. Just maybe going back to the capital recycling, I think last quarter when we spoke, you said sort of targeting $200 million to $400 million this year, but cautiously, you mentioned some momentum. Can you maybe give us an idea of what type of project or what type of sites or properties you'd be looking to dispose of?

Yes. I mean, like you would notice that we only talked about one potential development new. We've got 10 under construction, but they're lost in a lot of those. But in terms of new, we mentioned ArtWalk, but we didn't talk about anything else at the moment like starting Pickering or starting 1900 or starting Westside, I mean we've got a lot of zone property out there that are candidates for capital raising exercises. So it would be something like that. I mean there's a whole bunch of other ones I'm not mentioning that have entitlements that we could sell to a third party and raise capital. We obviously leave something on the table by doing that, but that's fine. So we're in discussions on that. And obviously, those are relatively liquid. I mean there's always interest in good as condo locations with entitlements. So those are the ones. And we also have this ongoing interest from potential institutional partners who want to be a partner with us on some of our developments. Those are primarily institutions interested in multi-res, so a little bit harder to make cork right now from a capital raising point of view and moving the needle point of view. But still, from a long-term point of view, I would say you could probably anticipate that we're going to have a couple of like partners in multi-res that will probably be there for many -- for multiple projects and multiple phases over a long period of time, but a little bit tougher to move the needle with those.

Fair enough. And since your last call, has buyer interest changed either for the better or for the worse?

On the sales side or on the buyer base? Yes, it's sort of an interesting question. I mean, it's almost like every day, it's like you could give you an answer on Thursday, I can tell you that actually it seems like it's quite strong right now. But tomorrow may have a different feeling. It's a bit of a weird market. Overall, I think there's this information. There's an attitude towards strong steady interest in buying condos in our locations. But there's this little under the surface sort of maybe sensitiveness that comes and goes. But you can induce it by offering certain things because the market is really quite deep. It's there. So it's really just finding kind of the sweet spot between deposit structure and pricing, of course, amenities and things like that. So I'd say the market is still quite strong indeed, but there is this little bit of -- it's not euphoria that's for sure. But it's still there. I would say, it's steady and somewhat cautiously optimistic there.

Okay. And then maybe just last one. You've spoken now a couple of times about starting to build some new retail, which is something we haven't really seen a lot of. And assuming it'd be already on land, what do you estimate the cost per square foot would be and what kind of rents would you need to make that work?

Well, I can tell you that the retailers during the last x number of years, like kind of through the pandemic and to now have become quite [ astute ] or whatnot too pricing and so they're not a step behind. They can sometimes be a step behind in terms of their rental expectations versus developers' cost realities. They are definitely pretty up-to-date. And so whether we build for $140, $150, $160 a foot plus, plus. It depends on where it is. It can even be higher depending on how much landlords work there is. But the tenants we're dealing with in our typical tenant in our portfolio, they're quite strong the retailers. They're long-term-minded and they kind of -- the rents make sense. I mean we would not be entering into those contracts. We would not be building those buildings if they didn't. We're not doing a deal at one rent and then going out to the market and finding out the deal doesn't really pencil. We're doing a stock step. And all the retail we're doing from scratch that we're referring to is really quite interesting economically accretive and quite positive economically.

Our next question comes from Tal Woolley of National Bank Financial.

I wanted to start just asking rents at the Millway. Can you talk about where you went out initially at and how you're seeing rents progress over time as you're leasing up the building?

We were sort of thinking originally, we would be $3.25. I think I'm going by memory, but it's been a while. But we are seeing $3.60 to $4, I would say, depending on the unit in my head, a little better than we expected.

Okay. Perfect. And I apologize, I missed the first minutes of the conference call as I was on another call. Any change in zoning for Westside Mall announced this quarter?

Not specifically, but Westside is making progress. I mean applications within the city of Toronto are a little bit slower. When you go just through the process, you don't know, hence you don't know what not, I mean. And so we are making good progress there. I don't get into the nitty gritty of the land use instruments and technical terms. But it's designated, designated for a couple of million square feet. And I guess, I would say, and maybe even sort of emphasize that even when it takes a little longer, these areas like Westside, I mean those areas are changing without us doing anything. It's getting better by virtue of the things that are happening around us, including, of course, the crosstown that never ending internal mass transit project that we've all come to live with, and they go transit. If you go by, they just look -- so it's not terrible, and that's -- when real estate good -- when real estate works, you have good locations and they get better with what's going on around us, and that would be true with a lot of our locations. So yes, the final zoning approval there is not done. But there are other things along the way between the designation and the zoning that are done, and we're not worried about it at all. It's just the winner, that property, that location is an absolute home run for the REIT.

Okay. Just on the retail tenant side, I think you still have 8 Lowes and Rona left. Can you just talk about what you're hearing with respect to how the new management team is taking -- dealing with the footprint? And do you happen to know how many stores you have in Quebec versus the rest of Canada?

Well, I'll start with the first. For a while, if you had asked this question 3 months ago, I think we would say we're not sure exactly because and not in a bad way, not implying anything bad. But I think that the 2 entities are, obviously, we're working through lots of things. So we have good relations with both. So -- but right now, it's sort of becoming more and more clear or it's becoming a little more clear with respect to how this is going to shape up, more probably next quarter, I would say. But suffice to say that we're fine, like we're pleased with how things are going to -- how we think things are going to end up with us as it relates to Lowes and Rona. So I mean, I'm sorry, I can't be more specific at this time. With respect to how many do we have in our portfolio in Quebec, I didn't know you may have come to us is temporarily, I wish I could probably figure that out.

I'll take that, one in Laval, I can recall, I think at most you'd ask, but one for sure.

Okay. So most of it would probably be in Ontario, though would be...

We've got a couple of...

Sorry, we got Regina -- so yes, no, it's mostly Ontario.

Okay. The total return swap, it's acted as a pretty big drag on your FFO progression. Is there any thought to unwinding that? Is there like -- I believe it was a 4-year term originally or something like that, that have been in place, like is the intention to keep that going? If maybe you can just talk about what was the original idea going into this with the total return swap and now that we're kind of in this position, how are you looking at it?

I'm going to turn it to Peter, but I'll just say the original was -- it's in fact our confidence in our company and investing in a sense in our own company. Obviously, we are sort of alone on that one. And so our unit prices almost an explainably down and discounted. So of course, that's the reason why the return swap. Peter, go ahead.

Yes. Tal, it's essentially it's a synthetic share buyback. There's about 5.1 million units that were notionally purchased under the swap. They were purchased at an average price of about $27.50. And of course, the stock today is trading around $25. So there's this mark-to-market adjustment, that's what you're seeing going through the FFO line this quarter. And that's simply a reflection, as Mitch suggests, a reflection of the stock is not where we think it should be, and we think it's very cheap. And so that's why we undertook the synthetic buyback in the first place. That having been said, it does have a maturity date in December of 2024. Our expectation, though, is that we're not going to realize on that mark-to-market. It's a noncash item, of course, that you see in the FFO item. It's unrealized and noncash. And should we get to the maturity date and the stock is where it is today, then we will, in all likelihood, extend that out. And we've had discussions with the counterparty on the swap, and we don't expect that to be an issue at all. So we don't expect to ever realize on that mark-to-market adjustment. And we do think that it is an inexpensive thought.

Okay. And I guess my last question is just maybe if you can give a broader sense of the chatter with your retail tenants right now. Like we just had Canadian Tire report today, they're pulling their annual targets for the year, the stock is down 5%. They're sort of signaling, times are getting a little bit tighter for the consumer. What's sort of the latest kind of chatter you're hearing from some of your larger retailers right now?

I mean the only thing better for us than good times or bad times. So we are the go-to when people are tightening their belt. So yes, I mean, there will be lots of analysis on what people are cutting back on and what they're spending on. But by the end of the day, we'll probably see increased traffic at our place and how it just distributed exactly between the retailers may vary, but I mean we're a company populated with the largest value-oriented discounters, Canadian Tire is part of that. But yes, I mean, they've had an unbelievable run, especially during some of these COVID, once they were open. And so coming off some pretty big numbers and maybe there's a bit of an oversteer on what happened today with Canadian Tire, they're unbelievably sound company in each one of their categories. So there might be a little bit of a -- one of those things we see sometimes, I wouldn't dedicate. They are very, very much a part of it. Yes, there would probably be a little bit of cutting back on some discretionary things and maybe some certain high-margin items. But we're very pleased to be there for the increased traffic and spending consciousness. We don't hear anybody like Canadian Tire with their details today. We don't see Canadian Tire pausing on the number of deals that we're doing with them. They're also very much long-term minded. They see beyond this particular moment in time. And so we don't really think like nobody is out there taking 10, okay, walking in here saying we want these 10, we want those 10. I mean we're doing a deal by deal, but it's adding up. I don't think that's going to change. These are the deals we're doing and have been around for whatever 3s in 12 months, and they're very thoughtful. They've -- everybody's considered the world that we're going into when they made these decisions. So I don't think it's going to -- if you're asking, ultimately, how is it going to affect us? I don't think we're going to see any kind of closures or as I said earlier. And I don't think it's going to stop the deals that we've talked about that we're doing. I anticipate to be honest, that we'll continue to do new deals with the likes of Canadian Tire over the next year or 2.

Yes. My intention was not to suggest that there was some issue with Canadian Tire. I think it was just more to understand like what you were hearing about consumer sentiment sort of more lately given that this is the kind of thing -- some of these larger retailers are talking about. And I just didn't know if you had any good commentary from other tenants that you're working with to just around what's...

Yes. There's a little bit of concern about consumers cutting back on certain discretionary items. We're not that discretionary like -- so it's SmartCentres. But yes, I don't want to signal anything out, but we're 98.2% occupied with very strong and even stronger tenant mix like as in covenants than ever. So -- but there is a little bit, yes, I mean, there's some people concerned about higher markets and stuff and some of the entity shops and so on. But there is -- it's sort of -- I don't think it's -- I've heard worse in my career. There is a little bit of chatter about tweaking merchandising mixes around some changing consumer behavior around some of the recessionary discussion and higher interest rates and stuff like that, which is pretty much common sense. But these are the retailers, our retailers are the ones that are -- I mean, they're designed for this. I mean, they made for -- they are the go-tos when people start thinking that way. So I think we're in pretty good position for it. But I think you're right. I think you will see some cutting back. We're not going to be the major -- our retailers aren't going to be the major ones. I think you're going to see some cutting back in some of the other higher-margin type concepts. I don't want to signal anything, I think you can figure it out.

At the moment, we do have 2 more questions in the queue. And the next one comes from Mario Saric of Scotia Capital.

Mitch, just on the back of your last comment in terms of merchandising mix. Not that SmartCentres and visibility to shift things around, given your high occupancy. But on the margin, if you were able to kind of add here and maybe deduct there, like how would you like to see the merchandising mix shift at SmartCentres over time?

Our own portfolio mix. I mean I'm pretty -- I think we're pretty happy with it. I mean, it's a good question. I guess it's kind of organic, right? Like we're in the -- probably the -- we're in the most successful locations in the healthiest markets. And we are at grade, we can accommodate, hey, almost any interest. Like can we get a call for something, it's pretty hard to imagine that we're not going to figure out how to accommodate you. So we are kind of the organic expression of the market and pretty quickly because we can build pretty quickly. So we are really just a function of -- I mean, the retailers don't create retail concepts that people do. And so they're just responding to what the people want, and we're probably the quickest responders to them. But if I had a magic wand, I mean, what would we love to add, yes, I'd have to single out some stuff. I'd probably -- I'm all about things that people need. So I guess wherever we've got a little bit more discretionary purchases and maybe a little bit more less necessities. I'd probably love to replace those with necessities. But we don't have a lot of that. So I don't know. I would say we can never have too many Walmarts. We never have too many shoppers and Loblaws and Home Depots and Canadian Tires. And so I guess if we could have more of those -- and kind of remember, we're also getting into the city centers sort of thing. So our retail format is changing a little bit. So it's kind of cool because we're now addressing what does that look like and who is that compatible with. So that's going to be interesting. But I don't want to make this call any longer, but that's a subject for another day. But otherwise, I think we're pretty generally pretty pleased with our tenant mix.

Okay. And then my last one, just coming back to capital cycling and if you were able to execute on some of that $200 million to $400 million in terms of potential partial state decisions in some of the developments that you're referring to, how would you rank the relative attractiveness of the redeployment of those proceeds today between putting it into your development pipeline paying down debt? I know you have the TRS structure in place, but maybe repurchasing [indiscernible] of that in terms of reducing the unit count and driving the premium growth higher that way? Just curious in terms of on a risk-adjusted basis where you see the best place to put your money today?

Lowering that is just -- everything is lowering debt because it doesn't matter. It's always debt, so we bring in $200 million. If you put it towards development and de facto which is lowering debt. So we apply it to the highest interest rate debt that we have that we can pay off. If we had more capital than we needed for lowering debt purposes, well, we would love to have that situation, but we might apply it to our units in one way directly in this way we're doing it now or maybe some other way. But we're adding that situation at the moment. So I wouldn't factor that into your calculations. But that's -- I mean that would be the answer, I think.

And our last question in the queue comes from Jenny Ma of BMO Capital Markets.

On a continuation of the topic of debt, you're sitting in the high teens in terms of floating rate debt, which you've been carrying for a few quarters. Hopefully, we're at the end of this interest rate hike cycle, but how do you think about where it's sitting at right now? Are you comfortable leaving it in the high teens to see where things may settle out? Or is this a number that you want to bring down?

Jenny, it's Peter. So I think it is appropriate for us to have a mix. And so right now, you're right, we're at 17% floating, 83% is fixed. And so I think there is some value to the optionality of having some floating rate debt. Also remember, we're a big development business. And so we do use floating rate debt for construction financing. And that's just because of the nature of that financing. It's typically sort of 12- to 36-month terms on it, and so it tends to be floating rate facilities. And so we think it's appropriate to be a majority fixed, but maintain some optionality through a floating rate piece.

Okay. So you'd be fairly comfortable leaving it close to where it is then?

Yes.

Okay. Great. With regards to industrial development, that seems to have happened very quickly, but we've been hearing a lot about increasing construction costs. What would you be looking for to launch Phase 2 of the Pickering development? Would you need to have a tenant pre-leased in place? Or would you be comfortable further on spec? What would need to happen for Phase 2 to commence?

I mean we have to lease up our -- the other half of the building that we just finished, meaning the other half has finished. And thank you very much for stating how fast that building went up. We're quite proud of that. So -- and we will not start well. And I'll say that, absolutely, but it's unlikely we will start a spec building on the balance of the land. I mean we do have interest from some companies to build them a custom building there. And that's what we anticipate will happen with the surplus lands, but we certainly don't have any plans at the moment or appetite right at the moment to spec a building there. It's great land that are is only going to get better. So we hope to land a tenant and build the building for them.

Okay. Between where rents are now and higher costs, do you think you could build to a similar yield as you go to Phase 1?

No, because -- mainly because just the -- like there's a little bit of an edge coming off rates a little bit rates, rental rates are a little bit and interest rates. Construction prices may have sort of stopped increasing. I don't even know if I could say that they are decreasing because you'd have to go out right now and do it and find out, but they might have stopped increasing. So no, I don't know. I don't think it would be -- but I wouldn't factor that in because I think by the time we do one, it will probably be a slightly from market because the market is changing quite rapidly. So I would anticipate by the time we do a deal, prices out of construction will probably come down a little bit. And we're not going to do it if it isn't a strong company, and they're going to want it, and we're not going to do it if the yield isn't decent, but there's a couple of things right at this moment, answering your question that would take it down a little bit from the yield we got on this one.

Okay. And then lastly, the self-storage assets you have, I know it's a very small part of the portfolio right now. But one of the upsides, I guess, of it, is the ability to raise rents at a fairly sequent or high-level clip. What have you seen some of the older self-storage older meeting by yield, right, self-storage facilities are we getting ahead of ourselves? It seems like you've been able to lease them up fairly quickly. So have you been able to pass on the increases yet?

No. First of all, we don't manage them, right? So we're not directly quoting rents to tenants or prospective tenants. But ours are pretty new, Jenny. I mean we're not necessarily increasing rents appreciatively on the ones that we built, but we did get better rents than we thought than we originally performed on the ones that we have done. So in a sense, I guess we got -- our timing was pretty good. The operator are they're really quite good. They specialize in storage. And they have found ways to come up with different types of offerings that, in a sense, raise the rents because they give certain other services, they're quite innovative in that respect. So there are some new offerings that they are offering the market and the market is responding. So probably getting a little bit of an uptick there. But I think we're pretty happy with the rents we're getting. And maybe in a year or 2, we'll see if we get any meaningful bumps from our very healthy initial rents that we're experiencing so far.

Okay. And the revenue that you're getting from self storage, is that in the miscellaneous revenue bucket in the income statement?

No. It's not in the net rental income. Not that insignificant. I mean, our miscellaneous income is actually becoming quite significant. But no, it's in there. It's part of our main overall.

And that was the last question in the queue.

All right. Thank you. Well, thank you for participating in our Q2 analyst call. Please reach out to any of us for further -- any further questions, and have a great day.

Ladies and gentlemen, this concludes the SmartCentres REIT Q2 2023 Conference Call. Thank you for your participation, and have a nice day.