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

Good day, ladies and gentlemen. Welcome to the SmartCentres REIT Q3 2024 Conference Call. I would like to introduce Mr. Peter Slan. Please go ahead.

Thanks very much, operator, and good afternoon, everyone, and welcome to our third quarter 2024 results call. I'm Peter Slan, Chief Financial Officer, and I'm joined on today's call by Mitch Goldhar, SmartCentres' CEO and Executive Chair; and by Rudy Gobin, our Executive Vice President, Portfolio Management and Investments. We will begin today's call with some comments from Mitch. Rudy will then provide some operational highlights, and I will review our financial results. We will 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. This also applies to comments that any of the speakers make this afternoon. Mitch, over to you.

Thank you, Peter. Good afternoon, and welcome, everyone. The momentum in retail fundamentals noted in previous quarters continued in Q3. Rental growth, cash collections and same-property NOI continued to drive solid metrics and higher occupancies, which ended at 98.5%, demonstrating the strength of SmartCentres's portfolio. The strategic nature of our locations also drove 187,000 square feet of executed deals on vacant space and 220,000 square feet of deals for new retail construction year-to-date. Our tenant partner relationships continue to deepen with same-store expansions and new stores either underway or beginning construction shortly with names such as Canadian Tire, Winners, HomeSense, LCBO, Sobeys, Loblaws, Dollarama, Golf Town, Banks and more. We are simultaneously enhancing the shopping center experience beyond the everyday essentials with health and beauty, entertainment, fitness, medical, pet stores, daycares and more. As we work closely with our tenants, every detail matters in providing a welcoming environment for customers. And therefore, it is not surprising, we have already extended over 88% of our 5 million square feet of tenant maturities in 2024. Also reflecting a strong quarter is the 6.1% or 8.9% exclusive of anchors -- exclusive anchor tenants, rental rate lifts achieved on these expansions -- excuse me, extensions. Rudy will provide some further details in a minute, but here are a few more operational highlights. Same-property NOI, excluding anchors for the 3 months ending September is up 8.2% and including anchors, nearly 5%. Our opportunistic industrial development in Pickering on the 407 is now fully leased on long-term leases. Cash collections remained strong at over 99%, again, a reflection of the quality of our income and strength of our tenants. And we expect this momentum to carry on through the year and into 2025. Built on this strong and stable cash-generating platform, we continue to build and secure significant mixed-use permissions with over 59 million square feet already zoned and as you know, on lands we have owned for many years. We, of course, will be strategic and financially prudent in executing any project that is when market conditions permit and with appropriate financing in place. Here are some specific highlights. Site works and excavations were completed and construction is advancing for our 36-story ArtWalk project here in the VMC, comprising of 320 sold-out condominium units. Through our Smart Living brand, -- the Millway, our 458-unit apartment rental project, which was complete late last year, was 93% leased at quarter end, above planned rental rates. We expect to be above 95% leased by year-end. Construction of our Vaughan Northwest townhomes with our partner is progressing well with 47 closings taking place this quarter and nearly all presold units expected to close on schedule by the end of this year or first quarter next. In Leaside, construction is well underway for a 224,000 square foot retail center comprising primarily of a pre-leased 200,000 square foot flagship Canadian Tire store. Opening is on schedule for early 2026. Our self-storage portfolio comprising 10 operating projects, which now accounts for over 1.3 million square feet at 100%, with 4 currently under construction. Completion will begin -- completion will bring the total to 1.9 million square feet. This strategic initiative portfolio continues to overperform, and we intend to carefully expand it. The next such expansion will be in Laval East, adjacent to our operating shopping center and in Victoria, BC, just off the downtown core. Our development teams continue to work diligently across the country in large and small markets, obtaining strategic residential permissions. Just recently, we were successful in 2 of our BC projects, achieving 2.7 million square feet of residential zoning in Penticton and Salmon Arm. These and our other 50 million square feet of residential zoning achieved allow us to launch or sell when market conditions align and enhance our shopping centers along the way to complete our vision of evolving our shopping centers into dynamic communities. We are pleased to announce that our annual environmental, social and governance report has been released, reflecting the significant progress we have made in all areas of our business. As I've said previously, ESG is woven into the fabric of our organization. It is a part of how we oversee our business, interact with our tenants and engage with our employees and communities. You can find our report on our website, and please refer to the ESG section of our MD&A for more details. As you can see, we are very active in enhancing value in our retail operations, prudent in our governance and strategic with our significant mixed-use development pipeline. We also take care of maintaining our conservative balance sheet and improving liquidity, which we did previously when increasing our operating line by $250 million to $750 million, increasing our unencumbered asset pool to $9.4 billion and raising $350 million in the quarter, which Peter will speak to in a few moments. Before that, let me pass the call over to Rudy for some operational highlights. Rudy?

Thanks, Mitch, and good afternoon, everyone. The third quarter was a stand out in virtually every meaningful operating metric. Tenant demand for more locations continues delivering high-quality income across all provinces and to a collective 98.5% occupancy. With a national platform, SmartCentres allows any tenant to easily double or triple down on locations being sought. It starts with 1 conversation and 1 lease template, whereby SmartCentres is able to accommodate over time, 40 LCBOs, more than 50 TJX banners, over 60 Dollarama stores, over 70 Canadian Tire banners, 100 Walmart stores and over 120 of the 5 largest banks in the country. It is in these deep-rooted relationships developed over decades that SmartCentres provide the highest quality, high-traffic value-oriented centers that align landlord, tenants and their Canadian consumer. The accelerating pace of new tenant demand also adds to the great existing tenant mix to improving cash collections and even higher occupancy, as you've seen. As Mitch mentioned earlier, in responding to the needs of each community, SmartCentres has been adding uses such as medical, daycare, entertainment, health and beauty, fitness and pet stores and more, providing that convenient one-stop place to shop. With the strong demand for retail across the country, we've executed nearly 187,000 square feet of deals in the quarter, filling small and large vacancies, signed 220,000 square feet of deals for new build retail year-to-date. And we have extended over 80% of our 5 million square feet of lease maturities in 2024 with rental lifts at 8.9%, excluding anchors, 6.1% all in. Our headline grocers, Loblaws, Sobeys and Metro with their banners number over 50 in our portfolio and more new construction is planned for these names. The level of activity not only drives sustainable growth in rents, but enhances our flexibility and improves our overall covenant and cash flow. Our premium outlets continue to excel in driving traffic and improving sales, leading to strong growth in EBITDA and value to the REIT. Tenant sales has our Toronto Premium Outlets in the top 3 highest performers in Canada and remains an outperformer in Simon's portfolio. Our Toronto and Montreal locations remain 100% leased with rental lifts and EBITDA continuing to come in ahead of budget. These affordable luxury centers and world-class brands continue to dominate in their segment. Overall, the REIT is strengthening its covenant and value with strong rental lifts, NOI growth, cash collections, tenant retention while delivering a broader array of tenants to meet the evolving need of each community. We expect this momentum to continue into Q4 and well into 2025. With that, I'd like to turn it over to Peter. Peter?

Thanks, Rudy. The financial results for the third quarter once again reflect the strong performance of our core retail business with improved occupancy and continued contribution from our mixed-use development portfolio. For the 3 months ended September 30, 2024, net operating income increased by $5 million or 3.4% from the same quarter last year, largely due to an increase in base rents partially offset by a decrease in condo and townhome closings relative to the same quarter last year. FFO per fully diluted unit was $0.71 and compared to $0.55 in the comparable quarter a year earlier. The increase is primarily due to the fair value adjustment on our total return swap, resulting from an increase in the unit price as well as from higher rental revenue, partially offset by higher interest expense. During Q3, we also delivered and closed on 47 units of our Vaughan Northwest townhomes project. FFO with adjustments, which excludes both the townhome profits and the TRS was $0.53 per unit for the third quarter compared to $0.54 a year earlier. The decrease of $0.01 was primarily due to an increase in net interest expense, largely because we are no longer capitalizing interest on our Millway apartment project. 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 September 30, 2024, was 75.2% or 90% for the trailing 12 months. Adjusted debt to adjusted EBITDA was 9.8x for the rolling 12-month period ending in Q3, which is a slight decrease from 9.9x last quarter, primarily due to the reduction in TRS debt and the repayment of debt from the town home closings. Our debt to aggregate assets ratio was 43.6% at the end of the quarter, a 10 basis point decrease compared to last quarter. Our unencumbered asset pool increased by approximately $60 million to $9.4 billion in Q3 as compared to last quarter. Unsecured debt, including our share of equity accounted investments, was $4.4 billion virtually unchanged from the prior quarter and represents approximately 82% of our total debt of $5.4 billion. From a liquidity perspective, we remain comfortable with our current liquidity position. As of September 30, we have approximately $863 million of liquidity and which includes both cash on hand and undrawn credit facilities, but it excludes any accordion features. During the quarter, as we mentioned on the Q2 call, we increased our liquidity through the issuance of $350 million of Series AA senior unsecured debentures. The proceeds from this offering were used to repay our Series O debentures upon their maturity and to repay higher interest floating rate debt on our operating lines. The weighted average term to maturity of our debt, including debt on equity accounted investments is 3.2 years. Our weighted average interest rate was 4.09%, a decrease of 16 basis points from the prior quarter. Our debt ladder remains conservatively structured where the most significant aggregate maturities are in 2025 and 2027. Approximately 85% of our debt is at fixed interest rates. Just before we open the call up to questions, I want to touch briefly on our development projects that are underway. Once again, we have updated our MD&A disclosure focusing on those development projects that are currently under construction. As you can see on Page 17, there were 8 projects under construction at the end of Q3, unchanged from last quarter. The self-storage facility in Stoney Creek is now open as of early Q4, and with the other 3 self-storage projects scheduled to open in 2025. So that Stoney Creek project will come off the list next quarter. The REIT's total share of capital costs on these 8 development projects is approximately $482 million with the estimated cost to complete standing at $275 million. Finally, we also entered into a construction facility for the 224,000 square foot retail project anchored by Canadian Tire and Leaside that Mitch described earlier. That construction facility totals $135 million, and it was undrawn at quarter end. And with that, we would be pleased to take your questions. Operator, can we have the first question on the line, please.

[Operator Instructions] The first question is from Michael Markidis from BMO Capital Markets.

Thank you, operator. Good afternoon, everybody. Congrats on a good quarter and the zoning achievement in BC. Maybe just touching on that zoning achievement. Mitch, you made a comment about developing and you've been very disciplined in terms of when market conditions align. Curious as to your thoughts about when conditions may align to ramp up development, whether it be via the putting into production residential development or actually selling some.

Yes. I mean I think it's better than it was last quarter, and last quarter was a little better than the quarter before. But it's not there yet. I guess the direction is positive. It's hard to predict when the market conditions might warrant considering going ahead with any sizable deal. Certainly, we might be a little more conservative than a private developer, condo developer might jump in before us. So we might be able to -- we might see some potential sales of this density sooner than maybe we would commence. But if I had to guess, I mean, second quarter next year could see potentially some action or if we're lucky, maybe middle to the end of first quarter next year, hopefully. But as I say, it's just the new election, there's going to be a lot of things going on that are going to influence the variables in the market.

Okay. No. So I mean, tough to predict, obviously, but things are slowly getting -- moving in the right direction. Sounds good. Okay. One of the things we've heard, the fundamentals in retail are great. It's showing up in your operating stats and your same-property NOI growth this quarter. Just curious on your -- you note the rental spreads that you're getting on the non-anchor space. On this leasing, one of the things we heard about is people pushing maybe for a little bit more in terms of the contractual increases throughout the term of the lease. Is that something that you guys have been executing and successful with?

I'm not sure what you meant by that. Can you say that another way?

Yes. Sorry, that was a little drawn out question for sure. So I guess just on the non-anchor leasing you're doing, are you able to push for higher increases throughout the duration of those leases, just given the strengthening fundamentals?

I'll start and then Rudy, you can weigh in. But I mean, we cannot increase rents. Obviously, most of our rents are fixed. And we really -- we don't negotiate or try to open negotiation on rents that are fixed. When I say fixed, I mean, they have built-in bumps, but they're built-in bumps most of the time. But at the end of terms, which we're going to see more and more of because of the -- it just so happens that the age of our retail and our leases is such that we're getting into extension terms, more and more of our leases will get into extension terms where a lot of them are at market. And so we have historically been kind of the -- or tried to be profitable at the lowest possible rent. And that's part of the formula of being aligned with the Canadian consumer. But at the same time, making good returns. But they're actually now somewhat outdated. So a lot of those leases that are coming up that are being extended, and we do have a high percentage of extensions because our locations are in good locations and they're now infill locations in a lot of them. Those rents are outdated and fair market rent is not just what it used to be a dollar, a couple of dollars. It's more than that now. So interestingly, you're starting to see our portfolio start to turn over and us reset our rents to the new market, the new market being in many -- most all the markets across the country with a few exceptions. Rudy, do you want to add some color to that?

Yes. I'm not sure, Mitchell I could add more to that than you just said. But the only thing that's different is there's not a lot of new retail centers being built in the country. And therefore, -- the tenants that are demanding more space want to be in Walmart-anchored centers because Walmart is such a great driver of traffic and they're doing so well that it makes the demand for our space, and you see it in the occupancy so much better. And like Mitch said, we started off years and years ago in this value-oriented space, not trying to get the highest rent we can. It's still not the highest rent we're always seeking. We're trying to be reasonable, but the lists are looking good because of the solid demand and improving -- and the improvement in what people view as what a great location and a great mix of tenants we have already. So the infill nature of it.

Yes, for sure. Okay. And if I understand you correctly then, I mean, I think we're all familiar with the nature of the Walmart leases, but it sounds like you're alluding to maybe non-anchor what you don't consider to be necessarily anchor space that had fixed rate renewal options for maybe several renewal terms and those are starting to burn off. Is that fair?

Yes. I mean, it depends, but lots of those anchor tenant deals are going -- anchor tenant deals go to market as well at some point. And they do move the needle, and we've got more and more of those coming up.

Okay. Great. Last one for me before I turn it back. Just Peter, on the Millway, you noted the dilution from the no way, no longer being capitalized. Can you just remind us what type of debt is on that asset now that it's stabilized? Is there a takeout opportunity that could be accretive for you going forward?

Absolutely. So we're working through some CMHC financing to take out the construction financing. That will be -- I would expect that will be a Q1 2025 item.

I'll add to that as well that we are anticipating that to be a positive accretive refinancing.

The next question is from Lorne Kalmar from Desjardins Capital Markets.

I just want to circle back to something I believe Rudy mentioned talking about building space for grocers. I was wondering if you could give us a little bit more color on that program? And if it hinges on the potential removal of exclusivity clauses from tenant leases or not?

I'll cover that one. In terms of the grocery, the shop -- the food store program, it does have some -- I mean it's got momentum with us. We're doing a number of food store deals that will be built from scratch, ground up construction. And I'd say some of them have the situation that you're referring to where somebody could potentially -- somebody's approval might be required, somebody who might have a restriction. So I'll just answer that by saying it does appear to -- I mean, there's movement both on the food store side and on the policy governmental side to change food restrictions. Mostly, it's driven by food. There are restrictions with other types of users. So I would say sometime in the next year or 2, there's going to be more competition in food. And you'll see that on our sites for sure. And I'll just go back to the first program. It's -- for us, it's going to move the needle, the number of food store deals that we've got in negotiation right now.

Okay. And then would these be at like would these be at centers that already have a Walmart with food or they would be not anchored.

Both. I mean there's negotiations going on, let's just say, in Orleans. We don't have a food store. We have a shopping center across the road from this center with food, but not on this property. We have negotiations going on in some markets where, yes, there's Walmart, but we're anticipating some of the changes that you mentioned, but there's just a couple of those, and we'll see how that goes. So -- and there's -- so I would say the majority of them actually don't have the restriction issue, but some do.

Okay. And then just quickly on the closings. It looked like you guys did pretty well this quarter. Obviously, there's been concerns around the closing side of things, right or wrongly, I'm just wondering if through the process so far, if you've seen an elevated rate of buyers not closing versus historical or if it's kind of normal course?

It's not normal course, I would say. There's no such normal course. There's no history of no closings in the last 10 years. And there used to be -- I don't know how old you are, but I can assure you, there was a period where it was not unusual for buyers not to close. I think we are entering an era or whatnot, a period where you'll see buyers not closing. It's just going to depend whereas we have not seen that for a long time.

Okay. And then maybe just one really quick 1 for Peter. Is there anything onetime in nature expected in NOI for 4Q? Or we've got a pretty good run rate here on a year-to-date basis?

Yes. On a year-to-date basis, it's a pretty good run rate, we think.

All right. The next question is from Dean Wilkinson from CIBC World Markets.

First one for Peter maybe. On the $1.7 billion of assets classified as PUD, how much debt would be against that number?

Well, so we don't break out exactly what's on the PUD versus what's on the income-producing portfolio, Dean. And as you know, most of our debt is unsecured. And so it really looks to the entire portfolio across both IPP and PUD. When we acquired the VMC West Lands, we did incur some debt specifically on that, as you may recall, that was back in 2021. But most of it is part of the unsecured portfolio.

Got it. So where I'm going with it is, I look at the stock price, I look at the balance sheet and at $25 and a [ 6% cap ], it's effectively zeroing out the PUD. So not only are you not getting credit for the zoning and the upside, you're probably not getting credit for work that you've already done. One, do you think that it's just completing these projects and then having them flip over to IPP that we'll see the realization of the value? And then two, if that's the case, would it have you maybe rethink how much of the balance sheet you're willing to put into that bucket if the market is not going to reflect that value?

I'm going to defer to Mitch on that.

I mean where do we begin? This is -- I mean, it's almost like if you hadn't said that in the form of a question, that would be just its own stand-alone statement. So yes, I mean, there's a lot of value in the company. That's the bottom line. We've been saying it for a long time. It will eventually come out in a wash. But whether you look at it like you did, which is one right way to look at it or you look at it other ways, there's a lot of value and real estate people would recognize it if you looked at the permissions like you said, and you look at the PUD and you look at our stock price and you look at the cap rate, I mean, it's like 0 for -- for density and for most of our PUD. So we know what to do with all that. We know what to do with the density. We know what to do with PUD. So we're going to do it, and it will come out in the wash.

Yes, I agree. That's why you're there and I'm here.

The next question is from Gaurav Mathur from Green Street.

Just given the debt maturities that are coming due in 2025, could you share some light on where the secured versus unsecured financing rates would be?

Yes. So we have 2 debentures, 2 unsecured debentures that mature in 2025, Gaurav. The first one is at the beginning of the year, it's relatively small. It's $160 million, if I recall correctly. And the second one is at the back end of the year, very late in the year, December, so over a year from now. Spreads have been tightening. Rates have been -- we've seen 3 rate cuts over the last 3 or 4 months. And so rates have been improving. We certainly haven't made a decision today about whether we would refinance those at what term if it's 3-, 5-, 7-, 10-year terms. That's something that we look at kind of opportunistically based on the rates at the time of those maturities and what fits in well with our existing debt ladder. But rates have continued to improve. And I think the -- most of the bank economists that we follow would suggest that there are future rate cuts to come between now and those upcoming maturities. And so we'd expect them to continue to improve, but I can't tell you today what the rates are likely to be when those maturities actually happen. On the secured side, we have seen very strong demand from all of our lenders on retail product. There, we tend to go a little bit longer. We tend to go in the 7- to 10-year terms. And we always -- as you know, most of our portfolio is unsecured, but we always have small centers, particularly those where we have partners where we continue to access the secured debt market. And as I say, there's been strong lender appetite for those. And so we would expect attractive rates. But again, it will be a determination at the time of those maturities as to where we are in the market and what rates look like at the time.

Okay. Perfect. And I guess just switching gears here towards dispositions. We've talked about it in the past where you've talked about disposing land with permission. I'm just getting -- just wondering, the rate environment goes lower. Has that improved market conditions in any manner?

Yes. Yes, it has. But yes, it's still not there. We're not sellers at prices that we think are just not justified -- there's an overcorrection, if you will, on pricing right now for buying, but at least there's a market now. So it's improving. Hopefully, we'll get there. We're not going to hold out for anything like the peak. We certainly don't see that in the foreseeable future. But we're not there yet pricing-wise for us to sell this density. So -- but it will come. And when it does, the difference between now and 6 months or 12 months or whatever it may be, will it justifies waiting in my opinion.

Okay. And then just as a follow-up. In that time period, is there any part of the portfolio that is attractive from a noncore perspective and could be potentially disposed off?

Look, we have a network of shopping centers. Like they don't operate like you drive by 1 and 2 and you sort of maybe -- but there is a world like that food and general merchandise and with the needs and other basics that is intricately weaved together that our network creates additional value as a result of our network. So we don't just look at selling a single asset as selling a single asset. it's part of the ecosystem that is our positioning in our space in this country. So that is also not, of course, reflected in our unit price. So it would have to be very compelling for us to sell one of our centers, but it could happen. It does happen sometimes. And I'm being conservative in my reflection of the timing of selling off density. But that's real estate. I mean, real estate is a long-term game. And so moving real estate isn't something -- or let's put it this way. If you want to move real estate quickly, you are going to be doing it at a severe discount. So I do see and we do see capital raising happening. We see it -- see the light now. I say a year ago, there wasn't really much light. We just don't know what form it's going to take, but we're open to it. We're considering things all the time. But we're not worried because in the meantime, we have very strong tenants, very strong IPP and interest rates are moving in our direction, and there's a few things finally moving in our direction to say nothing of rental rates, et cetera, et cetera. So there's no -- there's -- we're going to do this in a measured and proper way, but we will get there.

The next question is from Mario Saric from Scotia Capital.

Maybe just summarizing the disposition discussion so far. I think last quarter, highlighted a disposition target of $250 million to $350 million timing-wise, more likely in '25 and '24. It sounds to me like that's still a fair assessment of your plans in terms of quantum and timing and most of it would be residential land. Is that fair?

Yes. I mean it's going to be landed both because probably the land is both. It's the permissions on the retail land that we have. That's some of our most attractive residential land is actually within our shopping centers. But I would say that timing is still -- look, when it happens, when it moves, it moves across the board. So we'll be able to execute on, hopefully, that kind of order of magnitude. So it could go from 0 to a lot. That's real estate. So hopefully, it will be in 2025-ish, 2025, 2026, we will be able to move some land and to the extent of those $250 million, $350 million sort of thing.

Got it. And what do you see as the governor in terms of the quantum? Presumably pricing would be one. But what would incentivize you to instead of $250 million to $350 million go up much higher than that if pricing is pretty strong.

I'd tell you, I'm just being conservative with you guys. I mean if the market -- there's an appetite and we can do more, we're not -- we don't have to build all our residential. I mean we've got, in a sense, kind of an infinite amount of density, right? I mean if you think about it, if we sold 5 million square feet, we'd still have 45 million or even 50 million square feet. And we're good at -- that's our thing. We're comfortable in the land use world. So we can, generally speaking, over time, create more. Our locations continue to get better. So it's a bit of a renewable resource for us. So we're not going to hold back. It's not like, wow, nothing for ourselves to develop. We do want to end up with rental residential, we want that to be part of our shopping centers, it's good for our shopping centers, it renews our shopping centers. It renews our shopping center, it slowly but surely creates a community within your shopping center. It's part of how we see the future. So it's good for the retail and vice versa. So we want to end up with that. I mean we get some of that when we sell and someone builds a condo. But I would say we're not going to be shy. If the market is big, I mean, not because of our debt metrics and our debt-to-EBITDA necessarily, we want to bring that down, and we're very focused on it. But we may just do it because it's going to make doing our rental residential program that much more accretive and attractive. So it could be bigger. But I think the minimum that would sort of make a difference with us would be $250 million, ideally $350 million, but could be more for sure.

And to your point on the residential, I personally see that firsthand [indiscernible] done that almost every day. So I can appreciate the relevance of it to the retail for sure. Just...

Multiply that by 100 locations. And that's why we're -- behooves us our unit price, but it is what it is.

Fair enough. So just on the residential, Mitch, you've been in retail for a very long time. And one topic of conversation, not just for residential, but I think for retail in the past month that's come up has just been the federal government's potential immigration policy change, which is aimed to effectively kill population growth in the country for the next 2 years. I'd be curious to hear what your thoughts are on the matter. Like if the government does go through with it, is there an impact to SmartCentres portfolio or the broader retail landscape in general? And coming back to the residential land market or residential in general, are there implications in terms of land values if population growth after a period of some pretty strong growth?

No, I think land values were unjustified. Land values being density values were unjustified. And I don't think they'll come back, and I hope they don't come back, and we should all hope they don't come back. So I do think we're going to see trades at more -- at lower prices, which is fine. In our case, we're getting 0 for it right now. And it doesn't cost us that much to do. We're not buying land. We're just using our -- it's mostly consulting fees and intellectual capital. I mean. So it's quite accretive to us. In terms of demand, I also think there's going to be, in a sense, more supply than demand across the country crudely. But I think if you've got -- and always, I think, has been true, good locations, mass transit, amenities, changing demographics for whatever that may mean, people just moving around, you're in prosperous parts of the country. I think there will be demand, enough demand to absorb whatever percentage of our density. We've got 50 million feet and we built -- easy math, if we built on average 1 million square feet a year, that's 50 years. I mean it's a concept like we can't think in terms of 50 years from now. But it would move the needle. I think at Transit City, we built our share of 1.5 million square feet, and you saw what it did. And I think we will build on average more than 1 million square feet a year of residential on average, when it kicks in just because our locations are good, we're on mass transit, we're in evolving areas, prosperous areas, we've got amenities. So if we build on average over the next 20 years, 1 million -- 1 million to 2 million square feet a year of residential, and there might be some maybe mixing in there, some selling of that density. I think that wouldn't be a bad thing in terms of -- just in terms of growth and earnings and whatnot for the company, say nothing of evolving our shopping centers.

Got it. And just maybe on the retail side, like retail GLA per capita has been coming down quite a bit because of the population growth and virtually no new supply. Do you see -- like again, if the population growth stall, do you see any impact to your retail occupancy? Or is it simply that because there's no new supply coming in, you expect your retail occupancy to be stable despite slower population growth?

Look, we were high occupancy. We were probably 99% occupancy for 10 years going back 10 years ago, long before we opened -- long before immigration policies changed to increase population size. And obviously, because people don't shop, they shop where they shop for all kinds of reasons. And when you're strategically located, you've got certain tenants that are -- destinations, that is a huge part of when your -- over to your occupancy levels. But I see -- notwithstanding the growth in retail right now, I think retail square footage per capita will actually -- I mean, I think it could go down even further. It may go down even further. It's going to be interesting to see. I don't think it's really going to go up and its way down, retail per capita from where it was 10, 15 years ago. Nobody built retail in the last 10, 15 years for all types of purposes. And anyone who owned any decently located land that could potentially be retail, built residential. And a lot of it -- well, some of it was built on retail lands. And of course, the retailers weren't growing. They were worried about e-commerce and then the pandemic and the countries kept growing. We are way down in terms of retail per square foot. Now my big asterisks is how much retail gets built on the ground floor of high-rise, which I don't know how much of that we can count. But even if you count that, I don't know. I think retail per capita is going to stay the same or go down and its way down, which is good. And I think that who controls how much of that are very sound retailers because we're driven by retail demand. And so I think the Walmarts and the Loblaws and the Costcos of the world are very sober about how much square footage they want. And of course, their data is daily and they're watching population growth and whatnot. So I think we're in pretty good shape. I don't want to be naive or too optimistic, but I think from a retail landlord perspective, I think we're in good shape, all of us, and I think we're particularly as, I think, we're very well positioned for the economic reality of Canadian. So yes, I don't want to be too optimistic, but I'm kind of cautiously optimistic.

It's a good point on the high occupancy [indiscernible] population surge. So thank you for that.

The next question is from Matt Kornack from National Bank Financial.

Just quickly on the blended leasing spreads and spreads ex anchor. You tend to report the bulk of it in Q1. And I guess we've kind of seen it hang in that 6% and 8%, respectively, range for this year. Can you give us a sense as to what 2025 looks like? Are you expecting to see an acceleration kind of on both of those metrics and on the blend generally?

Rudy?

I do think that this momentum that has started and the demand we're seeing for not only filling space, and you'll see our occupancy, I think, continuing to grow. As Mitch mentioned, we were at 99% for over a decade plus. I think you'll see that. Those are driving rates up. I think that is impacting certainly the lease extensions with tenants realizing what's happening in the market. And a full center continues to want to be full with tenants standing in line, waiting to come in when there's space to come in or upgrading the quality of that income in our case, where we can because there may be tenants who aren't doing as well. So yes, I see 2025 as building on what we're looking at now in Q3 and Q4, certainly.

Okay. I appreciate that. And then maybe quickly, Mitch, we're coming off a pretty historic condo development boom and a lot of that capital, notwithstanding, obviously, your comment on whether all of it closes, but presumably most of it will close. A lot of that capital is coming back to developers. When you discuss with kind of your peers on the development front, have they given you a sense as to what they're going to do with all of that capital when it comes back to them? And is there a position to kind of rebuild land banks and expand?

I would say private developers, I used to be one. I mean, and early in my career, I did get -- I did go through some difficult years because inevitably, you sort of almost have to, by definition, extend yourself. So I have a feeling a lot of the capital that's still coming to developers is going to go towards commitments they've already made elsewhere, other debt, which is fine. And then, of course, at some point, they'll start buying again. I don't think there's too many private developers out there -- developers sitting there with no properties that they bought at the peak or near the peak and just waiting for it all to roll in. I mean, generally speaking, the successful developers go on and buy another and buy another. So I guess they're going to have some cash at the end of the day and then of course, they'll start to buy again and buy it maybe a little bit more cautiously. My feeling is they're just not from people that I know, they're just not quite in the mood. To sell to them right now, you'd have to sell at a very low price and probably give them terms. But it might not be long before at least 6 months, they'll be back to buying at something more reasonable, but they'll be back.

The next question is from Pammi Bir from RBC Capital Markets.

Just hopefully, a couple of quick ones for me. Just on the -- maybe building on the question around for 2025. Look, I mean, you're obviously very well occupied. The renewal spreads have been moving in the right direction. Is it reasonable to perhaps think that for next year, the organic growth trajectory could be in that 3% range? Or is that maybe a bit optimistic just given where occupancy already is?

I don't know, Peter or Rudy, do you want to take a shot at that?

Pammi, you're asking about same property, right?

Correct. Yes.

Yes. I mean the -- I think the run rate is looking -- like we're looking at a run rate that should be in the 3% to 5% range. Obviously, the NOI has a lot of stuff built into it, including recoveries, step-ups that Mitch mentioned earlier, where there's natural steps in the leasing, the tenant demand, percentage rent, all kinds of things, recoveries are built into the NOI. So I think the 3% to 5% range is probably a good run rate for us.

Okay. Well, certainly higher than what the company has put up over the long term. So that's encouraging. In terms of just on coming back to Q3, if I think back to last quarter, I think there was maybe a bit of a drag from the timing of recoveries. Was Q3 at all, I guess, close to 5% that you put up on same-property NOI this quarter, was there any sort of catch-up in recoveries maybe just got -- came through in Q3 and then maybe that drops off or you don't see that catch-up or maybe it drops off a little bit in Q4? Or was Q3 a pretty clean quarter?

I'd say yes, yes and yes to everything you just said. We are running everything with recoveries based on actuals. And so you might see a tiny bit of variability, but the run rate really looks good in terms of what you should be using. So if you're using that run rate, I think you're fine. But yes, there's going to be a little bit of seasonality to it because we are using actual cost to do our recoveries. So the tiny bit of seasonality is there. But for the year, I think you're fine with our run rate.

Okay. Last one, I promise. Just coming back to the comments around how you structure leases with -- from a renewal standpoint, aside from Walmart, which is flat, are you doing any deals where the renewal -- where the tenant has a renewal option at a fixed rate or a flat rate?

Yes. absolutely.

Yes.

We have lots of them, lots of bumps. I mean it's normal. But we have lots that don't, lots that have -- like a normal -- we deal with these, we're focused on certain type of tenants. So we give them fixed renewal. We give them extensions at fixed rates, which are bumps. But at some point, we can't get comfortable after a certain number of extensions. So we go to market, we say fair market value. We have a lot of those coming up. But we have a lot of ones that are at fixed rates. And we have some where the lease is actually up. It's over. They have no extensions. So obviously, it goes to market. So we've got more and more of those because of just the way it is. Like our bread and butter non-anchor tenant deal is probably 10 years with 1 or 2, 5-year options. So if you think about it, any deal we did like 20 years ago or something is like out of term. And then we have some larger anchors that were -- maybe they were 10 or 15 years with 2- or 3-, 5-year options. So some of those are 30 years or even 35 years are coming up. And so that's -- and the locations have changed exponentially. It's not just normal bump. So we've got a long run of that going, I think, for the foreseeable future, together with a lot of our locations are being -- are getting better, not just because of us and what we're doing, but because of what everybody is doing around us. So I think we're going to see some of that, and that's when real estate really starts to work kind of for you instead of you working for it. And we've got more and more of that coming up the road. But they're all over the map, sorry, just giving you a little bit more color.

The final question is from Sam Damiani from TD Securities.

I'll try and make this quick given that we're past the hour mark. I just want to drill in a little bit deeper on the property NOI growth coming in at 5% this quarter, which I think as someone else noted, was kind of a high watermark outside the pandemic for SmartCentres. Does that stat for the REIT include expansions or intensifications? Or is that a same-store, same space metric?

Yes, the latter, Sam, no intensification, no -- nothing in there other than same property, same store. So right out of there. I think as you've seen the momentum that was building and it hit mostly in the quarter, obviously, and it may hit again next quarter is that the strong, strong demand coming from food and coming from new builds, asking us to build more into the site, the rents that's driving is driving the rents on the market for the NOI. So it's not construction that's driving it, but the higher demand is driving higher rents on our negotiation. And you've seen with the extensions, it's near double digit without anchors. So that's coming out in what we're seeing. And of course, it also -- we are in the third quarter, it will pick up things that are all the other parts, which is better recoveries, step-ups like Mitch talked about earlier and so on. So percentage rent and all of that factoring into the same property.

That's helpful. And Rudy, your comments earlier were also helpful. And I think one of the sort of factors you mentioned was recoveries, which for this quarter were a little bit higher than, I think, last quarter on a ratio basis. So again, just trying to, I guess, reconcile the sort of mid- to upper single-digit leasing spreads, the amount of space that you roll every year, occupancy is basically peaking. You'll have easier comps, I guess, early next year. But it's just hard to mathematically back into a 5% or a 3% to 5%, just given the operating metrics that we see. So the question is, what else is at play? You mentioned recoveries. Is it new leasing? I don't think that's a metric that you guys disclosed like if a space went vacant that was paying -- getting $12 maybe a year ago and you relet it for $18, does that get into your operating metrics? I don't think it does. Or was there COVID relief that's now coming off for the first time, and that's a big tailwind for a couple of years kind of thing? Like is there what else -- what other factors might be at play?

Yes. It's certainly not new construction, but a little bit of the latter part of the COVID relief may be coming in. But what's happened is, as you know, when we're intensifying our sites, like we've leased near 300,000 square feet of space that's going to add to the base of our portfolio. And again, that's driving other tenants to see what the rents are coming in for new build construction, which is very good market rents. And like Mitch mentioned also earlier, we aren't a hard driving trying to get the maximum rent out of tenants. Like we're a value-oriented space, and we want value for -- in our rents, too. So -- but when tenants are driving demand and the competition for the same space when there is no vacancy or very limited vacancy and they want to be in certain spaces, what it forces us to do is look at how we can improve the quality of that income where we can move some things around. So there may be a little bit of shuffling around the depth in the portfolio. So I think you will see a little bit of that same-property NOI growth continuing for a bit as this momentum keeps building. So I don't think it will be unusual at all to see us in that range.

I guess just to, I guess, wrap it up, and you sort of said 3% to 5% is possible or sustainable through 2025. Like what would change that beyond 2025? Is there some kind of one-time or temporary tailwind that's helping 2025 that might not repeat itself in future years? Or is the 3% to 5% a long-term sustainable pace, assuming a steady-state situation?

Well, I want to make sure I have the same answer as Mitch on that one. But my answer to that would be, and Mitch may want to chime in as well on this one. We have a lot of land still remaining in our existing shopping centers and land that we can still build retail on, land we can build with intensification. So I think as we -- we're not out buying new shopping centers, so we're -- and the market generally isn't doing that. So you can see that the rise in the quality of our income is really driving a lot of that. And I think that is only going to beget more of the same as there's a push to higher quality tenants in terms of 90% -- near 90% of our tenants are national or regional already. So we're trying to push that up and keep the tenant covenant quality as high as possible. So that will continue. I mean nothing will continue forever, but that will -- I think that will continue for a bit. So as far as we can see, based on the current demand we're seeing and the demand for new space, meaning new build space within a shopping center continuing and improving the mix, all of that, when you add it together, still looks very positive. Yes.

There are no further questions in the queue.

Okay. Well, thank you for participating in our Q3 analyst call. Please feel free, of course, to reach out to any of us if you have any further questions. And have a great rest of your day. Thank you.

Thank you.

Ladies and gentlemen, this concludes the SmartCentres REIT Q3 2024 Conference Call. Thank you for your participation, and have a nice day.