First Capital Real Estate Investment Trust (FCXXF) CEO Adam Paul on Q4 2021 Results – Earnings Call Transcript

First Capital Real Estate Investment Trust (OTC:FCXXF) Q4 2021 Results Conference Call February 9, 2022 2:00 PM ET

Company Participants

Alison Harnick – SVP, General Counsel & Corporate Secretary

Adam Paul – President & Chief Executive Officer

Neil Downey – Chief Financial Officer and EVP-Enterprise Strategies

Jordan Robins – Chief Operating Officer

Conference Call Participants

Mario Saric – Scotia Capital

Sam Damiani – TD Securities

Jenny Ma – BMO Capital Markets

Tal Woolley – National Bank Financial

Pammi Bir – RBC Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the First Capital REIT’s Q4 Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Alison. Please proceed with your presentation.

Alison Harnick

Thank you, and good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today’s call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in our various securities filings, including our MD&A for the year ended December 31, 2021, and our current AIF, which are available on SEDAR and our website.

These forward-looking statements are made as of today’s date, and except as required by securities law, we undertake no obligation to publicly update or revise any such statements. During today’s call, we will also be referencing certain financial measures that are non-IFRS measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the REIT’s performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this call.

I’ll now turn the call over to Adam.

Adam Paul

Okay. Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today for our year-end conference call.

The quality of our portfolio continued to be demonstrated throughout 2021 as our properties not only show stability and resiliency but also very good momentum, especially leasing and disposition transactions. Last quarter, we talked about the 2 primary components of our portfolio, the exceptionally strong grocery-anchored centers predominantly situated in top-tier suburban neighborhoods and mixed-use properties in Canada’s super urban neighborhoods. We headed into 2022 with solid fundamentals and momentum across both property types with values in the private markets having never been higher for these types of assets.

We, of course, will cover our Q4 and annual results. But before we do, I think it’s important to step back as we view the results of our strategy and activities through a lens that spans more than any given quarter or year for that matter. Since 2019 through 2021, we have been more proactive than normal improving the quality of our portfolio and positioning FCR for the future. This resulted in $1.5 billion or 15% of our portfolio being sold during that time.

We were very deliberate in the properties we sold. We exited entire markets such as Québec City, Windsor, Trois-Rivieres, Sherbrooke, Red Deer and Airdrie to name just a few. Virtually, our entire portfolio is now located in Canada’s largest cities. In Ottawa, where we expect growth, but not at the same level as our other markets such as Toronto, Montreal or Vancouver, we executed a strategy that reduced our invested capital without compromising our operating scale. We did this by selling 50% nonmanaging interest to compatible institutional partners.

This increases our returns on invested capital through the fee income we earn from our partners and frees up capital for more productive uses. We feel this is a more efficient way of maximizing our exposure to our highest growth properties and neighborhoods without compromising the benefits of scale. During that time, we also invested approximately $1 billion into top-tier assets and markets through acquisitions, developments and CapEx. The cumulative impact of these activities resulted in a 25% churn of the portfolio. This is very significant, especially on a longer-term basis as our improved asset base has even more powerful earnings potential in Canada’s most sought after markets and neighborhoods. This took a lot of work by our team, and it is a major differentiating factor between our portfolio and those of our peers.

You can also see the impact of our investment strategy on our demographic metrics. The average population density within 5 kilometers of the $1.5 billion of properties sold over the last 3 years is 167,000 people, a good density number, but well below FCR’s average.

Turning to the $1 billion we invested during that same period. Those properties have nearly tripled the density at 483,000 people. FCR continues to be positioned as the clear and distant leader amongst its peers with respect to this metric with a portfolio of density number that exceeds 300,000 people on average today. We’re very pleased with our portfolio today, and we have reached our initial disposition target of $1.5 billion. Accordingly, we expect our disposition activities to be far more balanced in 2022 and even more opportunistic in terms of the pricing we require to transact.

Now focusing on 2021. Our healthy operating and financial results were underpinned by our strategic focus on high-quality, grocery-anchored and mixed-use properties in neighborhoods with strong demographics. Notwithstanding numerous waves of disruption, demand consistently remains strong for our portfolio. Through 2021, we completed a healthy 2.9 million square feet of lease transactions, including 2.1 million square feet of renewals at a healthy average rent increase of 8.6%. This, together with contractual rent steps and higher rents on new leases for formerly vacant space, contributed to an in-place average rental rate at year-end of $22.42 per square foot.

This is an all-time high, comping against Q3’s all-time high, which comped against Q2’s all-time high and so on. In fact, the average in-place rental rate for FCR’s portfolio has increased every single quarter for 22 quarters in a row now.

This demand has continued to allow us to be particular about the types of tenants in our properties, resulting in a tenant mix that better serves the communities in which we operate with stronger covenants. Jordie will cover our 2021 investment activities, which were robust, strategic and value creating, perhaps none more so than our Christie Cookie transaction this year. Throughout 2021, we also made significant progress on our ESG priorities, further embedding environmental, social and governance principles into our business and culture.

Some highlights of the year include some first. First Capital was the first Canadian REIT to be a signatory for the task force on climate-related financial disclosures, and we are committed to establishing a concrete plan to align with the TCFD recommendations. FCR was the first Canadian retail REIT to achieve the WELL Health-Safety Rating for facility operations and management from the International WELL Building Institute. We improved our GRESB score and ranked #1 in our retail peer group this year. We also met or exceeded our targets for decreased greenhouse gas emissions and energy consumption.

We completed our 5-year commitment set in 2016 to convert all of our exterior parking lot lighting to energy-efficient LED. And we incorporated sustainability-linked features into our main unsecured operating facility.

Turning to progress on our ED&I initiatives. Our employee-led EDI Council has made exceptional progress in such a short time. We have a clear vision and we have developed our 3-year ED&I action plan to direct and measure our efforts going forward. For the second consecutive year, we were honored to be listed in the Report on Business Magazine benchmark, Women Lead Here, a designation recognizing strong gender diversity metrics at the senior levels. And we were recognized as one of Canada’s Best Small to Medium Businesses and Greater Toronto’s Top 100 Employers for the third year in a row.

Our commitment to helping our neighborhoods thrive is embedded in our strategy and culture. As an extension of this, we launched the FCR Thriving Neighborhoods Foundation to support charitable initiatives that make a positive impact in the communities where we operate. This employee-led registered charity chose to focus on combating food and security and poverty its priority during 2021. I’m humble to say not only did the FCR team exceed their fundraising goal, but our trustees and our corporate friends and partners really stepped up. And together, we raised over $280,000 this fall, every penny of which was given to Second Harvest.

These funds equate to the rescue and redistribution of over 0.5 million meals for Canadians in need and avoided 2.9 million pounds of greenhouse gas emissions from what would otherwise be food waste. Talk about a win-win. I would like to personally thank our employees, Board members and corporate friends who helped make this happen.

We look forward to providing more updates on ESG in the future. In the meantime, the ESG section of our website is regularly updated and has a wealth of information on our activities.

And with that, I will now pass things over to Neil to cover our financial results for the fourth quarter and full year of 2021. Neil?

Neil Downey

Thank you, Adam, and good afternoon, everyone. For my prepared remarks today, I will be referring to Slide 6 of our quarterly conference call presentation. That presentation is available on our website at fcr.ca. Q4 2021 funds from operations was $60.8 million or $0.275 per unit. This is a decrease of 3% relative to Q4 2020’s $62.5 million, which equaled $0.283 on a per unit basis.

Selectively, our other gains, losses and expenses, or OGLE for short, tends to cause some periodic volatility in our reported FFO and our Q4 results were no exception.

As shown near the bottom of Slide 6, Q4 2021 results included aggregate other losses and expenses of $3.6 million versus other gains of $400,000 in the fourth quarter of 2020. This $4 million year-over-year swing in the OGLE accounts caused FCR $0.018 per unit or approximately 6 percentage points of growth in Q4 2021 FFO per unit. Overall, we believe our Q4 results were a strong finish to the year. If you return to the top of the slide, you can see that Q4 net operating income of $106.6 million increased by $400,000 from the prior year. The NOI increase was comprised of $3.2 million of same-property NOI growth, offset primarily by a $2.6 million increase in lost NOI related to disposition activity.

I’d also note that on a sequential basis, Q4 NOI increased by more than $2 million relative to Q3, and this was despite $165 million of property dispositions completed during the fourth quarter.

Q4 interest and other income of $4.2 million increased by approximately $600,000 year-on-year. While our fee revenues were down slightly, interest income increased by approximately 40% to $2.6 million as our portfolio of loans and advances receivable increased substantially from September 2021 through to year-end. Q4 G&A expenses of $7.3 million increased by $900,000 year-over-year. Much of the growth relates to the low comparable period or the Q4 2020 expense included the reversal of part of a variable compensation accrual.

Moving to Slide 7. We have a similar presentation for our 2021 annual results relative to full year 2020. Last year, FCR generated funds from operations of $251 million, representing a $29 million increase from $222 million in 2020. This equated to FFO per unit of $1.14, up from $1.01. 2021 NOI of $416 million increased by $15 million or 3.8%.

Growth was primarily driven by same-property NOI growth of $21 million, and non-same-property NOI growth of $2 million. These were offset by $7.8 million of lost NOI, again related to property dispositions.

2021 interest and other income of $11.8 million was $1.8 million lower than the prior year, principally due to lower average outstanding balances in our loans and mortgages receivable. 2021 interest expense of $154 million was $4.4 million lower than the prior year, primarily due to debt repayment, which I’ll touch upon a bit later. Last year’s G&A expenses of $32 million increased by $5.6 million year-over-year, due primarily to higher variable compensation, certain severance costs early in 2021 and the benefit of some wage subsidy support back in 2020.

As we approach the bottom of the page, I’ll draw your attention to the $17 million favorable change in the OGLE accounts in 2021 versus 2020. The swing factor here provided for — between $0.07 and $0.08 of growth in 2021 relative to 2020 in FFO per unit. The most significant contributor in this regard was $14.8 million of mark-to-market gains on marketable securities included in 2021. For those seeking additional detail on our OGLE accounts, they are provided on a Q4 and full year comparative basis on Slide 8.

Moving to some of our operating performance metrics. Beginning with Slide 9. As mentioned, Q4 same-property NOI growth was $3.2 million or plus 3.2%. This growth was driven primarily by rent escalations, higher variable revenues and lower bad debt expense. On the same-property basis, bad debt expense was $1 million in the fourth quarter of 2021 versus $2 million in the comparable quarter.

Same property lease termination fees were essentially 0 in each of the comparable periods.

Turning to Slide 10. The portfolio ended 2021 with an occupancy of 96.1%. This was up 20 basis points sequentially from Q3, which is significant in the face of a closure of an 83,000 square foot Walmart store at Deer Valley Marketplace, Calgary in October. In its own right, this closure equated to 40 basis points of portfolio vacancy. Overall, FCR’s occupancy was very steady throughout 2021. In the near term, we expect lower portfolio occupancy.

In Northeast Toronto, at our 476,000-square foot Cedar Brae property, we are initiating the redevelopment of approximately 137,000 square feet of space. Much of this area relates to a former 102,000 square foot Walmart anchor box that we backfilled with 2 temporary tenants when Walmart vacated. The thought process at the time was that the temp tenants would allow for the ongoing recovery of our operating costs while we advanced the plans to reposition Cedar Brae, while simultaneously advancing an opportunity to unlock significant future density value at our 3434 Lawrence Avenue property that’s located across the road.

Our finalized renovation and remodeling program will see an estimated 22,000 square feet removed from inventory with the remaining 115,000 square feet carried as vacant in the near term. It is this 115,000 square feet, which equates to slightly more than 50 basis points of portfolio GLA that will be classified as vacant beginning in Q1 and Q2 of this year. There will be an NOI impact but due to the nature of the tenancies, it should not be significant. We currently have deals for 73,000 square feet of GLA or about 2/3 of the space with national retailers at market rents. These rents, of course, are significantly higher than the former Walmart and temporary tenant rents.

We expect to have the balance of the space leased in 2022, but the occupancy recovery will not occur until tenants open, which is currently anticipated to be in 2023. Part of this redevelopment at Cedar Brae involves the relocation of some tenants from 3434 Lawrence Avenue. In December of 2021, we submitted a rezoning application for this 37,000-square foot property to permit the development of 571,000 square feet of residential space. Unencumbering this property, along with a successful rezoning application will result in a meaningful increase in the future IFRS value at 3434 Lawrence.

Turning to Slide 11. Extending a theme that remains very positive. Our leasing velocity was strong into year-end. Renewal leasing volumes were 452,000 square feet in the fourth quarter, and these were affected at an average rent increase of 9.2% when measuring the first year renewal rent of $26.60 per square foot relative to the $24.36 per square foot in the final year of the expiring leases. Full year re-leasing volume was 2.1 million square feet, and that was strong and similar to the 2.1 million square feet in 2020.

As referenced on Slide 12, our average in-place portfolio net rent reached $22.42 at December 31. As Adam noted, this is yet another all-time high. It represented growth of $0.18 in the fourth quarter and $0.53 per square foot or 2.4% for the year. Approximately 70% of the 2021 growth was derived from contractual rent steps and lease renewal lifts.

Turning to Slide 13. Here, we provide data on our rent collections. Through 2021, we collected approximately 98% of gross billed rents. Total bad debt expense was $1.4 million in the fourth quarter, it was $8.5 million for the year. The trend in our accounts receivable has been quite favorable since June 30, in particular.

It is no coincidence that this is the date that roughly coincides with a more widespread easing of restrictions. The year-over-year change in our AR is significant as well.

In our financial statements, you can see that tenant receivables at Q4 2021 were $27 million. This is a 40% decline from $45 million at the beginning of the year. And notably, this year-end 2021 tenant AR balance has returned to levels that are roughly in line with the $25 million balance at the end of 2019.

For your information purposes, Slide 14 outlines our ACFO derivation and it provides various payout ratio metrics. In Q4, our AFFO payout ratio, adjusted for OGLE amounts, was 37%. And for 2021, in its entirety, it was 40%. Our 2021 ACFO was $244 million. Relative to $103 million of cash distributions paid, this equated to an ACFO payout ratio of 42%.

Stated alternately, this means FCR had the benefit of $142 million of retained cash flow last year.

Providing some context on capital deployment as summarized on Slide 15. We invested $37 million into development, leasing and residential development during the fourth quarter. Most of this capital was invested into assets located in Toronto and Montreal. For the full year, we invested $166 million, including $111 million into development and residential inventory with the balance in CapEx and leasing costs.

Turning to financing activities on Slide 16. Last year, we repaid $321 million of mortgages and unsecured debentures having a weighted average effective rate of 4.5%. We also funded $28 million of principal amortization. For those of you seeking to refine your interest expense run rates, Q4 activity specifically included the repayment of 7 mortgages with an aggregate principal amount of $83 million on November 1. These mortgages had an average interest rate of 4%.

Slides 17 and 18 summarize some of our debt and liquidity metrics. As at December 31, FCR’s financial position remained strong with more than $750 million of available liquidity. Over the course of 2021, we reduced total debt by approximately $330 million, and we ended the year with a pool of $7.4 billion of unencumbered assets and a low secured debt to total debt ratio of about 13%. On January 31 of this year, we repaid our $200 million senior unsecured debenture Series O. As such, the outlook section of our MD&A sites a February 8 liquidity position of $660 million, which remains strong.

Moreover, over the next 60 to 90 days, we intend to further strengthen liquidity through the placement of 2 long-term fixed rate mortgages, which are expected to yield aggregate proceeds well in excess of $100 million to FCR.

This concludes my prepared remarks, and I will now turn the call to FCR’s Chief Operating Officer, Jordie Robins, to provide some commentary on property investments, operations and developments.

Jordan Robins

Thank you, Neil, and good afternoon. As you’ve heard, we finished 2021 strong as Q4 was another very positive quarter for FCR. This momentum can be attributed to our extremely high-quality grocery-anchored and mixed-use portfolio, which continues to perform. Given this quality and the strength of our team, with extremely high conviction about the trajectory of our business. To understand why we feel so strongly about our positioning, you need look further than the progress we’ve made in our investment, our leasing and our development programs.

It is these areas that I want to spend the next few minutes discussing. Adam went through our investment activity and the impact it’s had in terms of high-grading our portfolio. In Q4, specifically, we sold $165 million of assets. This aggregate price was meaningfully above our IFRS NAV. Notable in the quarter was the sale of 100% interest in Langley Mall located in Langley, British Columbia. Langley is a market where the existing demographic statistics are inferior to First Capital’s overall demographic profile. And Langley Mall is not a site that we considered to be strategic.

We brought this property to market in Q2 2021, received overwhelming interest and sold it to a condominium developer for a very significant premium to its IFRS value. But our approach to asset sales remains versatile and tailored. In Q4, we closed on the sale of a 50% interest to Tridel of the 2-acre site located on a discrete portion of our Humbertown Shopping Centre. These lands are approved for a 250,000 square foot residential development. Unlike Langley, Humbertown, located in the Kingsway neighborhood in Toronto, is an area in which we’d like to expand our presence.

So we partnered with Tridel, and we’ll retain a 50% interest in the condominium development and its profits. As anticipated, the demand per unit in this development named Edenbridge, is principally from homeowners wishing to remain in the neighborhood.

These purchasers view our adjacent Humbertown Centre, its grocery store, pharmacy, liquor store and banks as a valuable amenity. Today, 87% of the units have been sold. Excavation and shoring of Edenbridge has commenced and we expect it will be completed in 2025. These property sales in Q4 bookend a tremendous year in which we sold $345 million of assets and netted an additional $100 million from the sale to Pemberton of our option for 2150 Lake Shore. Notable highlights for the year include the sale of 100% interest in our assets in Airdrie.

This sale provided us an opportunity to exit a nonstrategic market at a price above NAV.

In 2021, we also sold a 16.66% interest in the residential component of our King High Line project. We sold this interest to Woodbourne, a Canadian developer, operator and investor in newly constructed residential rental property. Concurrent with our closing, Woodbourne purchase cap reached 33 1/3% interest. So today, Woodbourne and First Capital each own 50% of the residential component. The 506-unit residential building is now approximately 90% leased.

This property located in Liberty Village also consists of approximately 160,000 square feet of retail space in which FCR retained 100% interest. The retail commercial portion of the development is 100% leased to a variety of necessity and service-based retailers including Longo’s, Canadian Tire, Shoppers Drug Mart, Winners, Kids & Co Daycare, McDonald’s and PetSmart.

Last, but certainly not least, during the year, we closed the sale of a 50% interest in station plan to ensure an apartment REIT. Station Place is a purpose-built rental property located at Dundas Street West and Aukland Road in Toronto. The building houses 333 rental apartment units and 60,000 square feet of retail anchored by a Farm Boy, who opened in Q3 2021. The sales price for Station Place was well in excess of our costs, allowing us to crystallize significant development profit. With ensuring as a manager, it also added residential expertise to manage the property and share in the initial lease-up risk.

As a result of the transaction, First Capital’s effective stake in the property was reduced from 70.8% to 35.4%. Notwithstanding our success with dispositions in 2021, we continue to expand our positions in neighborhoods that we had identified.

In 2021 and early Q1 ’22, we purchased approximately $40 million of strategic and/or tuck-in assets that completed 2 separate assemblies. Last quarter, I talked about the correlation between the easing of COVID-related restrictions across the country and improvements in our operating performance. This correlation remains as evidenced by our leasing pipeline, which is a very good leading indicator for our business. Specifically, we have 1.7 million square feet of lease agreements under negotiation or execute where the tenant is not yet in possession. Included in this pipeline is over 1.2 million square feet of renewals, 400,000 square feet of new deals and 120,000 square feet of executed leases.

Turning to development. We have a pipeline of 23.5 million square feet of incremental density, of which only 7.7 million square feet has been valued and included on our balance sheet. Most of this development pipeline is residential and across the country and in Toronto specifically, where over half this density is located, there remains a housing supply shortage. So we continue to advance our entitlement program as the shortage is driving residential demand and in turn, density and housing pricing, higher.

In 2021, we submitted entitlements for an additional 1.5 million square feet of density. These applications contemplate intensification of a number of our assets in Toronto, including 3434 Lawrence, 332 Brewer Street West, 221 Sterling Road and Place Anjou, Montreal. In total, we have now submitted entitlements for 16.1 million square feet of incremental density representing just under 70% of our pipeline. While the process to secure entitlements is long, this past year, we continue to make meaningful progress.

In addition to the 3.2 million square feet already entitled, in 2021, we received approvals for another 4.8 million square feet of this contemplated density. But as we’ve said in the past, we don’t arbitrarily entitle assets simply because there exists an opportunity to do so. Our goal is to help build inclusive and sustainable neighborhoods with unique identities, significant public realm, curated merchandising and thoughtfully designed buildings.

With this in mind, included amongst the approvals received this past year is 138 Yorkville, our 310,000 square foot retail and residential development in Toronto. We continue to remain high conviction in this neighborhood and in this investment specifically. This property is one-off, if not, the best luxury residential sites in the country. Demolition of the existing structure on the site is currently underway. In addition to the projected profitability of investment, 138 Yorkville will serve to improve the functionality of our already significant ownership position in the neighborhood, which includes Yorkville Village, a Hazelton Hotel and the street front retail along Yorkville Avenue.

We’ve designed 138 so that will integrate with both Yorkville Village and the hotel, adding potentially a new anchor tenant to our mall and several new exterior points of ingress and egress. These changes will improve both circulation and accessibility and will create significant efficiencies as a result of our ownership position in Yorkville. Our 510,000 square foot retail and residential rental project located at Yonge and Roselawn, sets from Eglinton TTC and the new LRT station was also approved in 2021. The demolition of the existing structure on site will commence this quarter. Closer to our home in Liberty Village, 1071 King, our 200,000-square foot residential rental project was also approved in 2021. Demolition of the existing structure on-site is currently underway.

In 2021, 400 King Street West, our 460,000-square foot retail and residential condominium development was approved. 85% of the units in the proposed development have been sold. Sales are meaningfully above our revenue budget and critical elements for the project have now been tendered. Construction at 400 King will commence later this month.

Last, but certainly not least, is 2150 Lake Shore. Toronto City Council approved the secondary plan and bylaw for 2150 Lake Shore in 2021. In Q2, FCR sold its option to Pemberton and entered into an agreement with them to act as our development part. Pemberton will augment our team as we transform the property into a sustainable and inclusive master-planned, mixed-use transit-oriented neighborhood. Pemberton’s deep residential development, community building and large-scale construction expertise will be a critical asset for the expected 7.5 million square feet of residential, retail, commercial and the significant community uses contemplated.

Pemberton will provide all development and construction management services in connection with the residential and the infrastructure works. First Capital will act as development manager of the retail and commercial components. And upon completion, we’ll act as property and leasing manager for the retail and the commercial space. We look forward to sharing further details with you as this tremendous city building initiative progresses. Before I conclude, I want to highlight a few of the major construction projects we completed this past year.

Starting with the first phase of our Wilderton project in Côte-des-Neiges Montreal. Metro and Pharmaprix took possession of their premises in Q2 of 2021 and SAQ and Dollarama took possession of their space in Q3. All these tenants will be open to the public this quarter as construction of this new 130,000-square foot retail center is now complete. Once open in their new spaces, we’ll commence demolition of the remaining portion of the former center, which will serve as the trigger for the development of a 200,000 square foot final phase. And finally, we completed the construction of the 70,000 square foot expansion to our Leaside Village Centre in Toronto.

The center is now 98% leased. The tenants in the new building, including Shoppers Drug Mart, PetSmart and a collection of specialty medical office tenants took possession of their respective premises in Q1 2021.

As you can tell, we were very busy in 2021 and in Q4 in particular. But 2021 was a year that further demonstrated the strength and the value of our portfolio and the strength and the value of our team.

And with that, operator, we can now open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question is from Mario Saric.

Mario Saric

One quick question on the quarter and then a couple of questions on the outlook for ’22. So just on the quarter, I want to clarify the temporary tenant storage parking and other revenue was up $1.6 million sequentially versus Q3 to $8.3 million. How much of that $1.6 million increase would you classify as seasonal, for lack of a better term, or specific to Q4 to the extent that there wasn’t.

Neil Downey

Mario, it’s Neil. Candidly, I don’t have a firm answer to that level of detail. But what I can say is when activity level returns to our properties, we see the corresponding return in our variable revenues. And so people are out, people were about for holiday shopping and entertaining. And that’s the sort of thing that was reflected favorably in those Q4 variable revenues.

Mario Saric

Okay. And then just maybe shifting focus to ’22. Adam, you mentioned in terms of potential dispositions, you’ve achieved your $1.5 billion goal, including almost $350 million in 2021. You mentioned being more balanced and opportunistic in 2022. Given where kind of private market valuations are today, which you referenced as being pretty much at an all-time high and internal capital allocation priorities, like what kind of range if you can provide one in terms of decisions do you think we can see in ’22?

Adam Paul

We don’t have a range for you, Mario. It’s going to depend on a number of factors. It’s going to depend on our investment opportunities. So the more opportunities we find to invest, the more appetite we would have to dispose. I’ve never — in my whole career, I’ve never seen assets transact the way they transacted in 2021, in terms of the premium over “appraised” value or IFRS value.

I’ve never seen premiums garnered like that, and it wasn’t one-off. It was like virtually on every transaction. That’s continued into ’22. So part of it as well is like the Langley Mall transaction, like, we never in our wildest dreams would have kind of thought even 12 months ago about the value that we sold it for.

And so I would expect that there are pockets of that type of situation that surfaced in ’22. And there’s some asset — like Langley Mall, we would have sold that asset at that price if we had 0 leverage on our balance sheet, we would have done it. So it will also depend on what surfaces in terms of that. And we’ve continued to get more and more demanding on price and premium to NAV. And certainly, we feel very good that we’re in the best position to continue doing that in ’22.

So there’s a lot of potential moving parts to it. So we don’t have a disposition target for 2022. We don’t have a range that we’re trying to kind of get in between, just because we know it’s going to be driven by other factors that we don’t know the answers to right now as well.

Mario Saric

Got it. And with some of those other factors include any tax considerations given the distribution adjustment that will likely be in existence for this year as well, like — or special distributions and when are those a consideration in terms of how much you decide to sell?

Adam Paul

Yes. Look, tax is always something we pay close attention to, probably unlikely to impact the decision like whether we sell a specific property or not. If we thought our activities cumulatively, we could trigger a special distribution, that’s — we’re not averse to that, but we’ll look at it, understand it and decide whether we think it’s the best decision for the business.

Mario Saric

Okay. And just turning to occupancy really quickly. I appreciate the color in terms of the redevelopment impact in Q1, Q2. But if we step back and you look at ’22, assuming no kind of further extension of lockdowns and whatnot, is it fair to say that you see no reason why historical leasing volumes and renewal spreads can be achieved in ’22?

Adam Paul

Well, we definitely have no reason to believe that our historical leasing spreads can’t be achieved in ’22. We achieved them in conditions like in 2020 and 2021 that we feel are probably going to be less supportive of high growth than we see in ’22 at this point. So yes, that would be the same with occupancy. I mean we’ve run this business generally between 95% and 97% over 20 years. And yes, we’re kind of right in the middle of that range.

We anticipate to stay in that range. Where we are in that range depends on a bunch of factors, but we feel like we’re kind of in the long-term range, and we fully expect to stay there.

Mario Saric

Got it. Okay. My last question is just more of a higher-level question. Adam, if you were to kind of identify 1 or 2 operational or capital allocation to stretch goals that First Capital identified for 2022 to such that if they were achieved, you’d consider the year to get more of all success? Like what are my 2 things that you’re real focus?

Adam Paul

Sorry, Mario, you were breaking up a bit there. So if you don’t mind just repeating the question.

Mario Saric

Let me increase the volume. So if there’s 1 or 2 kind of operational or capital allocation stretch goals that First Capital identified for 2022, that you would consider the year a success if you achieve those 1 or 2 goals, what would those 1 or 2 goals or priorities be for the year?

Adam Paul

The first one always comes to mind for me is same-property NOI growth, probably one of the best indicators as to the health of the business. Obviously, any given quarter or even year, it can be skewed. But the general trend is — if you’re asking me to pick one stretch goal that would be — we’d be thrilled to break through would be same-property NOI growth.

Mario Saric

Got it. And that would be like higher than 2021 or like in line with historical average? Or how should we think about that goal?

Adam Paul

Well, the way I think about it on a longer-term basis is, yes, looking at the history. So our historical same-property NOI growth has been around 3%. Portfolio was better today than it was over, let’s say, that decade. So we’re not anticipating it to be less than that. But like I said, any given quarter and any given year, things can skew it one way or the other. But in terms of the general trend, as a baseline, historical is probably a good place to look.

Operator

Next question is from Sam Damiani.

Sam Damiani

I’ll just limit mine to 1 question. And I guess I just wanted to focus on the capital allocation. Adam, you mentioned at the outset, a more balanced approach to dispositions. Just wonder if you could sort of, I guess, balance that, I guess, with the objective of delevering and obviously initiating and completing the construction of the projects underway that are just getting started, including Humbertown, — for King and Yorkville, which all are going to consume capital this year and next?

Adam Paul

Yes. Well, you outlined several elements of the balancing act and the items we’re balancing. So we’ve chopped a lot of wood on delevering, and that’s one element of our business, not the main element of our business. And so the real estate is the main element, and we’ve done — we progressed a number of projects in a very exciting way. That, obviously, has got to be balanced against balance sheet strength.

So while my comments would certainly indicate a more balanced thought process, our intention is that in a year from now, we will have lower leverage metrics or improve leverage metrics versus today while we still do that.

Sam Damiani

And just before I let you go and turn it back, what would be the budget sort of development spend for this year and perhaps next year as well?

Adam Paul

So it’s — we expect it to land between $150 million and $200 million in 2022. If you had to pick one goalpost it’s likely to come in closer to $150 million this year than $200 million. And I think next year would be similar. Where it will get interesting is when you start getting kind of 2 to 3 years out, and we’ll evaluate it then. But the opportunity set in terms of the amount of capital we invest in that program, we would have flexibility to maintain a similar run rate as now, but we would also have the opportunity to increase it significantly, if that made sense.

Sam Damiani

Yes, certainly, if these projects are profitable, which it sounds like they very well should be.

Operator

The next question is from Jenny Ma.

Jenny Ma

In a continuation on the capital allocation. I was wondering if you could give us an update on your thoughts about the distribution. They’re over a year into the cuts that you affected in early 2021. And just given I guess, a bit of a slowdown in dispositions. And when you marry that against the development spend commitments you have, $150 million of retained earnings per year is pretty tempting.

Even without development, it’s a pretty good way in terms of deleveraging. So — is there any change in your outlook on the distribution and how you’re thinking about potentially reinstating it in a year’s time or sorry, recovering it to prior levels in a year’s time?

Adam Paul

Yes. So very good point here, Jenny. I mean, if we’re coming right to the chase, there’s no update. Our intention is to maintain this distribution level throughout the year. Our expectation, as we articulated when we made the adjustment was that starting in early ’23, it would be increased.

We expect it to be increased to a similar level to what it was prior to the adjustment and nothing’s changed beyond that at this point.

Jenny Ma

Okay. That’s fair. And then when we think about your — the credit facility balance, I’m just thinking about how you balance that against unsecured bonds. It’s a bit elevated on the credit facility balance over the last couple of years versus the 2 years before that. Are you thinking of converting some of that into some unsecured?

And considering some of the developments you have going on with green bonds fit into that framework?

Adam Paul

I’m sure Neil has got a lot to say about that, but we typically — like we pay attention to term of debt, too. So we typically don’t plan to carry large facility balances. With the disposition volume, it’s been a great place to fund short-term needs because we can easily pay it down. And I would expect that, that’s one of the elements that Neil would speak to, but there’s probably more. So Neil?

Neil Downey

Jenny, certainly, in my prepared remarks, what I referred to is some term financing that we’re in a fairly advanced state on. This will be 10-year money that will, as I indicated, be in excess of $100 million of proceeds, net to FCR. So that will pretty quickly recharge the drawings on our credit facilities possibly by March 31, if not very shortly thereafter. So you are correct in running at $660 million of total liquidity, it’s a little less than the norm, but you should look at that as being a point in time as opposed to some sort of change in our thinking.

Jenny Ma

Okay. Could you provide any commentary on how you’re thinking about potentially using green bonds to fund your initiatives? Is that something that you guys are discussing right now?

Adam Paul

Well, as you know, we’ve been one of the leaders in environmental matters over the last decade plus. And so yes, look, I mean, you should expect that I don’t know — I can’t guarantee it to the next series, but if we did 2 or 3 — the next 2 or 3 bond issues, you should expect at least one of them to be a green bond.

Jenny Ma

Okay. Great. And then my final question is, given that there were new restrictions put in place towards the end of the year, but not specific closures. Did you see any changes from your tenants in terms of rent collections or bad debt? Or was everything able to sort of maintain the status quo with most of the retailers operating at 50% capacity?

Adam Paul

Yes. Fortunately, this lockdown is a lot shorter than some of the others. And look, I’ll just turn you back to 2021. We had Toronto, our largest market, by far, locked down for nearly 6 months of the year. We collected 98% of our gross billed rent last year. So not to say it’s a nonevent, but certainly, it should be nothing material.

Operator

Next question is from Tal Woolley.

Tal Woolley

For your development spending for the year, you said $150 million to $200 million, was that correct?

Adam Paul

That is correct.

Tal Woolley

And — would that be — like would you — should we think of greater than that to include sort of your typical revenue sustaining revenue-enhancing CapEx and the residential inventory spending would be on top of that? Or is that the whole envelope?

Neil Downey

Tal, it’s Neil. So the $150 million includes investments in residential inventory. At a high level, on top of that, you could use $30 million for maintenance CapEx, TIs, leasing costs and the like. So that number would be up a little bit from last year where we were at $25 million. And then revenue-enhancing CapEx, there’s a wider range there, but let’s say that could be $30 million, possibly as much as $50 million, but there’s a range for you.

Tal Woolley

Okay. And then you outlined some of the things you want to get on some of the new projects you want to get started on. I’m just wondering like it’s been a crazy couple of years, and a lot has changed just in terms of supply chain availability, things like that. How are you thinking about the return profile for some of these developments versus how you would have thought about that maybe 2 years ago? Like is it still the same? Business as usual? Or has your thinking evolved around some of that stuff?

Adam Paul

Well, yes, a lot has changed in the last 2 years in how we underwrite these projects because we’ve had an environment with tremendous cost escalation and fortunately, very strong rent growth, which has made it all hang together. But if you look at our pro formas on things we’re starting now, — this goes back a few years, and it’s consistently been increased, but we carry much greater contingencies than we used to. We are much more sensitive to tendering major cost components of projects, at the same time that we’re committing to rents. So there’s a heightened sensitivity to that the last couple of years.

Am I missing anything, Jordie? I mean it feels like a lot has changed, but in terms of return expectations, no, how we’re getting there is slightly different. And I can tell you, it’s put some things into a situation where we look at the return threshold, the risk return profile, and it’s kind of less compelling than it was and it’s on a shelf. So it’s been a very dynamic environment, and I would say a lot has changed, but in terms of the profit margins and things like that, no, that hasn’t changed.

Tal Woolley

Okay. So you still feel comfortable you can kind of get on some of these larger urban stuff like some with a high residential component, something in the 4s as a development yield? Is that still a workable number that we can work with?

Adam Paul

Yes. Yes. If it’s a rental project, yes. And the one thing to keep in mind with the rental projects is people like to kind of crystallize profit when construction is complete. We built our first residential building over a decade ago. So it’s not even — obviously, we’re mainly a retail company. We’re not — it’s not totally foreign to us. And I can tell you the rents in that project are, I think, over double what they were when we were complete. So we’ve actually made a lot of money post-construction completion. And based on our views of the housing markets and the major cities we operate, we’re very bullish on it over time. So we feel not only can we crystallize and earn development profit on completion. But very importantly, when we look forward over the next decade, we think that there’s a lot of profit to be surfaced there as well.

Neil Downey

Sorry, Tal, especially when you look at replacement costs, we have shopping centers that in as long as we’ve owned them or built them, their market values have always exceeded replacement costs, but in a lot of cases, it’s theoretical because sites don’t exist to replace single-story retail centers in those neighborhoods. But now, they actually have appraised values that are below replacement cost and not because the appraised value drop. In fact, they’ve gone up, but replacement costs have gone up more.

Tal Woolley

Okay. And then when you’re looking at raising capital to fund these projects, you’ve pursued some individual joint ventures. I’m just wondering like from like your time and bang for the buck perspective, would it be like more interesting for a company like yours to maybe strike up like a larger joint venture relationship on some of these assets rather than sort of having to continue to put these out to market? And maybe that signals to the market like, “Hey, there’s all — there’s a good chunk of financing in place for us to proceed.”

Adam Paul

Yes. Our focus on partners is real estate strategy, first; financial contribution, second. And so the majority of where we bring in joint venture partners is on residential development properties where a specific expertise can be contributed to the partnership that we feel improves the probability of success. So a lot of the major developers — like look at Christie Cookie, I mean it’s one of the largest developers as our partner, but they’re focused on the GTA. They’re not focused in other markets.

They’re not present in other markets we’re in. So yes, theoretically, it’d be a lot more efficient to do one JV across the board with one partner. We don’t go into any JV with the expectation that it’s going to be a single JV because there are efficiencies to rolling it out — like Jordie touched on the Woodbourne deal. That was our first deal with them. We’re already working on others.

So we have a full expectation as today that, that relationship grows. And that’s how we view them all. But it’s not feasible given the nature of our business to limit it to a very, very small number of partners given the breadth of product we create and the breadth of neighborhoods that we’re in.

Tal Woolley

Okay. And then just lastly, Neil, for — on the [indiscernible] lease at [indiscernible] should we expect some term income early in the year?

Neil Downey

No. That matter has been settled.

Operator

[Operator Instructions] Next question is from Pammi Bir.

Pammi Bir

With respect to the $150 million of assets that are still held for sale, just how far along are these in the sale process? And at what point do you think they may actually transact?

Adam Paul

Well, I think the accounting rules say that we expect to transact within 12 months. Generally, Pammi, we would view them as higher — high probability transactions. Some are subject to purchase agreements. Some are not — they generally all have buyers that have been identified. So usually assets that end up in held for sale transact with a very high degree of probability.

So it could be spread out throughout the year, but given we’re early in the year, first half.

Pammi Bir

Okay. Now I appreciate there are some moving parts, but Adam, you made a comment that you do expect leverage to be lower by the end of the year. I’m just curious, in terms of the budgeting process that I’m sure you’ve gone through, is there a target in mind for the end of this year? And just again, if you could maybe comment on how you expect to get there.

Adam Paul

Yes. We don’t have a target. It’s a balanced approach. Neil, maybe you can touch on some of the things that we’re looking at that give us comfort that we will get there.

Neil Downey

Yes. So we believe that the progress that we’ve demonstrated specifically in the last 3 sequential quarters now are very positive trajectory. And I would say, thematically, that’s the trajectory that we intend to carry along. Many of the points as to how we might get there have really been scattered throughout this call already. So I think Jenny was referencing our retained earnings.

So using history as a guide, we had $240 million of ACFO last year, and our distribution obligation is $95 million a year. So you can do the math, there’s $145 million or $150 million of retained cash to begin with. We’ve talked about held-for-sale assets of another $150 million, which we fully anticipate to transact upon within a 12-month time frame. And then don’t forget, we’ve also got a portfolio of loans and advances receivable that we have some flex in the way we think about extending those and then there’s a natural repayment pattern to those loans and advances receivable as well.

So without doing anything, we could be collecting $80 million to $100 million of loans and advances receivable as well. So when you start to add it all up, even without adding to the held-for-sale asset pool, you can come up with in the range of $400 million of capital generation but it will be deployed into as we discussed, development, leasing and maintenance CapEx and debt repayment.

Pammi Bir

Got it. Just one last one. I think in the MD&A you made reference to 2 million, I think, square feet of expected zoning that you expect to get done this year. This is part of the entitlements program. As that space gets approved, is there an expectation that you may record some fair value gains on that space as it’s zoned? And any comments as to what you think that 2 million square feet might be worth on a price per buildable square-foot basis?

Adam Paul

Well, the first part is easy. Absolutely, we expect an upward mark on the fair value. A lot of this rezoning is more sweat equity than financial capital. And so you usually actually have very attractive returns when you do hit milestones like zoning. So yes, how much that is, is not something we guide to, Pammi.

Operator

There are no further questions at this time. I would like to turn the meeting back to Adam.

Adam Paul

Okay. Thank you very much. Really, we just want to take the opportunity to thank everyone for their interest and for attending our Q4 and year-end conference call. Have a great afternoon, everyone. Thank you.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.

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