First Capital Realty's (FCRGF) CEO Dori Segal on Q2 2014 Results - Earnings Call Transcript

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First Capital Realty Inc. (OTC:FCRGF) Q2 2014 Results Earnings Conference Call July 29, 2014 2:00 PM ET

Executives

Alex Correia - Corporate Administrator

Dori Segal - President and Chief Executive Officer

Karen Weaver - Outgoing Executive Vice President and Chief Financial Officer

Kay Brekken - Incoming Executive Vice President and Chief Financial Officer

Brian Kozak - Executive Vice President, Western Canada

Analysts

Sam Damiani - TD Securities

Alex Avery - CIBC World Markets

Pammi Bir - Scotia Capital

Mark Rothschild - Canaccord Genuity

Matt Kornack - National Bank Financial

Heather Kirk - BMO Capital Markets

Operator

Welcome to the First Capital Realty Q2 2014 results conference call. During the presentation, all participants will be in a listen only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions).

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

Alex Correia

Thank you, Melanie. Please note that forward-looking statements may be made during today's conference call. Certain material assumptions were applied in providing these statements, many of which are beyond our control. These statements 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 security filings, including our Management's Discussion and Analysis for the year ended the December 31, 2013 and our current annual information form, which are available on the SEDAR and on our website. These forward-looking statements are made as of today's date and except as required by securities laws, we undertake no obligation to publicly update or revise any such statements.

I will now turn over the call to Dori.

Dori Segal

Good afternoon, everyone, and welcome to our second quarter conference call. With me on the call today, as usual, is our senior management team except Greg, who is on a property tour. And I also like t welcome Kay Brekken, our new CFO who will start next week on Tuesday and she will say a few words.

Overall, the quarter is in line with our expectations with good operating metrics. Our focus continues to be, on first, recycling capital into our development program and strategic/complementary acquisitions in our core urban markets, second, strong emphasis on good and improving operating metrics, quality of our cash flow and a long-term risk adjusted return on our assets and third, extending our debt maturity profile and liquidity.

Let me touch a little bit on each one of those topics, starting with the first and second. Until we trade at the proper multiple, we are going to continue to rely on asset sales or to mainly rely on asset sales to fund the equity portion of our growth. Let me reiterate that. The capital that we are investing exclusively goes into very high quality asset. In fact, even better assets than the average of our portfolio. The importance of redeveloping high-quality assets combined with maintaining some level of strategic/complementary acquisition is paramount to us, given our view of the future retail landscape, its competitive nature and the continuous changes in demographics and consumer behaviors.

The retailers definitely understand it and so do we. The assumption that contractual rent is the only strength of this business is not one we share. Long-term, the quality and location in the retail offering is what's going to determine the strength and the growth in NOI. One should not take for granted present contractual rents as a given for years to come, but rather the choice assets you own and offering of retail in this particular shopping centre is what's going to determine this factor. This is the main driver of our real estate strategy.

And to the third topic. Notwithstanding the fact that following every debt deal we do, bond rates keep going down and our spreads keeps narrowing, we strongly believe that the way to finance an entrepreneurial long-term asset value creation business is with very long-term debt and high liquidity as the financial markets sometimes do not time themselves to the development business peaks and valleys. While this strategy in the short-term results in moderate FFO growth, it lays a very strong foundation for sustainable growth in future FO with a business model, that in our view, combines with the ownership of high-quality growth assets with a low level of risk.

Let me say a few words about our progress of our development program. S o I will try to go through it very quickly. We commenced construction in VMR, Centre Ville Mont-Royal in Montreal last quarter and we are very happy A, with the progress and B, with where the centre is landing itself. We are going to do our first Le Marché by Loblaws by Provigo grocery store, which is a very nice urban concept in Montreal. In Montreal, we also expect to complete our Viau shopping centre, which is quite a complicated development, quite a complicated task. It's a whole shopping centre that sits on a roof of a Walmart and uses the great separation between two sides of the streets to have multiple access points. And Phase 1 will be completed this year. We are a little behind on the return due to a bit of delay in lease up time and construction. We are basically adding another ramp that we didn't plan in advance and that caused us slightly more overhead. Slightly more investment than we expected.

Moving out west. We broke ground on the Edmonton Brewery District. We are very happy with its development and its progress. We are doing our first city market by Loblaws concept in Edmonton. And we are quite excited about that as well. Those new concept of supermarket, we feel, are where the future of going with these type of centres. And this is a very unique centre that's combines some preservation of historical building into our site.

Semiahmoo Shopping Centre in White Rock, Surrey. We have finally reached an agreement with Zellers where they are leaving in September, which will lend itself to redevelop the centre. The centre is a much more simple development program where we are going to use a rooftop parking on top of the old Zellers and redevelop the retail beneath and the development, at this point in time, is retail only with some residential in the horizon. So that is Semiahmoo.

Moving to Ontario. 3080 Yonge Street, we are at just the final stages of planning of combined two-story retail in the building, but the remaining floors to stay office. We are moving tenants around. This is a bit of a complicated project. We are talking to the TTC, we are talking to the city and we have to, as I said, move a lot tenants out and we are progressing extremely well, both with a most of the tenants we expect to have there and the development plan itself.

Rutherford Marketplace, we are pretty much done with our plans. We did alter them recently from doing 240,000 square feet of rental building to 160,000 square feet rental building as cost for the P3 parking garage came in higher than we had planned initially. The movement is a return, if at all, is either nil or maybe slightly positive as the garage is very expensive and as everybody knows, the return on residential are not that high. So that project is moving ahead and we expect to still have 50,000 square feet of additional retail.

Hazelton Lanes, to anybody who had a chance to visit it lately, it does look, I wanted to use the word war zone, but maybe that's not the right time, but the project is fully under construction. It is a very challenging construction project, but we are moving on time and on budget so far, and we expect to be finished with a major part of the construction in spring 2015 and then we have another year of what I call, not sure everybody in my company will agree with me, but a light construction period. And by the spring of 2016, we expect to be substantially completed with most of the tenants already in. So that's Hazelton.

Moving to Humbertown. In Humbertown, we are basically done with the planning and we are now in the height of costing everything that we are trying to do here. It is a fairly large and complicated mixed-use project which has many components, starting with town houses, condos and of course, 240,000 square feet of retail on two sides of the Kingsway with an underground garage to be connected under city streets. We are in the middle of costing of that. I would say that we probably won't start actual construction before the end of 2015 which actually, as far as we are concerned, lends itself pretty good to the timing with respect to Hazelton. We will finish one very complicated and time-consuming project and then move to the other one. But again, so far everything is in line with our plans and our budgets.

Liberty North. We have started excavations earlier this year and we expect to be out of the ground next year with 160,000 square of additional retail to our existing assets here and some 500 condos and that would be above that. This will be probably one of the nicest projects on King Street as we are planning a few things and amenities that other projects don't have such as a very nice addition, in the overpass over King Street where the rail is, or something that will look like the highline in New York and a bridge that will connect Queen Street with King Streets right next to our project. So in effect, you will be able to walk all the way from Queen Street down to the lake through Liberty Village. We don't have final approval for this. We are very excited about it. The city is very excited about it and we are still working on ways in different constituencies and interested parties that will contribute to that project. So it's a pretty big task for First Capital to put together for First Capital and Urbancorp, our partner, but obviously most of the costs, they are not going to be beared by us.

In short, this is our development program. As I said before, we are very happy with it. With the exception of one case, where we are behind on the return, but we expect to catch up next year in 2015, everything else is moving well according to our expectations, according to our budgets and we see very strong demands from tenants we would really like to have in those properties.

And with that, I would like to transfer the call to Karen and then we will come back to questions. Karen, please.

Karen Weaver

Thank you, Dori, and I will say welcome to Kay. More on that later. Ladies and gentlemen, friends of First Capital, thank you for joining us today on our Q2 2014 conference call. This is my last conference call with First Capital, and I must say it has been a pleasure to be the CFO of this fine company and a great pleasure knowing all of you and working with all of you for many years.

If I were to provide an analogy of our business and our results this quarter, the past year or even of the past decade that I have been here, I would say that it's like creating and completing the making of very finest wines, year after year. Each stage of the process is important. It takes its own time. And if you rush it, you may not get what you really want or need in your cellar. This is just like our property leasing strategies, our acquisition strategies, our development activities or our financing strategy.

I can point to the shopping centers across the country where our teams have developed or redeveloped over the years, well located, but tired and underperforming property into fantastic shopping centres that are heart of their communities for shopping for everyday life. Our financial position is considered to be the best in class in our industry. Everyone at FCR is extremely proud, proud of our property and the work that we do on them, proud of our balance sheet and the work we do on it and the people we have and the great work that they all do. Many of my team members are listening and I want them to hear me tell all of you, what a great team they are.

The quarterly reporting of our business is not nearly as exciting as the design, development and completion of a shopping centre or even calculating our new weighted term of debt after a financing, and yes, we do that easily. No one wants too much excitement in a quarter report. Many would say that it's a good thing to be stable, predictable, on a known course, with quality assets and you are right. And that is how I describe our quarter.

So briefly to the numbers. The property portfolio status is on slide eight. NOI, by property status is on the next slide nine. And this shows you quarter and year. I will make some reference to numbers on both slides. Starting with the stable, our largest portfolio, and the stable properties with expansion. The current value of these properties totaled CAD5.4 billion and comprises 74% of the total current value of the properties. Together they contributed CAD77.1 million or 75% of NOI in the quarter. The total same property growth year-to-date was 2.5%, 2.7% in the quarter and we are still guiding with our estimated growth of between 2.5% and 3.5% for the full year based on current asset classifications.

On the balance sheet, we have a total of CAD285.4 million of properties that are held for sale and that comprises CAD258 million, which are income properties. The balance are land. Our current intention is to sell these properties, subject to market conditions, in the remainder of 2014 and in 2015. The related NOIs of these properties is segregated under property held for sale. During the quarter, we did sell one income property and four land parcels, bringing our sales year-to-date to CAD56 million. The NOI related to these properties is in the dispositions line and totaled CAD1.1 million year-to-date. We continue to see space coming online from our development and redevelopment, bringing NOI from these properties to CAD30.3 million year-to-date. Our MD&A provides you with some more numbers on our development initiatives and supports some of Dori's remarks.

Moving to slide 10. Just a couple of comments here. Interest expense, year-to-date, has obviously increased due to the increase of our debt outstanding, which is from the growth of our company over the past year. This was partially offset by higher capitalized and of course a reduction in the weighted average cost of our term of debt which decreased by approximately 12 points in the period-over-period to -- for June 30, 5.01%. By the way, when I started it was sub-8%. I just looked it up. Year-to-date, we have repaid or prepaid CAD110 million of term debt at a weighted average rate of 5.69%. During the quarter, we issued CAD150 million of Series S senior unsecured debt and has an effective rate of 4.43% and a term of 11.1 years and this is the longest unsecured debt that we have ever issued.

Subsequent to quarter-end, we did reopen the series and at a tighter spread and lower yield raising a further CAD60 million. We have previously announced that we will prepay CAD100 million of term debt and incur prepayment penalties and this will occur during the third quarter. As a result of our prefinancing activities, we carried cash in the quarter and year-to-date, and while this was dilutive to our earnings, our practice to prefund our development activities strengthens our financial position. These prefinancing activities are the primary reason for the tightening of the guidance.

Moving on just to comment on slide 11. This shows you our other gains, losses and expenses in the quarter and the year compared to prior year.

Same month, slide 12, in terms of the period, this shows the role of FFO to AFFO. There is really not much to say here. These are the usual suspects, and I think it explains well in the MD&A.

Slide 13 shows the quarterly other gains, losses and expenses that are in AFFO. And this helps explain the year-over-year changes in that measure.

Lastly, the actual FFO and AFFO are summarized per share versus the prior period on slide 14 and 15. And again, I will point you to slide 15 as what I call the bottom left corner. If you take out that gains we earned last year on the Fusion Condominium development and compare, this is always the bottom corner that I look at on a quarterly basis to look at our growth in cash from operations.

So turning to some of our financing details. Some right here on slide 16. But what's new here this quarter is Series S, which I have spoken about, but also the extension and downward repricing of our credit facilities, which were completed in the quarter.

Slide 17 recaps our key financial metrics. Our unencumbered assets are at CAD4.8 billion and comprises 60% of our total assets at the quarter-end. And just to give you an idea where we have come from, these assets totaled only CAD700 million at the time we adopted our covenants to maintain a pool of unencumbered assets, which was on our second unsecured debt issuance completed in 2006. We have come a very long, long way. Also note our secured debt continues to decline and is at our lowest percent ever.

And on slide 18, the effect of all these financing transactions can be seen with the terms of maturity now at 6.1 years and the weighted average rates now below 5%.

So, Kay, I am leaving the financial position that has dramatically changed from the one when I started. That was in January 2004 and our capital structure and financing activities were very, very different. But even before that, I will tell the story again, that I first met Dori just after he took over the company in August 2000 and FCR was levered 88%. He wanted me to join the company and I simply said at the time, thanks but no thanks. But he cleaned up the balance sheet enough in the next years to convince me and for me to understand there was great potential in this company, with the board, the management team and especially, most especially, with Dori and Chaim. So the second time he asked me to join in 2003, I did and the rest, my friends, is history.

Before I say goodbye to all on this call, I want to point you to the guidance forecast, which is not slide 19 and 20. The inceptions are in the press release. I am not going to comment any further on that. I think they are all very explanatory. I am going to remind you that First Capital has a property tour. It is scheduled for September 10 for investors and analysts. And while I will retain personally a large investment at First Capital Realty, I will not be able to join the tour. So please contact Vanna Fernandez if you would like to reserve a spot and have not already done. So I thank you Dori. I thank my team. I thank my colleagues and I thank all of you on the call.

Now I am going to turn the call over to my friend of many years and my successor Kay Brekken.

Kay Brekken

Thank you, Karen. I am truly honored and excited to be joining First Capital Realty and I look forward to being an important contributor to the company's continued success as an innovator and market leader.

Now let me turn it over the Dori.

Dori Segal

Thank you, everybody. I am going to say couple more words and then we will open the call for questions. So January 12, 2004, this lady walked into our office, changed the furniture in the CFO corner office and put a flower on her desk. I thought it was a little strange, but I liked it. Since then, Karen has done CAD7.5 billion worth of financing. Our company grew from 127 people to 430, and from CAD1.5 billion balance sheet to CAD8 billion balance sheet.

She has been my personal accountant for all these years and I know some of you might find it hard to believe, but some people say that I am not a very patient person. I know it is hard to believe. Karen used to walk into my office, close the door and say Dori, you have to listen to people. And I tried. And I think I got a little better at that in the last 10 years. So on behalf of all of us here, we have a couple of events planned for Karen still, after this call obviously. But I think everybody in this market enjoyed working with here. Somebody even went and said, she is the golden CFO. I would agree with it.

My definition was the super CFO always. To those of you who don't know, she was responsible for all the IT in the company as well, so not only the finance. And although I know I have a better approach to people than Karen, she insisted on heading HR as well for all these years. And being the patient guy that I am, I let her. Other than that, we are all going to miss you. I think you definitely made this company to what it is today. And you could have been here three years more, if you were a little faster, but I guess when you are CFO, you have a little bit more calm and collected approach than the damn real estate guy. So that's the way it is.

Okay, we will now open the call for questions. Thank you. Melanie?

Question-and-Answer Session

Operator

(Operator Instructions). First question is from Sam Damiani from TD Securities. Please go ahead.

Sam Damiani - TD Securities

Thank you and good afternoon.

Dori Segal

Hi, Sam.

Sam Damiani - TD Securities

Karen, I just wanted to congratulate you on everything you have accomplished at the company. We are certainly going to miss you these calls and working with you at First Capital. My question is actually going to be on the leverage side. The leverage has ticked up year-to-date to about 8.3 times net debt to EBITDA. I am just wondering, as you look out a couple of years, where do you see that penciling out, as you continue to sell assets and complete your major development projects?

Dori Segal

Bang on. That's a very good question. And that's probably one of the number one topics in our internal finance meeting. So let me first say, that what we are doing right now, we are just recycling capital from income producing properties into our development program which, I just want to emphasize, is very short-term, in terms of its horizon. In other words, we are not developing ground up shopping centre that takes four or five years to develop, but rather the majority of our program is turning assets that are yielding us very low yield into higher yield and usually in phased programming.

In other words, you don't take out a lot offline at any given time, but from a debt to EBITDA perspective, Sam, when you sell a shopping centre and you put the money into development, although the development has a capitalization component, which somewhat offsets the impact of the sale versus FFO, from a debt to EBITDA perspective you are losing 100% of the rent, because the interest that you are paying, from the capitalization or for the debt of the company is fully equitable on the side of the interest expense. We would probably look for the debt to EBITDA to edge off a little bit, get to its high end towards to the end of this year to beginning of next year and then start gradually going down.

To give you a sense of what it is, it's probably every 10% of the debt that you could have wiped up by way of raising equity, by selling stocks from treasury, it would equate to about 100 basis points in the debt to EBITDA ratio. So that's more or less -- the flipside of us selling asset could have been, instead of let's say selling this year CAD200 million, we could have raised probably same amount of money in equity, which would have a much better impact on the debt to EBITDA. I think our clear choice and we communicate all these to the rating agencies and tour debt investors, the way we look at it right now, to dilute ourselves from those prime assets is not the right thing to do for the company and I think the offset for the higher than desired debt to EBITDA is very high liquidity and we are probably one of the most, if not the most, liquid entity in our space and value long-term maturity.

So if you look at our 2014, we have no debt coming due. And 2015 and 16 together has very little debt coming due. This is really the trade off now.

Sam Damiani - TD Securities

That makes sense. So two or three years down the road, its hard to say, but would you see that trending down to the 7.35 times?

Dori Segal

Again, because some of the impact on the number at the outset, and let's say, you say mid-2016 is a good period of time to shoot for, some of the impact of this number also would have to be considered given what multiple we are going to trade, let's say, at the end of 2015 or things like that. Or for instance, the return of some of the development. So I talked about view. We have a couple of development that are penciling out at higher return than we had originally planned. And we are very well advanced. We have got all the construction tendered. We have pretty good visibility on leasing. So I think it's a tough number to call two years in advance. But I would say that it's the number one number that we are looking at.

Sam Damiani - TD Securities

Okay. Thank you. I will turn it back.

Operator

Thank you. The following question is from Alex Avery of CIBC. Please go ahead.

Alex Avery - CIBC World Markets

Thank you. I also wanted to congratulate Karen on a great run and wish you the best of luck in your new role. And also welcome Kay to the First Capital team. I had a few questions I guess on the capital recycling side. You have noted that there is as much as CAD340 million or CAD350 million of assets in your assets held for sale as well as the additional ones, which is soft circled and it looks like, per your guidance, there is another CAD100 million to CAD150 million to sell in 2014. Can you give us a sense of what the timing might look like for the CAD100 million to CAD150 million this year? And then do you have any sense of what 2015 might look like on that front?

Dori Segal

Okay, so I will try to give you a short answer unlike that is now characteristic for me. We are shooting for December 30 to close all the properties we are going to sell. Obviously that's not ideal, from an FFO perspective, but we have a few things on the contract. We actually had a couple of sales that we were very close to, at the end of the day we didn't, we were not willing to go with the offer that got. And we are doing some work on the properties to give the buyers well, generally speaking I will say, IPP income producing property buyers a bit more visibility in terms of the income and really within weeks, we are back in negotiating on those assets. So I would say, starting from closing in September all the way to December, that's what we are shooting for.

Alex Avery - CIBC World Markets

That's the CAD100 million to CAD150 million?

Dori Segal

Yes, and maybe one closing in August, I guess.

Alex Avery - CIBC World Markets

And then for 2015, is it evenly spread throughout the year? Or back-end loaded like it was this year?

Dori Segal

2015, it's hard to say. We are going to basically try to work with the assets themselves. There is one asset we want to sell that we have some work to do in terms of expanding a liquor store, another 10,000 square feet of lease-up that we have to do. We are negotiating at the moment 12,000. So it has also something to do with the level of income in those particular assets. The regrettable thing is that when we were working on those assets we are increasing the income and it doesn't go into our same property NOI, because its assets held for sale. So it's a bit disappointing in terms of those same property NOI number, but that's pretty much where the sale program is related to is occupancy and income.

Alex Avery - CIBC World Markets

Okay. So some of the ones in 2015 could again be somewhat back-loaded?

Dori Segal

I am not going to commit to it. It's really more related to the property itself than to the timing of the balance sheet. We are not trying to time the balance sheet. I was joking about December 31. Ideally you won't sell all your assets. But given the state that nobody knows where markets are going, and this is our equity pipeline, we are moving prudently to sell assets.

Alex Avery - CIBC World Markets

Okay, and then just in the other items, I was wondering if you could clarify what transition services and protective rights, specifically relates to?

Dori Segal

They are sitting next to me.

Alex Avery - CIBC World Markets

Got it, and the -- okay. That's great. Thanks, guys.

Dori Segal

All right.

Operator

Thank you. Your following question is from Pammi Bir of Scotia Capital. Please go ahead.

Pammi Bir - Scotia Capital

Thanks and good afternoon, and congrats, Karen, and again best of luck.

Dori Segal

Are you congratulating her for leaving? I won't take it personally. I am not taking it personally.

Karen Weaver

Pammi, you know you can't win.

Pammi Bir - Scotia Capital

Yes, absolutely. I will wait for that day. Just going back to the total leverage question. I guess it's really with all of the investments that you have made in the existing asset base and all the redevelopments going on, shouldn't that leverage also start to come down from arguably stronger internal growth out of the portfolio than say, maybe that 2% to 2.5% that you have typically done?

Dori Segal

From a debt to EBITDA perspective, that would be contributive but the main contributor, Pammi, when you take again, when you look at the total sale of this year which was close to CAD300 million, and assume two-thirds of it was applied into our development program, you are substituting, let me give you some numbers, just to show here. The property that was sold were, on average, closer to 6.5% cap rate. So 6.3%, 6.4%. It depends obviously on how you look at it, and that's a growth. Your capitalization on development is 5% and change. So right there, there is quite a bit of gap from an FFO perspective. But from a debt to EBITDA perspective, you lost all the income on the asset you sell. So the CAD300 million of asset sales lost you about CAD20 million of EBITDA.

Pammi Bir - Scotia Capital

No, I agree with the math. I guess --

Dori Segal

When it come back, when that comes back in form of, let's call it, the same return of development but obviously it's a change, a bit more risk and work and fluid equity, the contribution to EBITDA is slightly faster than FFO obviously.

Pammi Bir - Scotia Capital

No, I guess the question more so was, longer term with all the changes made in the asset base and improvements you have done, say typically somewhere between 2% to 2.5% same asset NOI growth excluding the redevelopments and extensions, so should that be moved up to say, closer to 3% and that would accelerate the reduction on to you leverage over time? Or are you still targeting, with all these changes, the portfolio maybe only does 2% to 2.5% even longer term?

Dori Segal

Okay, so now I understand exactly what you are asking. So our assumption for same property NOI has been 2.5%, and we haven't changed in our model, even when we present stuff to rating agencies or other. This is our assumption and I will tell you why, Pammi. I was very clear, I think, in the last five years in saying that the retail landscape has changed in Canada, and I think it is going to continue to change. We assume our assets continues to perform that well but we also assume that there might be some competitive headwinds in the business itself that you have to take into consideration. Growth is not something you achieve regardless of any real development in the field. So no, obviously if you can assume higher same property NOI, and we always say this, business is good, yes, we will see, I think, higher same property NOI. but we also assume and we get asked very often what happens with excess development in Canada, and you know most of the retailers have expanded quite a bit. We have got retailers from U.S. The grocery business has expanded. The competition is tough. You can't ignore those things. So I think it's only 2.5%, same property NOI growth is a fair assumption to our portfolio assuming you take some risks as well. If you want to take best case scenario, you can put 3.5% in the model. The model takes everything. Its not a problem. You can put whatever you want there.

Pammi Bir - Scotia Capital

So arguably 2.5%, three or four or five years from now will look a lot better than, say, 2.5% five years ago?

Dori Segal

Let me give you one simple example. In 2008 and 2009, some of the best companies in the U.S., the best which I hold in high regard, had negative same property NOI growth. I don't think you can get into this business and do a 10 year view assuming everything goes well. And if you want me to be a little bit more specific, at the risk of always sounding maybe not as enthusiastic as some of my peers, we have had a good run for 10 years. Given what we see in the market, I think it will be irresponsible to assume that once every 20 years you have a couple of years of weakness in any industry. So I wasn't shy about saying it. I think that on a relative basis, we are ending up with a portfolio that I don't think you can buy. I think we achieved returns on our development and redevelopment programs that are in excess of what these properties can be bought. And the few trades that you have seen in urban markets, I think prove me right. And that's basically it. In the 90s, all those performance that people did in real estate, they had assumed growth forever with no risk. We saw how it ended. You have to run your business as if something could go wrong as well. And I think that's what we are doing.

Pammi Bir - Scotia Capital

Okay. Just one last one. I am just going back to your comments on 3080 Yonge. It's a great location, right on the subway. But can you expand on the retail changes that you are planning? And have you looked at perhaps trying to acquire some of the space around it?

Dori Segal

Well, we did acquire some more space up the street and we usually comment on deals, as I have done in the Brewery District and in VMR, once the deals are done and completed. I think we have a fully clear idea which type of retailers we want to have in our assets. I would say that so far we have all indications that we are going to get it. But we don't have a done deal yet.

Pammi Bir - Scotia Capital

Okay. All right.

Dori Segal

I mean if rent was never an issue, we would have had a deal the day after we bought the property, by the way.

Pammi Bir - Scotia Capital

Right. Okay. All right. I will leave it there. Thanks very much.

Dori Segal

Okay. Thank you.

Operator

Thank you. The following telling question is from Mark Rothschild of Canaccord Genuity. Please go ahead.

Mark Rothschild - Canaccord Genuity

Hi, thanks. Good afternoon, and I will just repeat what Pammi said and congratulate Karen and welcome Kay. So you started off by saying that you are not happy with the share price, and that's why you are going to fund the equity component of the development and growth with assets sales and it's clear you are pursuing asset sales more than doing something like a joint venture. So my question is, is this a philosophical decision to not do joint ventures as opposed to asset sales? Or is that more of you saying that you really would rather not own these assets because times might get more challenging at some point?

Dori Segal

No, I think that I will divide my answer into three. First of all, have done more joint ventures in the last 18 months than in the history of the company. So we have done the number of joint ventures out west. We have acquired both Seton Shopping Center and South Oakville over the last few months with a joint venture of 50% partner. In Seton, it was an institution partner, and in the case of South Oakville, it was an existing owner in the property that owned 25% of the asset and wanted to increase its stake to 50%. So although it's a private entity, we are still the property and asset manager. So you will see partnership coming from us, particularly on acquisitions.

Second, I think that our asset sales versus selling equity in the clear statement. I am not going to be shy about it. I think when I look at what is the replacement cost of the assets we own and I duly implied cap rates, I have a strong bias against selling stock. It's very simple.

And I think the third, some of the sales we have done, Mark, are of smaller assets. We have sold some land of prospective developments in, I would be gentle in saying in trade areas that we don't own enough or we don't want to buy more. So it was a good piece of land. The people who bought it from us will make money. But again, we have a very clear view on resell which we express modestly. But it doesn't mean that we don't have a clear view. And we are acting upon it.

Mark Rothschild - Canaccord Genuity

Okay. You also talked about your view on contractual rent. That it's not always guaranteed longer term as leases expire. Are you seeing something in the market that leads to those comments, which seems a little more cautious than something you might normally say? Or is it just a general view that at times things change?

Dori Segal

I don't see anything in the market that leads me to say it. I just, sometimes, see that there is a bit of complacency or there is a basic assumption with what you have is what you have and the only direction it is full is to grow and the only question is by how much. And I would like to remind people who have been, I think most people have been around for a long time, know that rent doesn't only have one direction. And I think that if you look at the States as an example and Central and Western Europe as an example, we have seen cases where the new trends in retail, the new trends in demographics and the new consumer habits, well now new but changing consumer habits, which again is a process that takes years, do affect rent. So rent could go up in the industry 2%, that means in some place they are going up 5%, some place they are going down 2%. So some of the things we do, I think, are driven and motivated by a long-term view of certain trade areas and certain type of assets and certain type of tenants and certain type of uses, including but not limited to the online phenomena that is not going to be smaller. But it is not something specific. I just think that you also have to look when you own assets at what is the potential downside. It's not only what's the potential upside.

Mark Rothschild - Canaccord Genuity

Okay, great. Thanks a lot.

Dori Segal

Thank you.

Operator

Thank you. The following question is from Matt Kornack of National Bank Financial. Please go ahead.

Matt Kornack - National Bank Financial

Good afternoon, guys.

Dori Segal

Good afternoon.

Matt Kornack - National Bank Financial

Just quickly on Main and Main. I know it's not a substantial part of your portfolio, but it does look like they have been buying some, I would assume fairly lucrative, land positions, as well as they have drawn about CAD40 million on the credit facility that they have with them. Is there something that we should expect in terms of the new development coming forward out of that entity?

Dori Segal

First of all, the line of credit that you saw for Main and Main substitute more expensive debt that we had to this entity. Because we have a partner in the entity, we always left it to him. And if Rick wanted to refinance at a much cheaper rate than what we charge the business, then he is welcome to do it and therefore it is his decision and we have absolutely went along with it. There are a couple of approvals that we got on some of the Main and Main development that are moving ahead and as I said in the last call, I was hoping to elaborate a little bit more on this call. Stay tuned, we like very much what's happening there. There is a couple of assemblings towards the end. The nature of this business is obviously more work that is done without a lot of hoopla because it requires us to assemble assets that are continuous to each other. So it takes a bit more time on that.

Matt Kornack - National Bank Financial

Sure, sounds good. In terms of, there was some Sobeys' closures during the quarter, but I don't know, that doesn't directly impact you or maybe it does, I am not sure. I haven't looked at all of the assets. But are you seeing that trend anywhere else, in terms of any of the other retailers within your portfolio?

Dori Segal

We had one closure of Sobeys out west in a small property off Macleod Trail. Maybe Brian, you want to, can we comment on any of that or?

Brian Kozak

Well, no, and it was a store that wasn't performing fairly well, so we were aware of that issue. But we don't foresee anything else in terms of the Sobeys' network as far as we are concerned [ph]. In that particular case, we do have a number of other operators, food and otherwise that are currently looking at it.

Matt Kornack - National Bank Financial

Okay.

Dori Segal

And it is a very long term lease. So I think we are in a pretty good position, let me put it this way.

Matt Kornack - National Bank Financial

Sure, and on the dividend increase, what was the rationale or the discussion that went into ultimately increasing the dividend at this point?

Dori Segal

So we have always said that we would aspire to increase the dividend by maximum of a half of our growth in FFO. We have a CAD0.02 to CAD0.03 FFO growth this year. So we thought CAD0.01 would be appropriate and that obviously automatically suggests the CAD0.01 increase next year, which tells you a little bit of where we are there as well. So we are pretty comfortable all the way at the height of our development program that we are going to continue, due to the strength of the stabilized portfolio to perform well regardless of the development program. That was really the issue. I don't think there is anybody that's heard us in the last number of years would be surprised that they are not going to be spectacular, given the increases in the next two year, but the moderate FFO growth allows to edge it up a little bit.

Matt Kornack - National Bank Financial

Great. Thanks, guys, and best of luck, Karen.

Karen Weaver

Thank you, Matt.

Operator

Thank you. The following question is from Heather Kirk of BMO Capital Markets. Please go ahead.

Heather Kirk - BMO Capital Markets

In terms of the payout ratio comments or the dividend increase, given your comments about slower growth, are you more comfortable than having more, I guess, return go back to shareholders in the form of distribution? In terms of your commentary about the outlook potentially slowing going forward? I know in the past, you had talked about 80% being a target. And I am just wondering whether that's been revised?

Dori Segal

So you see, our target AFFO payout ratio is 70%, Heather and I think this is ultimately where we need it to be. Again, I think that if you look at CAD0.02, CAD0.03 growth CAD0.23 for this year and maybe slightly better for next year, with CAD0.01 dividend increase, we are continuing to improve our payout ratio. And I think that with the end of 2015 and 2016, we should see other development coming online, we are certainly confident and hopeful that you are going to see a pickup in FFO growth and again, I don't know make comments about the fact that we recognize that markets can change to be a final review on the market. I think that if you don't recognize today that retail is a more competitive business, then perhaps I envy you because my view is that we have to be cautious in terms of our expectations from the full industry itself. It's a competitive industry, I know. I am saying it for years already and I think that in the last couple of years, more people commenting on this and I It's pretty much a common knowledge where it is. You are very highly dependent on location and on your mix and offering in your centre in order to perform sales growth within the retailer that would allow them to pay you more rent. You cannot disconnect this relationship. People don't pay you more rent because there is a lease and it is coming to an end. They pay you more rent because they have good sales and they can't find another place in the market at a cheaper rent. That's why they pay more rent. There is no relationship that gets you more rent. It's only the strength of the retail.

Heather Kirk - BMO Capital Markets

So it would be accurate to say that it's more a question of, I guess, risk mitigation or preparing for potential adverse markets than it is the expectation that rental growth is going to fall off?

Dori Segal

Yes.

Heather Kirk - BMO Capital Markets

And I am just kind of wondering whether, you did talk a while back about 5% to 8% FFO growth, as some of the developments came on stream. So would that still hold?

Dori Segal

I think if you look at the things that hold up our balance sheet right now and sum it up, you will see that CAD0.02, CAD0.03 can double if some of the things that hold up the balance sheet today are removed. It's a simple math. And I think that the fact that we have a very comfortable debt maturity and we keep such high liquidity to make sure that we can fund all our plans and refinance our debt in a comfortable manner has a cost. You can't ignore it. It is very simple. I understand that seven year money is a lot cheaper than eleven year money. And maybe even disproportionately cheaper. We still finance for the longest period we can because we like to have certainty in the spread between our cost of debt and the future return.

Heather Kirk - BMO Capital Markets

Given your comment on how cheap you think the equity is, is that a potential use of -- is buying back your stock something that you consider, given how much cash you have on the balance sheet?

Dori Segal

The cash we have on the balance sheet, first of all is to the end of the quarter. We have a call on a bond for CAD100 million. So you can deduct from the CAD250 million, CAD100 million right there. Again, we are at least of the habit of prefinancing some of our development spending. And let me be very clear on it. When you go in to a renovation program in Hazelton that cost you X amount of dollars, I don't care where the economy is going next year. You are going to finish it and you are going to see it through, in order to get your rent. So I don't think the excess liquidity, if you see, other than being a prudent developer and leaving things to fate and counting on markets to be there always to finance you. I don't think if you look at the debt to EBITDA for First Capital, our leverage today, we are in a position to buy back shares unless they were outside event, so the market comes in and the shares trade at CAD0.50 on CAD1. I am not saying no. I never say no. And there has been previously in my career in this business that I have been ahead of a lot more leverage than I am today. But if you want to be a high credit quality company, which we absolutely want to, this is the core part of our strategy, then you look at the number and you look at what we are doing with our capital, I don't think buying back shares is the best use of capital right now. I think we all agree to this.

Heather Kirk - BMO Capital Markets

Thanks very much.

Dori Segal

Thank you.

Operator

Thank you. (Operator Instructions). The following question is from Sam Damiani of TD Securities. Please go ahead.

Sam Damiani - TD Securities

Thanks. Just on the market rents that you estimated in the MD&A at CAD23 to CAD25 against an in place rent of CAD18, so around 30% to 35% differential, yet your renewal uplift is consistently in the 12% to 15% range, let's say. How would you account for the difference there? And do you see that, being able to capture a larger renewal uplift in the future?

Dori Segal

First of all, Sam, all the renewals include fixed down leases as well. So it's a blend. I guess I could probably give a bit more details about the renewal and split them into all fixed leases versus not. So that's the number one thing. The other thing is, if you look at our development and redevelopment coming online, they are pretty much having the CAD25 range, and the only difference between the space that come up for renewals with no TI and no IPO investment and no capital versus redevelopment or development is the fact that the market price for a brand new space, I don't mean we can go back and value every cent that we have and look at market rent, but the combination of average renewals of north of 10% including fixed leases, and by the way, our renewal rate, Sam, includes all anchorage as well and that you know, some of them like supermarkets, like Canadian Tire, like Walmart, like such store tenants have fixed leases and if they do have upticks, they are hardly ever more than 5% every five year. So all that is part of the blend. We may be able to, in future, do a little bit more disclosure on that front we will definitely, if that's something that you care about, we would definitely look at doing that.

Sam Damiani - TD Securities

I mean, it might be helpful, and thank you. The other question I had was just on the operating cost recoveries and the tax recoveries. They were down, give or take, one percentage point year-over-year. We spoke about this a quarter or two ago, partly a function of different properties acquired over the years having different lease structures, but is this something that you see recovering, if you will, in the next little while, being able to recover more of these operating costs and property taxes in the next couple of years?

Karen Weaver

Yes, Sam. I would say, yes. I mean, if you look back over 10 years, you can see that we have, for the most part, stayed at a certain level of recovery for taxes and operating costs and we will continue to see uptick in that is our development and redevelopment completes on each of the properties. I think we have a pretty good track record in terms of these and we will some slight increases, but its not going to be anything dramatically different from what it is, a couple of points here and there, but most of it is occupancies are development related.

Sam Damiani - TD Securities

Thank you.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Segal.

Dori Segal

Thank you very much. And again, I would like to end the call by two things. As I said before, we are very pleased with where our portfolio is today and where it is going, notwithstanding the fact that I might sometimes sound like I have concerns. I think this is what I am paid to do. When you do the type of business we do with the type of entrepreneur work we do, you have to err on the caution side when you run the business both financially and in terms of your expectations. So but if you actually look at what you are doing and look at the type of development we are doing, it is quite remarkable, I think that we have managed to assemble these type of assets and get the assembly to a point where we can actually draw such a value from consolidating those assets, both in the Hazelton area, Liberty, Mount Royal in Montreal. So I am actually very pleased with where we are. And I think we are going to continue to see modestly good news as the year progresses, as next year comes.

Then the second thing, again I would like to thank Karen for everything she has done for us. I am sure we will see her again and hopefully we will see her in (inaudible) this year. And thank you very much for listening to us. We will talk to you in the next quarter. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you now disconnect your lines.

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