SmartCentres REIT had a very solid 2022 and expects that positive momentum to continue this year, executives revealed during a Feb. 9 conference call to discuss its Q4 and year-end financial and operating results.

“From virtually every perspective, 2022 was a strong recovery and 2023 is shaping up to be more of the same,” said Rudy Gobin, executive vice-president of portfolio management and investments. “Physical retail and especially our value-oriented and enclosed centres continue to be in high demand in communities across Canada.” 

SmartCentres’ (SRU-UN-T) portfolio is comprised of 185 properties comprising 3,500 acres and 34.8 million square feet of income-producing retail and office space. Walmart anchors about three-quarters of the retail properties.

“The fourth quarter capped off a year of resurgence both in consumer traffic and retailers wanting more space,” said executive chairman and chief executive officer Mitchell Goldhar. 

“Not only are we seeing continued demand for space in most of our nearly 35-million-square-foot value-oriented portfolio, but we are also welcoming new retailers to our centres in many segments, allowing us to provide a more compelling and diverse offering to every community we serve across Canada.”

Operational highlights

Shopping centre leasing activity remained strong with occupancy at 98 per cent in the fourth quarter ended Dec. 31. That represents a 40-basis point increase from 2021 and a return to pre-pandemic levels.

SmartCentres completed 720,000 square feet of vacancy leasing in 2022. Leasing demand was driven by a variety of tenants, including grocery stores, dollar stores, pharmacies and health and beauty retailers. In non-urban markets, demand has also come from furniture, home decor, appliance and craft stores.

The REIT renewed almost 90 per cent of maturing leases comprising about 4.5 million square feet, with an average rent increase of 3.1 per cent. It has already renewed half of the leases maturing this year.

Financial results

“The financial results for the fourth quarter reflected continued solid performance in our core business, with results that are now trending above pre-COVID levels by virtually every measure, including net operating income, payout ratio and average rent per square foot,” said chief financial officer Peter Slan. 

Same property net operating income for the quarter increased by $5.1 million, or four per cent, as compared to Q4 2021. It rose by $16.5 million, or 3.3 per cent, for the full year. 

SmartCentres’ total assets were $12.1 billion at the end of the year, compared to $11.5 billion to close 2021. It has an unencumbered pool of assets valued at $8.4 billion, a 43.6 per cent debt-to-asset ratio and significant liquidity, according to Goldhar.

“We remain comfortable with our conservatively structured debt ladder where the most significant aggregate maturities are in 2025 and 2027,” said Slan.

“We do have an upcoming maturity this spring with a $200-million debenture and we are currently exploring multiple refinancing options. 

“Approximately 82 per cent of our debt is at a fixed interest rate, which has been a significant benefit to us during the recent rising rate environment. In short, our balance sheet remains strong.

"It withstood the pandemic well and we believe that we are extremely well-positioned to fund the various growth-oriented development projects that are currently in our pipeline.” 

Development activity

SmartCentres’ intensification program consists of rental apartments, condos, seniors’ residences and hotels that will be developed under the SmartLiving banner, and retail, office and storage facilities that will be developed under the SmartCentres banner.

It’s expected to produce an additional 56.1 million square feet (with 41.2 million square feet being SmartCentres’ share) of space.

SmartCentres achieved more than 6.1 million square feet of permissions for new mixed-use developments in urban locations with high demand for housing in 2022.

More than three million square feet of construction activity is underway, principally high-rise condominium and purpose-built rental residential on existing shopping centre sites in and around Toronto, Montreal and Ottawa.

All of these projects are expected to be completed by the third quarter of next year.

“The REIT’s share of the total expected project costs, including land, is $539 million, of which $304 million has been spent to date,” said Slan.

“We have more than adequate liquidity to finance the remaining $235 million of construction costs associated with these projects.”

Current developments

Construction of the 45- and 50-storey Transit City 4 and 5 condo towers at the SmartVMC site in Vaughan is in the final stages, with closings scheduled to start in March. All 1,026 units have been pre-sold and construction costs are on budget.

Construction of The Millway, a 36-storey, 458-unit purpose-built rental apartment building that’s also part of SmartVMC, will have its first tenants take occupancy this month.

The REIT’s share of SmartVMC, when completed, is expected to include approximately 20 million square feet of mixed-use space.

SmartCentres and its partners recently started construction of a townhome subdivision with 174 homes at the nearby Vaughan Northwest development.

Goldhar said apartments in the Montreal suburbs of Mascouche and Laval are nearing completion and have received a high level of interest from renters.

Construction of a 240,000-square-foot industrial building with 40-foot clear heights on 16 acres of a 38-acre site on Highway 407 in Pickering, Ont. is in the final stages and half of it has been pre-leased, according to Goldhar.

Construction continues on the 402-unit Laurentian Place retirement residence and seniors’ apartment project in Ottawa, with completion expected in the first quarter of 2024. 

“Our JV partner on this project, Groupe Sélection, is currently facing some financial challenges,” said Goldhar.

“However, construction is continuing and SmartCentres continues to support this project and we are confident in a path to substantial and successful completion.”

Goldhar said the REIT has opened seven self-storage facilities in the Greater Toronto Area and has three more under construction — which will have more than 2,600 storage units — in Markham, Brampton and Whitby.

SmartStop Asset Management, LLC is a joint venture partner in SmartCentres' self-storage properties.

“We are very pleased with the performance, both in terms of stabilization and overall NOI,” said Goldhar, noting SmartCentres’ yield for self-storage is exceeding seven per cent.

Future development

SmartCentres has 48 other development projects scheduled to start construction in the next two years, though some could be put on hold if it’s decided the timing isn’t right due to variables including higher interest rates and inflation, other economic factors or political uncertainty. 

Goldhar said multiresidential developments are at the most risk of being held back because they’re the most capital-intensive and take the longest to build.

“However, sitting back is not in our DNA,” said Goldhar. “Over the past 30 years, we have consistently navigated and pushed forward in many market conditions, building a dynamic and resilient portfolio starting from 1994 with the opening of the first newly built Walmart in Canada. 

“At SmartCentres, we’re far too forward-thinking to be distracted by noisy headlines to take our eye off our long-term vision and objectives of building lasting value for communities across Canada and enhancing value and growth for our unitholders.”