Primaris Real Estate Investment Trust (OTC:PMREF) Q1 2024 Earnings Conference Call May 2, 2024 8:30 AM ET
Company Participants
Alex Avery – Chief Executive Officer
Pat Sullivan – President, Chief Operating Officer
Rags Davloor – Chief Financial Officer
Leslie Buist – Senior Vice President, Finance
Morde Bobrowsky – Senior Vice President, Legal
Graham Procter – Senior Vice President, Asset Management
Claire Mahaney – Vice President, Investor Relations & ESG
Conference Call Participants
Mark Rothschild – Canaccord
Lorne Kalmar – Desjardins
Brad Sturges – Raymond James
Matt Kornack – National Bank Financial
Sam Damiani – TD Securities
Sumayya Syed – CIBC
Mario Saric – Scotiabank
Operator
Good morning everyone. And welcome to Primaris REIT’s First Quarter 2024 Results Conference Call. At this time, all lines have been placed on mute. After the prepare remarks, there will be a question-and-answer session. You may ask one question and a follow-up, at which point you may return to the queue.
I will now like to turn the call over to Claire Mahaney, Vice President of Investor Relations & ESG. Please go ahead.
Claire Mahaney
Thank you, operator. During this call, management of Primaris REIT may make statements containing forward-looking information within the meaning of applicable securities legislation.
Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Primaris REIT’s control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information.
Additional information about these assumptions, risks and uncertainties are contained in Primaris REIT’s filings with securities regulators. These filings are also available on Primaris REIT’s website at www.primarisreit.com.
I will now turn the call over to Alex Avery, Primaris’ Chief Executive Officer.
Alex Avery
Thank you, Claire. Good morning. Thanks for joining Primaris REIT first quarter 2024 conference call. Joining me today are Pat Sullivan, President and COO; Rags Davloor, CFO; Leslie Buist, SVP Finance; Morde Bobrowsky, SVP Legal; Graham Procter, SVP Asset Management; and Claire Mahaney, VP, IR & ESG.
We are pleased to report continued growth in our business in the first quarter spanning same property NOI growth, occupancy and conversion of preferential lease structures back to standard leases. We have maintained and slightly increased our guidance measures, reflecting a strong start to the year and see several more years of above average growth ahead.
From a platform perspective, the acquisitions completed in 2023, our larger national footprint and high asset quality continues to increase our relevance with both existing tenants and new and exciting new-to-market retailers. This dynamic is a positive feedback loop that we expect to continue to accelerate as we leverage our platform and new investments.
We continue to be very active in discussions on several acquisitions and dispositions. Following our $400 million unsecured bond offering in November and the upsizing of our undrawn $600 million credit facility, we have robust liquidity and are finding lots of attractive opportunities.
We have capacity for more than $1.5 billion of acquisitions and require no financing conditions in our deals. This profile is a well-capitalized, incredible counterparty in the market and a real differentiator in what is a currently challenging transaction market for many participants.
Subsequent to quarter end, we entered into an agreement to sell Garden City in Winnipeg, Manitoba for $31 million. This is our first non-core income-producing property disposition entered into since the spin-off and aligns with our strategy to focus on owning a growing high-quality portfolio of market-leading and closed shopping centers in Canada.
This disposition improves our overall portfolio quality and growth profile and further demonstrates Primaris’ ability to transact. We are currently engaged in discussions with prospective purchasers for further dispositions. Our capital recycling program is a key pillar supporting our profile as a buyer of market-leading malls and positions us well to capitalize on future opportunities.
I now turn the call over to Pat to discuss operating and leasing results followed by Rags who will discuss our financial results.
Pat Sullivan
Thank you, Alex. Primaris is now the largest owner and manager of enclosed shopping centers in Canada measured by Mall Counts. This means that we have very good visibility into the performance of a wide network of stores across many retailers and banners nationwide.
Given the nature of our business and our unique lease structure, the majority of CRU tenants or tenants under 15,000 square feet are required to report the sales they generate within our malls.
The analysis of tenant sales enables proactive management of merchandising, the identification of trends and insights into tenant financial health in advance of any formal corporate disclosures.
Analysis of tenant performance enables us to manage merchandise mix in order to maximize revenue and mitigate risk associated with potential tenant failures. We review monthly sales reported for changes in trends specific to tenants and categories in each of our properties and compare performance across our national portfolio.
Property merchandising plans are crafted to optimize the size and tenant composition of each category to maximize potential revenue growth. Our leasing and operation teams work diligently to identify new brands that would complement and enhance our tenant mix while proactively working to reduce exposure to those tenants that are losing relevance with the consumer.
From a retail tenant perspective, tenants are continuously looking to optimize their portfolio of stores, opening new stores in locations where there is strong demand and closing underperforming stores. Store rationalization is a regular course of business as retailers look to optimize their portfolio to drive profitability and increase brand awareness allocating capital where they believe it will generate the best return.
E-commerce has provided tenants valuable information regarding their customers and retailers have come to recognize the importance of having a physical store presence in markets where they have strong online sales. The rise of e-commerce activity has become an important tool for retailers in evaluating their portfolio of stores with tenants rationalizing their number of locations in a given market focusing on market coverage from the highest traffic locations as opposed to market saturation.
Primaris focus has been and will continue to be on owning market leading and closed malls in Canada. With that background on the visibility we have into tenant sales performance and profitability, the financial health of tenants continues to be quite favorable and the dialogue with tenants looking for new and expansion opportunities remains robust.
Our NOI growth in the first quarter is supported by both strong fundamentals we’re experiencing, low supply, rising sales, population growth, and increasing tenant demand for quality space as well as our national full service platform and team. Specifically growth is coming from a number of sources including rising occupancy, remerchandising of former anchor premises, increasing sales, falling non-recoverable expenses, and improving recovery ratios.
As a result, same properties cash NOI was up 2% for the quarter as compared to Q1, 2023. In Q1 portfolio in place occupancy with 92% relatively flat versus Q4 as over 100,000 square feet at Halifax shopping center came online offsetting the typical decline in the in place occupancy as a result of the Q4 holiday shopping season.
Committed occupancy was also remained flat at 94.1%. As compared to Q1, 2023 same property in place occupancy increased by 1.2% to 91.6%. We remain focused on driving our occupancy back to historical levels of 95% over the next few years.
During Q1 2024 we signed 26 new deals for 150,700 square feet and are in advanced stages of negotiation with a number of large format tenants which we anticipate to close over the next two quarters. Same property, same store sales productivity is at an all-time high of $628 per square foot and including Conestoga and Halifax productivity rises to $677 per square foot.
Tenant sales remain very strong across all categories and we continue to see strong sales growth in Alberta due to high population growth. In Q1 2024, renewal rents increased 7.4% over previous in-place rents. We anticipate continued positive growth in rental rates due to strong fundamentals in the enclosed shopping centres industry being a 30-year low in per-capital enclosed malls square footage in Canada coupled with high tenant sales.
Not captured by our renewal leasing spreads is the conversion of leases with preferred rental terms such as percentage rent and lieu of base rent back to net leases. The implication being that there are additional rental gains beyond those that are captured by the traditional net-to-net leasing spread analysis and our leasing spread understate the growth we are experiencing.
At quarter end, approximately 9.2% of our tenant base was on preferred rental structures compared to 11% at year-end and 15% at the beginning of 2023. With the number of other leases completed and commencing later in the year, this figure will continue to decline during the balance of the year, which will have a significant positive impact on our NOIs for 2024 and beyond.
We have made significant progress in addressing our 2024 maturity and have 883,000 square feet of expires remaining of which 580,000 square feet is CRU. We are well advanced in discussions with our 2024 expiry tenants and have no concerns pertaining to completion of outstanding negotiations.
To conclude, we are pleased to announce the $54 million redevelopment of the former Sears space at Halifax Shopping Center with substantial completed prior to our acquisition in November of 2023 is now open.
The redevelopment includes a 56,200 square foot Simons, a 38,500 square foot Winners, a 13,000 square foot Dollarama and a 15,000 square foot PetSmart, all of which opened prior to the end of March.
The first to market Simons opens to a large and enthusiastic crowd. Simons location at Halifax Shopping Center is the only location east of Quebec and we believe Simons, in addition to other stories unique to the region including Apple, Eritrea and ZARA, will continue to make the Shopping Center the leading retail center in the maritime.
And with that, I’ll turn the call over to Reg to discuss our financial results.
Rags Davloor
Thank you, Pat. And good morning everyone. Strategically we continue to focus on a differentiated financial model represented by low leverage, low payout ratio and significant free cash flow, which we believe is a major strategic advantage for Primaris REIT.
Keeping in line with best practice and transparency, and reflecting strong results to date and the strength of our business, we are raising our 2024 cash NOI guidance range by $2 million to $265 million to $270 million and the FFO per unit guidance range by $0.001 to $1.61 to $1.64 per unit.
Other changes to guidance include a $1 million increase in G&A range to $31 million to $33 million and straight line rent and rental revenue to $4.8 million to $5 million. The above guidance does not contemplate future acquisitions, nor the deployment of the $74 million of cash on hand. For the details of our 2024 guidance can be found in section four of the MD&A titled Current Business Environment and Outlook.
With regards to disposition, we currently have 124 million of assets held for sale, inclusive of Garden City, which is currently under contract and are in various stages of discussions on the majority of the disposition asset pool.
The team is continuing to progress on ESG initiatives, including the development of ESG performance objectives and targets that align to our business strategy, formalizing a climate strategy, allowing to IFRS S1 and S2 standards, preparing our second grant submission and wrapping up the successful implementation of the utility data collection system.
Our operating and financial results for the quarter remain very strong. Tenant health is strong across our portfolio and our many operating metrics are continuing to improve, capturing growth.
For the quarter, FFO per unit was $38.08 as compared to $36.09 for the same quarter last year, an increase of 5.2%. Our average net debt to adjusted EBITDA was 5.7 times, relatively unchanged from Q4 and within our range of 4 times to 6 times. As a reminder, this range forms part of our Executive compensation structure with the top end of the range of 6 times a hard line in the sand of which we will not breach.
The unsecured syndicated revolving term facility was upsized to $600 million from $400 million in Q4, significantly increasing liquidity. At present, we have nothing drawn on the facility and are ready to capitalize on potential acquisition opportunities.
We refinanced two JV assets of secured debt, Cataraqui Town Center and Regent Mall, replacing maturing debt for these properties. The rate on the $35 million loan on Cataraqui is 5.29%, and the $40 million loan on Regent is floating at adjusted core rate plus 1.45%.
Our exposure to floating rate debt is very low at 1.5% of total debt as we had $20 million of the variable rate debt subsequent to quarter end. During the quarter, we incurred a favorable fair value adjustment of approximately $13.1 million, primarily driven by rising cash flows on our properties.
During the quarter, our best-in-class capital structure was reaffirmed as DBRS Morningstar reconfirmed our BBB high Stable rating. With unencumbered assets of $3.3 billion, unsecured debt totaling 78% of total debt, the only maturing debt in 2024 is a $50 million mortgage and full availability of our $600 million operating line with significant cash on hand.
We are well positioned with reduced refinancing risk and access to liquidity. Our total available liquidity at quarter end was $684 million, giving us lots of room to capitalize on future investment opportunities.
Primaris has been in the market continuously repurchasing units since March 9, 2022 under the NCIB. At that quarter end, we have repurchased for cancellation of $8.5 million units, with an average value per unit of approximately $13.81, or an approximate 36.8% discount to NAV of $21.86. This program is very accretive to unit holders.
Maintaining a conservative financial model and generating free cash flow after distributions and operating capital is a core focus, which we will not deviate from.
And with that, I’ll turn the call back to Alex.
Alex Avery
Thank you, Rags. I wouldn’t be doing my job if I didn’t mention our differentiated financial model. I’ll draw everyone’s attention to the fact that our IFRS NAV per unit rose year-over-year and sequentially, while the going in cap rate used to value our properties rose modestly again year-over-year and sequentially. The going in cap rate rose primarily due to stable values and the growing NOI.
It is worth looking at the details metrics used in our IFRS values including a 7.16% going in cap rates, an 8.34% discount rate, and a 7.31% terminal cap rate. Notably, these metrics provide a very healthy 150 to 200 basis point positive cap rate spread over Primaris’ current cost of debt.
This level of cap rate spread over financing has historically been a very attractive spread for real estate investors. Primaris’ differentiated financial model eliminates the incentives for Primaris that other organizations face, making them reluctant to reflect higher cap rates to value their properties. A fact highlighted in the public markets by the scarcity of Canadian REITs with IFRS values that offer significant positive cap rate spreads over the cost of financing.
The incentives I mentioned include compensation tied to IFRS NAV and asset fair values as well as the hurdles that arise for refinancing properties where fair values have been reduced as well as executive compensation benchmarking based on total assets.
In reality, it’s just a timing issue. Users of our financial statements should be aware that we have seen the metrics embedded in our IFRS NAV move more significantly than our peers and currently reflect very conservative values. Our confidence in the REITs IFRS NAV is underscored by the continuous repurchase of units under our normal course issue of the everyday since March 9th of 2022.
As a result, Primaris’ materially better positioned to see NAV and cash flow per unit growth over the next few years driven by internal growth, reinvestment of excess free cash flow, and stable valuation metrics.
For those looking to better understand our business, we’re looking forward to showcasing our latest acquisition, the Halifax Shopping Center, at an Investor Day and Property Tour we are hosting in Halifax, Nova Scotia in September. We hope you can join us.
To conclude, we spend a lot of time talking about the differentiated financial model, because of the very significant advantages it offers to our unit holders, including superior FFO and NAV per unit growth, as well as the financial flexibility to execute on the REITs corporate strategy to grow the scale and quality of our business.
We’d now be pleased to answer any questions from call participants. Operator, please open the line for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Mark Rothschild from Canaccord. Mark, your line is now open.
Mark Rothschild
Thanks and good morning everyone. In regards to the asset sale and potential additional sales, not sure if you disclosed the cap rate, but I assume it would be higher than where your core portfolio is. I assume it’s maybe even somewhat dilutive on an FFO per unit basis. I’m wondering if you could just expand on how you think about the cap rate? If you can disclose any more information on that? And whether you’re looking at it in regards to the impact on NAV with unit buy back in regards to where you think the market is or how it would impact FFO units or just how this fits into your strategy.
Alex Avery
Yeah, thanks Mark. I know that we have some sensitivity around the cap rate from the purchasers’ perspective. What I think would be a reasonable assumption is if you took the average for our IFRS fair values, it would be in that range. So I think 7.16 is the going-in cap rate.
And when we think about it, FFO impact is not really the primary criteria that we’re looking at. It’s not a large enough transaction to have any material impact on our overall metrics in any event. But when we’re looking at it, really what we’re looking at is that these non-core assets that are generally not enclosed shopping centers are capital that we can recycle into enclosed shopping centers, which is our strategic focus.
So we’re pursuing several of these transactions. Generally, they are smaller. Generally, they are unenclosed retail, although we have an industrial property that’s asset held for sale as well, some land parcels, things like that and what we’re really focused on is really more managing the balance sheet. So these dispositions provide fuel for further acquisitions of our core focus being market leading shopping centers.
A – Rags Davloor
Again, just to add to that Mark. So the cap rates generally are higher as would be expected in the assets we’re selling, but we’re selling raw land. And so when we’re selling the land, there’s no dilution that’s accretive. It’s just pure cash, so that sort of balances out some of the dilution from the income-producing assets we’re selling.
Mark Rothschild
Okay, great. Thanks. And maybe just to follow-up on that. You notice that you’ve been buying units back in the market pretty much every day, I guess that you’re allowed to. To what extent are you comfortable continuing doing that? And I recognize there’s a big discount to NAV, considering that it does feed into the liquidity of the units in the market.
A – Alex Avery
Yeah, I would say number one, we are very comfortable continuing to buy back units when you do the math exercise around what the return on invested capital looks like, there’s nothing that comes remotely close. I made some comments about the IFRS spread that we have over our cost of financing to going in cap rate versus the marginal cost of debt.
If you look at our units, they are implying somewhere in the mid to high 9% cap rate and that’s a 400 to 500 basis point spread over our cost of financing. It’s just a really remarkable return.
But to your second or your follow-up question points, we are very cognizant of the impact that we have on trading liquidity and on float. And generally, what we do is we fund any and all NCI repurchases out of excess retained free cash flow. So in effect, we’re not actually shrinking the business. And that, to contrast that with what the alternative would be, it would be either levering up the balance sheet to buy back stock or selling assets to buy back stock and those are two things that we haven’t done.
We’re not contemplating doing those things. We’re very focused on our business and pursuing our strategic objective of becoming the first call for retailers when they come to Canada. And that is assembling a market leading shopping center portfolio across the country. And as we pursue that, we’ll – we are very keen on increasing the trading liquidity in our stock and it’s sort of a positive feedback. The better the trading liquidity gets, the less the concern is about trading liquidity, the higher the valuation, the better the trading liquidity becomes. So it is something that we think about a lot.
And if you look at our filings every day in 2024, so far we’ve bought 2,500 units a day. It’s not a very big number. To put that in context, there were large chunks of Q4 when we were buying 30,000 units a day. So we’re continuing to allocate capital there, but we’re also balancing that with some of the other strategic objectives that we’re working on.
Mark Rothschild
Okay, great. Thanks so much.
Alex Avery
Thanks Mark.
Operator
Our next question comes from Lorne Kalmar of Desjardins. Lauren, your line is now open.
Lorne Kalmar
Thanks. Good morning. Just looking at the gap between in place and committed occupancy, it looks like it’s kind of consistently widened out now, I think a little over 200 basis points. What has been the drive of that? And do you see that gap narrowing over the balance of the year?
Alex Avery
Hi, Lauren. We still have a lot of deals that are coming in. Q2 should be very productive in terms of leasing as well. And there’s a lag between the time we do the deal and the time the tenant opens, and there’s a lot of these stores that are large formats. So when there are bigger stores, they typically take longer to get open. So I expect our committed occupancy is actually going to jump next quarter as well, but we do see store openings happening. It’s just a matter of timing.
A – Rags Davloor
And we are experiencing some delays in the fit-outs just because of the municipal approval process, and that’s causing some headaches, just on the build-out outside. That’s caused some of the widening, and that should come back in and start to fix itself in Q3, Q4.
Lorne Kalmar
Okay. And we’re hearing a lot about retailer expansion plans across Canada and the lack of space. And I know one of your open-air peers is saying they don’t think that a lot of retail is actually able to accomplish with expansion plans. How do you think the enclosed mall kind of plays into this whole dynamic?
A – Alex Avery
I think for us, it’s a great opportunity. We do have space as you know, like we’re working on driving our occupancy materially higher, and we’ve been successful in the last couple years of making great progress. There’s still a lot of retailers looking for expansion premises.
We do have tenants continuing to relocate from other centers in our markets into the shopping center and part of that is driven – there’s a number of factors. One is the availability of space in our malls compared to other developments. Another is just the more secure nature of the enclosed shopping center in terms of shrinkage. So there’s a number of factors driving our occupancy gains.
Lorne Kalmar
Okay, interesting. Thank you very much. I’ll turn it back.
Alex Avery
Thanks Lorne.
Operator
Our next question comes from Brad Sturges of Raymond James. Brad, your line is now open.
Brad Sturges
Hey, good morning. Just to go back to the asset sales discussion there and looking at your assets held for sale. It looks like the composition changed from your answer at the end of Q1. One land parcel might have been removed and it looks like a couple income-producing assets added. Just curious, is that simply a function of the discussions you are having today or is there another (inaudible) for the composition change?
Alex Avery
It really is just a function of the latter, what you said. It’s just a function of the discussions we’re having. One of the land parcels we did have for sale, there was servicing issues for the site. It’s not that it’s being taken off for good. It’s just a delay and so the discussion we had gets moved out. But generally the composition is more or less aligned with where we started. It’s just the ebb and flow of the people we were discussing with.
Brad Sturges
Okay. And in terms of the 2024 guidance as it relates to FFO, does that include asset sales? And if so, I guess beyond Garden City, would there – I guess how much of – how much in terms of dispositions would be included in that figure if they are included?
Alex Avery
Yeah, they are all included, but it tends to – we have a bunch that we’ve assumed will close in like October from the balance in December. So it really doesn’t have a big impact on the FFO. On the flip side, we haven’t modeled in any acquisitions and on the cash that we’re holding, that’s obviously slightly diluted. I mean, you do get a good return today on deposits. So we’ve assumed that were in 5% on the cash. So if we do redeploy, then that should be accretive to FFO. So that’s sort of how we put the model together.
Brad Sturges
Yeah, that’s great. That’s helpful. Thanks a lot.
Alex Avery
Thanks Brad.
Operator
Our next question comes from Matt Kornack from National Bank Financial. Matt, your lines are open.
Matt Kornack
Hi guys. Just quickly, the renewal spreads were quite strong this quarter and I know they jump around a bit. But can you tell us, just in terms of the relationship between the large format versus the CRU. It looks like you’ve done a bit better on large format than CRU. Do you expect that dynamics to change in time as kind of occupancy moves higher and you can push more on the CRU or am I reading into that incorrectly?
Alex Avery
Matt, no, I think one of the factors that plays in here is we do quite a few more renewals with small tenants than we do large, and I think there’s only a handful of large format tenants, with somewhat a function of which tenants are expiring and what their current rent is and such forth.
I do think as our occupancy is driving higher and with the lack of alternative space and our sales continuing to rise, there is good momentum in driving rent higher. It typically does come back to the subset of tenants that are expiring in that quarter. But I do expect over the course of 2024 to continue to show good, strong and positive rental growth in our renewals.
Matt Kornack
Okay, makes sense. And then two quick follow-ups, but just it looks like the leasing cost associated with bulk has been fairly consistent. So it is – and that you’d expect that going forward. But also just on the capital statements with regards to CapEx, is there a reason that that differs from your capital expenditure disclosure and then the IPP schedule? It just looks a little higher. Just wondering which one we should [Cross Talk].
A – Rags Davloor
Yeah, the reason why is, the cash flow statement is on a pure cash basis, while the financial statements on an accrual basis. So if we’ve committed and sort of let’s say the invoice is in, it’s accrued for. So it will be sitting in accounts payable, but it may not be running through the cash flow statement. So you do run into some noise as far as trying to reconcile the two numbers.
Matt Kornack
Just in terms of modeling is it probably better to use the disclosed CapEx schedule as opposed to the cash flow statement?
Rags Davloor
Yeah it’s a difficult one, because what we disclose is what we sort of spend. We don’t look at the timing of actually writing a cheque. So that’s actually done more on an accrual basis. So it really depends on how much is carried forward from the prior year, but it shouldn’t deviate materially.
Matt Kornack
Okay. No, that makes sense. Thank you.
Operator
Our next question comes from Sam Damiani from TD Securities. Sam, your line is now open.
Sam Damiani
Thanks and good morning everyone. Maybe just to – maybe looking for a bit of an update on Northland Village and the former Sears at Devonshire, what are sort of the latest and greatest in terms of what’s going on there?
Alex Avery
Devonshire, we have tendered out the demolition of the Sears box. We’ve got very good pricing in. We’ll be starting the demolition in the next 60 days. We’ve just about completed leases with two tenants on the interior portion of the mall. So we’re resetting the interior portion, which has been predominantly vacant. We bought the property before that, so that’s a significant pick up in occupancy in that property, and those leases should be done in the next – it would either be this quarter or next.
In terms of Northland, we’ve made great strides in terms of pre-leasing the remaining pad opportunities. We’re basically 100% pre-leased on the pads and so our plan is to start those up right away. It’s probably still about 24 months to completion, but we’re tracking towards around a 7% return on the project.
Sam Damiani
That’s great. Have the rents evolved since you started the project to today on Northland?
Alex Avery
The rents are higher than our original per forma. I mean costs have gone up, but they’ve been offset by a bit of increase in our rental revenue as well.
Sam Damiani
Great. Last one for me. Just like the business is doing well. All of the metrics are moving nicely in the right direction. Just wondering if you could – if there’s any regional disparities worth mentioning that would be helpful for us to understand in terms of maybe how you are thinking about capital allocation going forward as well?
Alex Avery
I don’t really know that there’s any significant regional differences. Alberta and actually the Maritimes are seeing very strong sales right now. All the markets are seeing strong sales, but Alberta especially with the population growth in that market is very buoyant right now.
I think our capital allocation in terms of the properties where we are selected, there are properties that have great upside potential and we’re going to be allocating capital to those properties and there’s some on our disposition list that we’re going to be clearly not spending a lot of money on those properties going forward, outside of what is required.
Operator
[Operator Instructions] Our next question comes from Sumayya Syed from CIBC. Sumayya, your line is now open.
Sumayya Syed
Thanks, good morning. Just on your disposition strategy, what appetite are you seeing for non-grocery open air centers and how would you characterize your willingness to structure future sales, similarly by utilizing the vendor take back component?
Alex Avery
Thanks, Sumayya. I think there’s quite strong buyer interest in the assets that we’re looking to sell. It’s really not anything specific about the assets that we’re looking to sell, other than that they are the right size. The private buyer market is pretty deep and people are interested in investing.
As I touched on earlier, we’ve been fairly hands-off in terms of our IFRS fair values, the cap rates that the appraisers recommend are the ones that show up in our financial results. As a result, as I mentioned, there’s a pretty healthy spread between where we’re carrying the assets from the cap rate perspective and the cost of financing. So there’s a pretty deep buyer pool for these assets.
As it relates to the structure, the purchaser in this case requested a vendor take back mortgage. That mortgage is six months – nine months. Pretty short term and we were happy to oblige. It’s really, only really enough time to put in place more permanent financing. We don’t think the loan to value is a challenge. We don’t think that this buyer will have any difficulty arranging a mortgage, and it’s quite small in the context of what that asset represents as a percentage of our total.
As a general rule, I think Primaris is very keen on having a reputation in the market as a group that can transact efficiently and get things done. So I think that’s just another example that’s on the buy side and on the sell side.
Sumayya Syed
Okay, that’s helpful. And then secondly, just moving on to your leasing activity, I noticed fairly long lease terms for new and large format tenants. I think around 13.8 years to be exact. So when you do leases of that length, how are the contractual rents there structured, if its annual and what’s the rate of growth there would be on average?
Alex Avery
Typically we’re pushing for 2% annual increases. With the largest format tenants, you sometimes get that, and sometimes you just get steps every three to five years. So it just varies depending on the tenant, but our goal is to push for 2% annual increases.
Sumayya Syed
Okay, great. Thank you.
Alex Avery
Thanks Sumayaa.
Operator
Our next question comes from Mario Saric from Scotiabank. Mario, your line is now open.
Mario Saric
Oh yeah, thank you. Good morning. So just the first question, I just wanted to touch on the slight increase in guiding. I recognize that the numbers are pretty small. I’m curious in terms of what the key drivers were behind the $2 million increase in cash NOI, the $1.3 million increase in straight line rent, and the $1 million increase in G&A.
Rags Davloor
Yeah, so the NOI was really driven by the strong performance of the recent acquisitions. So that was the main driver behind that, so almost all the $2 million was in connection with Halifax and Conestoga coming in stronger. What was the other one?
Alex Avery
Sorry, oh yeah, straight line rent was really Halifax, just the timing because of the Simons and all of that. There was some significant straight line rent in Q1. So we just sort of adjusted the numbers up. And then G&A is really just the increase in compensation and personnel. Just added a little bit more than we expected.
Mario Saric
Okay, that’s helpful. And then my second question would just be on bottom growth. Just given the magnitude of the potential opportunity there, there’s been a lot of macro headlines with respect to provincial and federal government looking to accelerate new supply growth on the residential side. There’s been some commentary about planned reforms to immigration that should be announced later this year by the federal government.
So I’m just curious if you can share kind of where that process stands today? Whether there’s been any change in terms of timing on a potential transaction there, and just some incredible pipeline, whether anything has changed in the last three to four months at that property?
Alex Avery
Thanks, Mario. Duffin Grove and Duffin Mall are topics of continuous discussion in our management meetings and board meetings. I think you referenced the potential changes in terms of development rules and regulations. There’s nothing as yet that’s concrete that we can really respond to.
I think when we think about Duffin Grove and try to frame the opportunity, it’s a fantastic development site. There are two developers right across the fence that are developing residential purpose-built and condo right now. So to the extent that someone was to come along and want to buy Duffin Grove and break ground, there’s an appropriate period of time to allow the market to absorb the other two projects.
I don’t think there’s a whole lot more time before someone might want to break ground on our site, but it’s also a very sizable development parcel, a lot of value, and as you mentioned, there’s a lack of clarity right now that has led to a decline in construction starts for both, purpose-built and for condo.
So we’re not in a position where we have to do something. We think about this asset as a very valuable asset to us, and we want to optimize the timing and pricing on that asset. So in a long-winded way, not a whole lot has changed in the last 90 days or 60 days since we last got our Q4 results, but I think it’s definitely something that we talk about.
We do see it as a real lever that we can pull in the business. As Rags mentioned, when you sell land, you lose no EBITDA, but you do get a whole lot of cash, and that’s something that we do discuss on an ongoing basis.
Mario Saric
Great. Okay. Those were my two. Thank you.
Alex Avery
Thanks Mario.
Operator
We currently have no further questions, so I’d like to hand the call back to the management team for closing remarks. Thank you.
Claire Mahaney
Thank you, Bruno. With no further questions, we’ll close today’s call. On behalf of the Primaris team, we thank you for participating, and we look forward to speaking with you again on our next call. Thank you, and have a great weekend.
Operator
Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines. Thank you.
