Primaris Retail REIT Q2 2026 Earnings Report

Primaris Retail REIT EPS Results

• Actual EPS: -C$0.10
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Primaris Retail REIT Revenue Results

• Actual Revenue: $174.11 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Primaris Retail REIT Announcement Details

• Quarter: Q2 2026
• Date: 7/29/2026
• Time: After Market Closes
• Conference Call Date: Thursday, July 30, 2026
• Conference Call Time: 10:00AM ET

Primaris properties including all of H&R REIT's enclosed malls comprises real estate properties. The assets are located in Canada. Primaris properties including all of H&R REIT's enclosed malls(TSX:PMZ.UN) operates independently of H&R Real Estate Investment Trust as of December 31, 2021.

Primaris Retail REIT Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Significant embedded NOI growth: Management identified approximately CAD 52 million of incremental annual cash NOI expected over the next three years, representing more than 13% growth from the midpoint of 2026 guidance. The opportunity is supported by signed leases, further leasing at productive centers, and the replacement of former HBC spaces.
• Positive Sentiment: Leasing momentum remains strong. Q2 CRU renewal spreads were 5.8%, overall leasing spreads were 7.4%, and CRU in-place occupancy improved to 92.3% from 89.4% a year ago. Former HBC space is 84% leased or in advanced negotiations, at rents nearly four times those previously generated by HBC.
• Positive Sentiment: Operating and earnings performance exceeded underlying headwinds: Reported FFO per unit rose 1.3% year over year to CAD 0.451, or 5.4% excluding terminated transaction costs and prior-year tax recovery impacts. Management reaffirmed 2026 guidance and expects same-property NOI growth to exceed its typical 3%-4% range over the next several years.
• Positive Sentiment: Additional capital sources and portfolio optimization: Primaris identified CAD 275 million-CAD 375 million of excess land and approximately CAD 200 million of non-core retail pads and other assets that could be monetized over time. Q2 dispositions and acquisitions also improved portfolio quality, sales productivity, occupancy metrics, and balance-sheet simplicity.
• Neutral Sentiment: Acquisition outlook is constructive but uncertain. Management said it is in more discussions with pension funds and could acquire one to three malls this year, but no transaction is currently advanced or certain. The company remains open to cash acquisitions or structured transactions while maintaining leverage discipline.

Presentation

[Operator]

Good morning, and welcome to Primaris REIT's second quarter 2026 results conference call. At this time, all lines have been placed on mute. After the prepared 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. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now turn the call over to Claire Mahaney, Vice President, Investor Relations and Sustainability. Please go ahead.

[Claire Mahaney, VP of Investor Relations and Sustainability at Primaris]

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 primarisreit.com. I'll now turn the call over to Alex Avery, Primaris' Chief Executive Officer.

[Alex Avery, CEO at Primaris]

Good morning. Thanks for joining Primaris REIT's second quarter 2026 conference call. Joining me today are Pat Sullivan, Rags Davloor, Julian Schonfeldt, Leslie Buist, Mordy Bobrowsky, Graham Procter, and Claire Mahaney. Halfway through our fifth year post spin-out, we are having a lot of fun at Primaris. All of the hard work over the past five years is manifesting in our financial and operating results. It has been a remarkable five years of change, with 70% of the portfolio new since 2021. We have moved from the 19th largest cap REIT index member to the ninth, driven by sector-leading FFO per unit growth, significant portfolio growth through net acquisition activity, and as our FFO and AFFO multiples have expanded to the low end of our peer group. We are still in the early innings of the mall recovery story.

[Alex Avery, CEO at Primaris]

In June, we announced visibility to approximately CAD 52 million of incremental annual cash NOI from leasing activity expected to commence over the next three years, underscoring what we believe is one of the strongest embedded growth profiles in the Canadian REIT sector. With in-place occupancy currently sitting at 86.6%, we have approximately 1,000 basis points of occupancy gains ahead of us to get us to stabilized occupancy of 96%. The CAD 52 million we have identified comes from three sources. First, signed and committed deals. Second, future lease up at our 10 most productive centers. Third, lease up of the 10 former HBC spaces that are now 84% leased or in advanced negotiations at rents four times higher than previous. Compared to the midpoint of our 2026 guidance range, this represents more than 13% growth in NOI over the next three years.

[Alex Avery, CEO at Primaris]

Taken together, our leasing pipeline and improving portfolio quality initiatives provide a clear and highly visible path to meaningful earnings growth over the coming years. With significant embedded NOI growth already identified, a stronger and higher quality portfolio, and multiple sources of internally generated capital, we believe Primaris is exceptionally well-positioned to create long-term value for unitholders and further strengthen its position as Canada's leading owner of dominant enclosed shopping centers. With that, I will now turn the call over to Pat, who will walk you through our operational results for the quarter.

[Pat Sullivan, President and COO at Primaris]

Thank you, Alex, and good morning, everyone. Year-to-date, tenant demand remains robust, with both the quality and volume of executed deals continuing to improve. CRU leasing performance is outstanding, driven by record leasing volume, strong renewal spreads, and sustained tenant demand. Leasing activity across our former HBC locations continues to accelerate, with retailer demand well ahead of our initial expectations. Benefiting from a constrained retail supply environment and the high quality of these real estate assets, we have leased or are in advanced negotiations on 84% of the former HBC space, including 58% that are under long-term lease agreements. Upon commencement, these leases are expected to contribute approximately CAD 19 million of annualized net rent or CAD 22 million of cash NOI from a diversified roster of high credit quality tenants.

[Pat Sullivan, President and COO at Primaris]

We believe the full impact to NOI could be higher, as this analysis does not account for the benefit to adjoining retail premises, some of which are currently vacant, that will benefit from being next to new tenants generating higher traffic. These leases executed to date are at rents nearly four times that of previously generated by HBC from the same space. Anticipated cash rent commencement from redeveloped HBC locations will begin in some properties as early as early 2027, with overall yields expected to be approximately 10%. On to our operating results. Same property NOI performance this quarter was fundamentally very strong, driven by rising base rent resulting from strong leasing volume as well as rental escalations and high percentage rent driven by rising sales.

[Pat Sullivan, President and COO at Primaris]

The reported 0.5% increase in same property cash NOI was impacted by CAD 0.4 million in prior year property tax recoveries, as well as CAD 1 million in lower rental revenue due to the disclaimed HBC leases. Excluding the CAD 0.4 million contribution from the recovery of property taxes last year, same property's cash NOI would have seen an increase of 1.1%. Notably, Q2 2025 was the last quarter of full rents from HBC. We anticipate that same property NOI growth is likely going to jump next quarter, accelerate further in the fourth quarter, and again in the first quarter of 2027. We expect it to then remain elevated for the following 10 quarters. Leasing activity was extremely strong during the quarter, with 109 leases renewed across 482,000 sq ft. CRU leasing spreads were 5.8% and 7.4% for the overall portfolio.

[Pat Sullivan, President and COO at Primaris]

51 new deals encompassing 213,000 sq ft were completed during the quarter, including 45 new CRU deals for 86,000 sq ft. New CRU leases completed during the quarter were completed at a weighted average net rent of CAD 52.20 per square foot. For context, average CRU rents in the portfolio have risen to CAD 50.69 per square foot as at Q2 2026 from CAD 42.02 per square foot at the end of 2022. The portfolio's 91.1% committed occupancy compared to 86.6% in-place occupancy represents 450 basis points of embedded occupancy growth already under contract.

[Pat Sullivan, President and COO at Primaris]

This committed space provides approximately CAD 15 million of base rent, a strong source of future NOI growth, and demonstrates the momentum of our leasing program. Another key occupancy stat for us is CRU occupancy, which refers to the space under 15,000 sq ft. CRU in-place occupancy improved 290 basis points to 92.3% from 89.4% a year ago.

[Pat Sullivan, President and COO at Primaris]

Same property CRU occupancy is even higher at 93.1%, reflecting the lower CRU occupancy in newly acquired centers than our portfolio average, which provides significant income growth in these high performing centers. Occupancy is a key driver of recovery ratio improvement, and CRU occupancy has the greatest impact on this metric. Many of the properties acquired since 2022 had an elevated CRU vacancy, and our leasing efforts to reduce this vacancy at malls such as Conestoga, Devonshire, and Oshawa Centre have resulted in higher NOI over the past few years. With continued strength in new CRU leasing, coupled with accelerating leasing progress with HBC replacement tenants, occupancy and recovery ratios will continue to improve at our properties, including newly acquired top-tier centers such as Oshawa and Galerie de la Capitale, where recovery ratios remain well below our target levels.

[Pat Sullivan, President and COO at Primaris]

Sales continued to be strong with all-source sales volume at CAD 3.5 billion and sales per square foot at CAD 825 per square foot for the 12-month period ending May 2026. Notable increases were realized at Orchard Park, where sales volume is up 10% to CAD 220 million, and at the Halifax Shopping Center, where sales volume is up 8% to CAD 300 million, as well as Southgate and St-Bruno, which are growing at high single digits. Conestoga Mall, which we called out last quarter, is now producing over CAD 200 million in sales volume as a result of the significant leasing activity at the property.

[Pat Sullivan, President and COO at Primaris]

In Q2, we approved a CAD 50 million redevelopment of the food hall at Promenades St-Bruno. At present, the food hall area encompasses approximately 30,000 sq ft and generates substantially no income. The project is expected to generate approximately 10% return and will be completed within 24 months.

[Pat Sullivan, President and COO at Primaris]

In closing, strong leasing momentum, accelerating HBC re-tenanting, and a strengthening tenant roster positions us for meaningful NOI growth in the years ahead. The underlying fundamentals of the portfolio remain exceptionally strong, reinforcing our confidence in long-term value creation for unitholders. With that, I'll turn the call over to Julian to discuss our land optimization strategy, dispositions, and acquisition outlook.

[Julian Schonfeldt, Chief Investment Officer at Primaris]

Thank you, Pat, and hello, everyone. Alongside this tremendous operating momentum, we are actively executing on our land optimization strategy, which is focused on unlocking value from excess and underutilized land across the portfolio that generates little to no NOI today. We have identified a potential pipeline of CAD 275 million-CAD 375 million of excess land, which we intend to monetize over time, unlocking embedded value and generating an additional source of zero-cost capital to fund future growth within our core portfolio. By monetizing these land parcels and redeploying the proceeds into our higher yielding enclosed shopping center business, we can create meaningful value for unitholders while remaining focused on our core strategy. Several sites are already under contract or actively being marketed. Importantly, these opportunities have been evaluated to ensure they can be executed without disrupting mall operations.

[Julian Schonfeldt, Chief Investment Officer at Primaris]

As a reminder, we have no intention of owning, managing, or developing residential properties ourselves. In Q2, we also completed some smaller but strategic shopping center transactions totaling CAD 100 million of dispositions and CAD 68 million of acquisitions, improving the portfolio quality and metrics, as well as simplifying our balance sheet with fewer co-owned properties and less secured debt. The dollar amount may appear small, but the impact to our broader portfolio metrics are meaningful. Occupancy at the disposed properties was higher than that of the remaining portfolio. However, the tenant mix was weighted towards short-term and specialty leases, reducing the overall quality and stability of cash flow.

[Julian Schonfeldt, Chief Investment Officer at Primaris]

These transactions contributed to the sales productivity increasing to CAD 825 per square foot, long-term in-place occupancy growth to 83.5%, and weighted average net rent per square foot growth to CAD 32.84, resulting in a significant increase in cash flow quality and durability.

[Julian Schonfeldt, Chief Investment Officer at Primaris]

Beyond excess land, we've also identified approximately CAD 200 million of non-core retail pads and other assets beyond what is currently reflected as assets held for sale that may be monetized over time. Together, these initiatives represent a significant source of low-cost capital to fund future growth and enhance portfolio returns. Turning to acquisitions, the annual cadence of pension fund activity in Canada has driven a meaningful uptick in discussions around acquisitions over the past month. We remain optimistic that we could acquire one or two or even three malls this year, though nothing is in advanced stage or has any certainty to date. As a reminder, our target acquisitions are typically in the CAD 300 million to even more than CAD 600 million range for each mall. With that, I'll turn the call over to Rags.

[Rags Davloor, CFO at Primaris]

Thank you, Julian, and good morning, everyone. Primaris supported FFO per unit of CAD 0.451 per diluted unit, up 1.3% for the quarter over last year. This YoY increase was achieved despite the impact of approximately CAD 1.9 million in terminated transaction costs, CAD 0.4 million of lower prior tax recoveries recorded in 2026 over 2025, and CAD 1 million of lost rent from the now disclaimed HBC leases. Excluding the CAD 1.9 million in terminated transaction costs and the CAD 0.4 million impact of prior tax recoveries, FFO per unit was up 5.4%. This growth, even after absorbing the loss of CAD 1 million of HBC revenue, speaks directly to the strength of our underlying core portfolio and operating business. We achieved these impressive per-unit results despite non-core asset sales over the last 12 months and the impact of the disclaimed HBC leases.

[Rags Davloor, CFO at Primaris]

If you're trying to reconcile same-property NOI growth to FFO growth, it is important to note that over one-third of our 2026 cash NOI guidance is attributable to the 2025 acquisitions, which is not included in same-property NOI, which have also benefited from strong NOI growth due to robust leasing activity. As a result of this dynamic, we have added new disclosure on quarterly same-property cash flow growth in Section 9.1 of the MD&A. Consistent with prior years, NOI growth from recent acquisitions has boosted overall NOI growth. We're also reaffirming our 2026 guidance, most recently updated and disclosed in our press release dated June 29, 2026. Turning to the balance sheet, we remain very comfortable with our financial position. At quarter end, average net debt to Adjusted EBITDA was six times, liquidity was CAD 655 million, and we continue to have no debt maturities until 2027.

[Rags Davloor, CFO at Primaris]

In March 2027, we have CAD 250 million in unsecured debentures maturing at 4.82%. Today, we could issue five-year unsecured debentures at approximately 4.25%. We remain disciplined in our approach, well-capitalized, and well-positioned to continue executing on both internal growth initiatives and selective external opportunities. With that, I'll turn the call back to Alex.

[Alex Avery, CEO at Primaris]

Thank you, Rags. As you can see, our team continues to deliver remarkably strong leasing activity and very solid operating results across the portfolio. Our progress is increasingly being recognized in the capital markets, with our weighting in the TSX Capped REIT Index rising to over 5% and our trading liquidity now nearly five times what it was two years ago, as measured by the dollar value of units traded per day. We saw strong engagement from the investment community at our recent Oshawa Centre property tour. The event provided investors with a first-hand look at one of our dominant centers that we have added through our acquisition program and showcased the significant leasing progress, redevelopment opportunities, and long-term growth potential embedded within the asset.

[Alex Avery, CEO at Primaris]

Building on that momentum, we look forward to welcoming investors to our upcoming Investor Day at Promenades St-Bruno this fall, where we'll be able to provide a deeper look at our strategy, portfolio strengths, value creation opportunities, and the substantial growth runway we see ahead. We'd now be pleased to answer any questions from the call participants. Operator, please open the line for questions.

[Operator]

Thank you. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. You may ask one question and a follow-up, at which point you may return to the queue. We'll pause for just a moment to compile the Q&A roster. Your first question from the line of Lorne Kalmar with Desjardins. Your line is open.

[Lorne Kalmar, Analyst at Desjardins]

Thanks. Good morning, everyone. Julian, you mentioned a bit of an uptick in conversations around acquisition with the pension funds. Just wondering if you could elaborate on exactly what's been driving that.

[Julian Schonfeldt, Chief Investment Officer at Primaris]

I think as we're approaching year-end and folks are looking at their targets or goals for the year, that can tend to be a bit of a driver. It's hard to kind of understand everyone's specific or unique motivations in the background. We are relatively active with them. Nothing that's advanced, with the cost of capital that we have now and the access to capital that we have, that could potentially be driving it. Again, nothing specific to report right now, but we're hopeful that we'll be able to drive at least one this year.

[Lorne Kalmar, Analyst at Desjardins]

Okay. I guess you kind of alluded to it a little bit there, just with the stock now trading above IFRS NAV, it obviously changes or can change the calculus on the transaction structures. Has that been reflected at all, or have conversations changed at all as a result of that?

[Julian Schonfeldt, Chief Investment Officer at Primaris]

I'd say it gives us more tools in the toolbox to use to affect the transaction. We're not shy about bringing that up. We remain open to using structured acquisition structures. Ultimately, yeah, it gives us more tools in the toolbox. We're not shy to mention that.

[Lorne Kalmar, Analyst at Desjardins]

Okay. Thank you very much.

[Operator]

Your next question from the line of Mark Rothschild with Canaccord. Your line is open.

[Mark Rothschild, Analyst at Canaccord]

Thanks. Good morning. Alex, you made a comment about the capital markets recognizing increasingly the value of Primaris units. Obviously the unit price has done quite well of late. To what extent does this correlate with any moves at all in cap rates in the market or the prices of deals that you're seeing, is it simply that the unit price was just severely undervalued for some time?

[Alex Avery, CEO at Primaris]

Thanks, Mark. It's very difficult to ascribe the reasons behind a stock price movement, as you know. I would say a couple of observations, though. What we have seen in the direct property market is a significant uptick in the number of parties interested in acquiring closed shopping centers. Most of those parties remain focused on sort of the mid-tier and lower type properties, and generally, ticket size of under CAD 200 million or maybe CAD 150 million. I think that's probably a part of it, but also the liquidity in our stock was really probably the biggest thing. When we talked to some of the trading desks about what is happening with our stock, there's a couple of dynamics that they consistently cite. One is very large institutions that were constrained by a lower daily trading volume than we had until earlier this year or late last year.

[Alex Avery, CEO at Primaris]

The second thing is, I think there were a number of investors who didn't pay a lot of attention to Primaris when it was a smaller index weighting. You can probably skate by without having any exposure, and then it all sort of came together at the same time. As the liquidity increased, our weighting in the index increased. You had First Capital announce their privatization, which I think also created a little bit of a tailwind for retail property broadly. It was a bunch of different things. At least that's how we see it, but it could be something entirely different that we're not aware of.

[Mark Rothschild, Analyst at Canaccord]

Okay, great. Thanks. Maybe just one more. It seems like selling off some residual density of property, so land is something that you're going to be looking to do. To what extent is this something we should expect in the near term? Obviously development land is not trading as much now as it might have been a few years ago.

[Julian Schonfeldt, Chief Investment Officer at Primaris]

Yeah, Mark. On the land side, what I would say is you're right, the market has changed, and particularly as it relates to residential being PBR and condo, it's come down in many markets. I'll say we're not just focused on that. We're looking at all different asset classes. Seniors housing has become quite interesting, hospitality as well. We're even having discussions on student housing and self-storage, depending on the site. I wouldn't take the depressed residential in some markets to be a sign that we're not going to be active on it. We're looking at highest and best use for each market separately, and we're active. I'll even say on the residential side, there are some markets that are still holding up strong and that can still benefit from favorable government incentives as well as favorable financing.

[Julian Schonfeldt, Chief Investment Officer at Primaris]

Again, we're not in a rush to do something if a particular market or use is challenged, but we are being creative. We're talking to parties across kind of the entire landscape. Stay tuned.

[Mark Rothschild, Analyst at Canaccord]

Okay, great. Thanks so much.

[Operator]

Your next question from the line of Pammi Bir with RBC Capital Markets. Your line is open.

[Pammi Bir, Analyst at RBC Capital Markets]

Thanks. Good morning. Just given the progress on the leasing and I guess your comments on organic growth, how do you think same property NOI growth shapes up in 2027 versus, say, that standard 3%-4% three-year target that you've guided to?

[Alex Avery, CEO at Primaris]

Yeah. Pammi, it's sort of a little bit of a TBD. What's really going to dictate it is just the cadence and the timing of when these leases all roll in. We are approaching our budgeting process for 2027 and beyond, which we'll be doing over the next 30 days, 45 days. I think qualitatively, you could say, we expect our same property to exceed that 3%-4% range probably for the next three years consistently. How much it's going to exceed that by or where it sort of lands, a lot of it could land in one year or it could be equally spread out. It really just depends on when all of the leases take effect. Yeah, I would think it would be 4%+ consistently for a fairly long period of time.

[Pammi Bir, Analyst at RBC Capital Markets]

Got it. That's helpful. Then just maybe as a follow-up, on the terminated transaction costs that hit G&A, I'm just curious if you can maybe share any color as to maybe why that deal did not go forward, or if it was multiple deals or one, and just any insight would be perhaps helpful.

[Alex Avery, CEO at Primaris]

Yeah, sure. We were looking at a transaction that was a portfolio disposition. Part of the reason the fees were more significant than we would typically see on a property transaction was that it had structure in the same way that when we acquire properties, we give the vendors preferred equity and equity. Think about a very similar transaction, only Primaris is the vendor. We were doing that because we had concerns that we would not have enough capital to fund all of the acquisition opportunities that we encounter. Ultimately, we ended up terminating the transaction when two things happened. One was that we had success finding buyers. We had unsolicited interest arrive for McAllister, for Marlborough, and we've now concluded two of those enclosed mall transactions.

[Alex Avery, CEO at Primaris]

It became easier for us to sell properties because, as I mentioned earlier, there's quite a number more people interested in buying the mid-tier mall properties. The second thing is that our stock price moved from 14s last year up to 19 at the time that we terminated the transaction. As Julian was saying, with our stock price higher, when we engage with prospective vendors, it's an easier conversation. You can imagine that a few years ago when we were trying to get people to take our stock at CAD 22 when it was trading at CAD 13, it was a bigger discussion point than it is when your stock's within a CAD 1 or CAD 2 or CAD 3 of the IFRS fair value.

[Pammi Bir, Analyst at RBC Capital Markets]

Thanks very much.

[Alex Avery, CEO at Primaris]

Thanks, Pammi.

[Operator]

Your next question from the line of Sam Damiani with TD Cowen. Your line is open.

[Sam Damiani, Analyst at TD Cowen]

Thanks. Good morning, everyone. Just on the recovery ratio, it's not in your guidance officially, but give some thoughts as to where that would land in 2026 for the full year and into 2027.

[Pat Sullivan, President and COO at Primaris]

Hi, Sam. I think HBC has somewhat muddied the water in terms of our recovery ratio. It is a difficult measure to talk about quarter-to-quarter just because it's driven by the timing of the spending throughout the year, and it's something really that I tend to focus personally on at the end of the year when all our spending is complete for the cycle and we've recovered all the money that we're going to from the tenants. It is definitely going to trend upwards simply because of all the CRU leasing we're doing. The number one driver in recovery ratio improvement is occupancy, and the CRU occupancy is the primary driver of that. As a lot of these committed leases kick in, our recovery ratio will improve. Somewhat held back by our tax recovery ratio on the HBC boxes.

[Pat Sullivan, President and COO at Primaris]

I suggest it'll be slightly stronger towards the end of this year and materially stronger at the end of next year.

[Sam Damiani, Analyst at TD Cowen]

Okay, great. Thanks. That's super helpful. Maybe just a couple smaller sort of modeling questions. I noticed the percentage rent jumped quite a bit this quarter. Was there anything unusual in there? Any reason not to sort of look at that as a run rate, at least for a second quarter? Sort of similar on the specialty leasing revenue, is that a line item that might taper off as some of these long-term leases take effect?

[Pat Sullivan, President and COO at Primaris]

The percentage rent is driven by the timing of the tenant's lease year-end. Tenants, it's not always January to December. Some tenants have their lease years ending March, some June, some October. That kind of drives the timing of when their percentage rent gets paid. It becomes difficult to model in terms of quarter-to-quarter, simply because it's driven by the cycle of the tenants when they're expiring. The percentage rent jump is completely tied to the sales increases. I mean, it's the benefit of having tenants report sales is that we're participating in the inflation or the increased sales impact that's driving their sales higher. When we go to renew these leases, we'll try to recapture some of that or all of it, or the percentage rent in a higher base rate on the lease.

[Pat Sullivan, President and COO at Primaris]

It is somewhat hard for you guys to model that, but it is directly correlated to sales rising. In terms of specialty leasing, yes, as we lease up space, you will see that number theoretically drop, although we have other initiatives that are driving it higher, such as branding and other promotional activities. There is a spike right now coming in Q2, Q3 that is driven by large format tenants taking some of the empty bay boxes that have not started construction yet, specifically Spirit Halloween, which those opportunities will not be available to them next year.

[Sam Damiani, Analyst at TD Cowen]

Got it. Thank you. That's really helpful. I'll take back.

[Operator]

Your next question from the line of Matt Kornack with National Bank of Canada Capital Markets. Your line is open.

[Matt Kornack, Analyst at National Bank of Canada Capital Markets]

Morning, guys. How should we think? Have the easy bay deals already been done and that's in your committed occupancy, and then now you're going to kind of expand existing tenants into spaces and that will take more time structurally? I mean, you mentioned 13 quarters of really solid growth. We're just trying to understand, is it front-end weighted or is it actually kind of tempered by the fact that there are structural limitations to how much you can do in a particular period?

[Pat Sullivan, President and COO at Primaris]

Matt. Yeah, no, there's still a lot of Bay replacement tenants that have not been signed off completely yet. There's going to be a continued jump in the committed for the next few quarters to start with. A lot of the store openings take place over the next say 24 months. It all depends on the complexity of the redevelopment and when we start. We've started in Galerie de la Capitale, and we're going to see some tenants opening early in 2027. In Lime Ridge, the Walmart, which is not in a Bay box, it was in a Sears box, sounds like they're going to open much earlier than we all anticipated. They're going to open in November, it sounds like, versus the original thought of January.

[Pat Sullivan, President and COO at Primaris]

It really is just being driven by the timing of the openings, and we expect that timing to just be stretching out over the next 24-30 months, actually.

[Alex Avery, CEO at Primaris]

That's the HBC side of things. If you go back to our Q1 results, you saw the gap between in place and the committed jump out to 350 basis points at the time, and substantially all of that was CRU leasing. That CRU leasing, generally there's less fitting out time. Sequentially, you're going to see a lot more of the CRU occupancy moving up quarter-to-quarter for the next few quarters. The actual rent commencement from a lot of the Bay stuff is more 2027, 2028. It all layers together, though. It'll be a pretty consistent ramp for a while, but the different moving parts kind of contribute at different times.

[Matt Kornack, Analyst at National Bank of Canada Capital Markets]

Makes sense. Maybe switching gears to the acquisition side of things and just, you mentioned you've traded quite well. You're at a premium now to your IFRS value. How should we think of the structuring of deals going forward? I mean, in the past, it was almost by necessity that you kind of issued some shares as you were doing these deals. Is there the potential that now you do an entirely cash deal and issue equity and go about it that way? Or do those structured deals still make sense in the context of the size of these assets?

[Julian Schonfeldt, Chief Investment Officer at Primaris]

Matt, it's kind of an ongoing and dynamic discussion. Touching on what I was saying earlier on the call, it just gives us more tools in the toolbox. We remain open to using the structure. We're also open to using cash. We have our kind of stated leverage goals that we want to remain within. Again, open to using kind of the former structure that you've seen us use actively and open to also doing cash. It just makes us a lot more nimble and powerful in our ability to acquire.

[Alex Avery, CEO at Primaris]

Even though our stock price is trading above IFRS NAV, the way that we have structured the deals all the way along was they need to make Primaris a better company. It needs to be accretive to the unit holders. The math is a little bit different. The underlying principle is the same. I keep saying this, but we don't attach a huge amount of significance to the IFRS NAV as a number. It is a backward-looking reflection of the transaction market that right now has been dominated by the lower tier malls and smaller transactions. It is very difficult to get a really good read on what the market value of a lot of assets are when there isn't a lot of transaction activity. We tend to not place as much significance on IFRS as a goalpost than some might think.

[Matt Kornack, Analyst at National Bank of Canada Capital Markets]

Makes sense. Ours is above yours at this point now. We'll see where it trends. Okay, take care.

[Alex Avery, CEO at Primaris]

Thanks, Matt.

[Operator]

Again, if you would like to ask a question, press star then the number one on your telephone keypad. Your next question from the line of Mario Saric with Scotiabank. Your line is open.

[Mario Saric, Analyst at Scotiabank]

Hi, good morning. I just have a small two-parter for Pat and then maybe a longer-dated question for Alex. Pat, with respect to tenant demand and specifically thinking about foreign entrants, what trends are you seeing, if any, that may signify kind of a return of foreign entrant demand into the mall space in Canada over the next 12 months?

[Pat Sullivan, President and COO at Primaris]

Hi, Mario. It's been a pretty good uptick in foreign demand, especially from Southeast Asia over the last couple of years. We've seen quite a few retailers, led by Uniqlo, opening a lot of stores in Canada. Uniqlo has been on a pretty good expansion kick, and we've managed to do a few, and we've got a lot more that we need to do. I think it's going to continue. There's some American tenants continuing to look up here, and whether that's new entrants or tenants generally that's just looking to expand their footprint. I think they're all realizing that space is becoming difficult to find, especially quality space and quality malls. There's a lot of tenants really scrambling to find that space.

[Pat Sullivan, President and COO at Primaris]

What we are finding in a number of our malls is that we're starting to look out, say, beyond 12 months into 24-month range in order to figure out how to accommodate these tenants. Demand side's fairly strong, and it is actually being driven by a number of foreign entrants.

[Mario Saric, Analyst at Scotiabank]

Okay. Just associated, in terms of the demand that we've seen, like retail tenant demand, not just necessarily mall demand, but just retail tenant demand. Your peers have, in the past, communicated kind of this catch-up from a COVID lull in terms of explaining the demand in the face of slowing population growth in the past 12 months anyways. Do you agree with that? Secondly, where do you think we are in that cycle in terms of retailers just simply catching up in the square footage demand post-COVID?

[Pat Sullivan, President and COO at Primaris]

I think there's a definite desire by tenants to find space to capture the increasing tenant demand. Sorry, not tenant, consumer demand. There has been a significant increase in sales in the last number of years, and the inflation impact really wore off, say, two years ago. That's what the tenants have told me. They're really realizing a big sales jump. A lot of them are looking to expand their footprint. As you know, there's been no new retail built in a meaningful way. They're really clamoring for more space in a finite amount of retail space within Canada. We are starting to see The Bay boxes represent an opportunity for a number of tenants to relocate from existing centers into The Bay boxes to get larger.

[Pat Sullivan, President and COO at Primaris]

Once that opportunity's gone, there'll be a real lack of additional space in the market to accommodate that. There won't be any new construction unless rents rise materially, which, it's questionable whether large format tenants can afford the rents that are required to build additional retail. I really do think it's not so much a, I guess a catch-up maybe is the right way, but really, they're chasing the fact that their sales are rising, and a lot of them just need bigger footprints.

[Mario Saric, Analyst at Scotiabank]

Yeah. Okay. Just maybe really quickly for Alex, I guess more of a longer data question. You talked about how same store NOI growth should be higher than the 3%-4% range over the next three years, and that's clear in terms of getting up to a 96% stabilized occupancy over that timeframe. Once the portfolio is at stabilization, say two to three years from now, given your balance sheet leverage and kind of where you see that portfolio three years out, what do you think the structural earnings power growth of that portfolio may look like?

[Alex Avery, CEO at Primaris]

We've actually spent a fair bit of time thinking about this over the last four or five years. What we've concluded is we believe that it's going to be in the 3%-4% range fairly consistently. That is better than inflation, which is really quite good. A lot of it is a function of the moat around our properties. These properties are very expensive to build and very difficult to create new enclosed shopping center properties within an urban boundary. Finding 40, 50, 60 acres of land is very difficult. Even if you do, to build a new mall today would be at a minimum CAD 1,000 a square foot.

[Alex Avery, CEO at Primaris]

That would require rents of about CAD 90 a square foot, which is about three times what we are averaging in our portfolio across the large box and the small box on a blended basis. We can see a long runway of rental rate growth without any threat of new supply. It's probably a 10-year window where we think we can consistently do 3% or 4% after we go through this abnormally high growth rate period.

[Mario Saric, Analyst at Scotiabank]

Got it. Just for clarification, that 3%-4% you're referring to, that would be kind of FFO or same store NOI, and presumably would exclude any potential benefit from the sale of residential land?

[Alex Avery, CEO at Primaris]

Yeah, no. That's just net operating income. Same property NOI. That's the 3%-4%. I think in our three-year guidance, we had also said 5%-6% on the FFO line. I think if you can do 3%-4% same property, you should be able to do 5% or 6% FFO growth. We have relatively low leverage compared to some of our peers as well, that math is all factored in.

[Mario Saric, Analyst at Scotiabank]

Okay. Thanks for the color.

[Alex Avery, CEO at Primaris]

Thanks, Mario.

[Operator]

There are no further questions at this time. Claire, I turn the call back over to you.

[Claire Mahaney, VP of Investor Relations and Sustainability at Primaris]

Thank you, Warren. With no further questions, today we'll close the call. On behalf of the Primaris team, we thank you all for participating. Have a great long weekend.

[Operator]

Thank you.

Participants

Analysts

• Claire Mahaney, VP of Investor Relations and Sustainability at Primaris
• Alex Avery, CEO at Primaris
• Pat Sullivan, President and COO at Primaris
• Julian Schonfeldt, Chief Investment Officer at Primaris
• Rags Davloor, CFO at Primaris
• Lorne Kalmar, Analyst at Desjardins
• Mark Rothschild, Analyst at Canaccord
• Pammi Bir, Analyst at RBC Capital Markets
• Sam Damiani, Analyst at TD Cowen
• Matt Kornack, Analyst at National Bank of Canada Capital Markets
• Mario Saric, Analyst at Scotiabank