Primaris Real Estate Investment Trust (PMREF) Q2 2024 Earnings Call Transcript

Primaris Real Estate Investment Trust (OTC:PMREF) Q2 2024 Results Conference Call August 1, 2024 10:00 AM ET

Company Participants

Claire Mahaney – Vice President, Investor Relations & ESG
Alex Avery – Chief Executive Officer
Patrick Sullivan – President, Chief Operating Officer
Raghunath Davloor – Chief Financial Officer

Conference Call Participants

Sam Damiani – TD Securities
Mario Saric – Scotiabank
Lorne Kalmar – Desjardins
Mark Rothschild – Canaccord
Brad Sturges – Raymond James
Matt Kornack – National Bank Financial
Sumayya Syed – CIBC

Operator

Good morning, and welcome to Primaris REIT Second Quarter 2024 Results Conference Call. [Operator Instructions].

I will now turn the call over to Claire Mahaney, Vice President, Investor Relations and ESG.

Claire Mahaney

Thank you, operator. During this call, management of Primaris REIT may make forward-looking 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 our website at primarisreit.com.

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

Alex Avery

Good morning. Thanks, Claire, and thanks for joining Primaris REIT’s Second Quarter 2024 Conference Call. Joining me today are Pat Sullivan, President and COO; Rags Davloor, CFO; Morde Bobrowsky, SVP Legal; Graham Procter, SVP, Asset Management; and Claire Mahaney, VP, IR and ESG. With our second quarter results, we have delivered another very solid quarter with continued growth across virtually all of our metrics, 6.8% growth in FFO per unit, increased guidance for FFO per unit and NOI for 2024. Occupancy rose more than 3% from a year earlier for both in-place and committed occupancy.

Importantly, we saw a material improvement in our recovery ratios, which is an important but lagged manifestation of the progress we have been making in converting pandemic-era lease modifications back to standard lease terms as well as continued progress raising portfolio occupancy. Over the past 2.5 years as a relative newcomer to the Canadian REIT landscape and with a strategy focused on what was until recently an out-of-favor property type, more than a few people have described Primaris as a show-me story. We are extremely pleased with the results we have been showing since the spinout. Notable highlights include more than 700 basis points of occupancy improvement. Same-property NOI growth approaching 20% aggregate growth over our first 3 years by the end of this year.

Tenant average sales in our portfolio have risen more than 25% from $539 per square foot at Q2 2022 to $676 per square foot today. Notably, Simon Property Group reports average tenant sales of $745 per square foot. We acquired 2 of Canada’s top 15 malls for $640 million in 2023 and are actively engaged with a number of potential vendors or a number of further acquisitions of similar caliber malls. We have also risen from the 19th largest constituents in the S&P/TSX Capped REIT Index to 14th place and expect to make further improvement in this ranking by year-end. We received a BBB high, stable investment-grade credit rating from DBRS Morningstar.

We have also built out a $1 billion unsecured debenture program. And perhaps most interestingly, we have absorbed $0.145 per unit of higher interest expenses while still delivering positive FFO per unit growth and expect to see that FFO per unit growth accelerate from here. Our in-place weighted average interest rate of 5.2% is now above the marginal cost of a 5-year unsecured debenture based on recent market pricing. In summary, the team at Primaris is collectively very proud of the track record we’ve been building over the past 2.5 years since becoming a stand-alone REIT again and see significant runway for further growth. This future growth is expected to come from further occupancy gains, significant recovery ratio gains with higher occupancy and lease standardization, the benefits of a growing and increasingly high productivity mall portfolio as management takes advantage of the REIT’s growing scale, as well as the benefits of the REIT’s differentiated financial model, allowing Primaris to compound capital at a significantly greater pace than our peers.

We continue to be very active in discussions on several acquisitions and dispositions. We have the capacity for more than $1.5 billion of acquisitions and require no financing conditions in our deals. This profile as a well-capitalized and credible counterparty is a real differentiator in what is currently a challenging transaction market for many. During the quarter, we closed on the sale of Garden City in Winnipeg, Manitoba for $31 million, in line with our IFRS fair value. 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 leading enclosed shopping centers in Canada.

This disposition improves our overall portfolio quality and growth profile, demonstrates Primaris’ ability to transact, and provides proceeds available to fund further acquisitions. During Q2, we also completed the tuck-in acquisition of the Zehrs grocery store building and associated land for $19.7 million at Conestoga Mall in Waterloo. This building is connected to the mall and completes our ownership of the site, expanding the land area to 59 acres from 50 acres previously. I’ll now turn the call over to Pat to discuss operating and leasing results, followed by Rags who will discuss our financial results.

Patrick Sullivan

Thank you, Alex, and good morning. As the largest owner and manager of enclosed shopping centers in Canada, measured by mall count, we have very good visibility into the performance of a wide network of stores across many retailers and banners nationwide. The financial help of tenants continues to be quite favorable and the dialogue with tenants looking for new and expansion opportunities remains robust. Our business performance is very strong as a result of rising occupancy across our portfolio, which is driving higher recovery ratios and strong leasing spreads. Our NOI growth in the second quarter continues to be supported by the strong fundamentals we are experiencing, including low retail supply, strong tenant sales, population growth, and increasing tenant demand for quality space, as well as our national full-service platform and team.

Occupancy is rising, former anchor premises are being remerchandised, sales remain strong, non-recoverable expenses are falling, and recovery ratios continue to improve. As a result, same-property cash NOI was up 1.3% for the quarter as compared to Q2 2023. If we drill down to our same-property shopping center performance, excluding the large contribution in 2023 from the recovery of prior year’s property taxes tied to successful tax appeals, same-property cash NOI growth was almost 6% for the quarter and 4% year-to-date on a same basis. In Q2, portfolio and place occupancy was 93%, up 1% from Q1 and up 3.2% as compared to Q2 last year. Committed occupancy was 94.4% versus 91% in the same quarter last year.

We remain focused on driving our occupancy back to historical levels of 96%, at which point we’ll be in a position to drive rents further upward and proactively replace underperforming tenants. Leasing activity remained very strong with 74 leases renewed at spreads of 6.8% for the quarter and 30 new deals were committed to for over 100,000 square feet. We expect to sign additional due deals during the remainder of 2024 in excess of 50,000 square feet. Not captured by our renewal leasing spreads is the conversion of leases with preferred rental terms such as percentage rent in 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 spreads understate the growth we are experiencing.

At quarter end, approximately 8.5% of our tenant base was on preferred rental structures compared to 11% at year-end and 15% at the beginning of 2023. With a number of other leases completed and commencing later in the year, this figure will continue to decline during the balance of the year, which is having a significant positive impact on our NOI for 2024 and beyond. The conversion of variable rent leases back to net leases, along with higher occupancy, is being reflected in our rising recovery ratios. Recovery ratios measure the landlord’s ability to recover mall operating and maintenance costs, such as common area maintenance, utilities, and property taxes. In-place occupancy is about 1.5% less than the committed occupancy and 3% below our long-term target occupancy level.

That, coupled with an expected continued reduction of variable rent leases, will drive recovery ratios higher and in turn, NOI higher for the next few years. We have 580,000 square feet of 2024 lease maturities remaining with about 60% of that being CRU. We are well-advanced in discussions with the remaining 2024 expiring tenants and have no concerns pertaining to the completion of outstanding negotiations. Same-property, same-store sales productivity remains very high at $625 per square foot, and including Conestoga and Halifax productivity, arises to $676 per square foot. For the past 24 months, tenant sales have rebounded significantly from their pandemic-era lows, with many retailers operating in our properties now reporting their highest 12-month rolling sales figure at the property since opening.

Sales productivity and growth should be viewed over the long term, given ongoing remerchandising efforts and the seasonality of the shopping center business. Our ability to grow rent is tied to sales performance of our tenants. However, the overall mall productivity figure does not necessarily reflect the strength of our tenant sales base. Our focus remains on driving occupancy and NOI higher, not on undertaking actions simply to drive the reported mall productivity figure hire. Over the long run, we anticipate sales growth at our properties due to the strong fundamentals in the enclosed shopping center industry, being a 30-year low in per capita and closed mall square footage in Canada, coupled with increasing population.

To conclude, our business is performing very well, and we are positioned to capture continued growth within our malls. And with that, I’ll turn the call over to Rags to discuss our financial results.

Raghunath Davloor

Thank you, Pat, and good morning, everyone. Strategically, we continue to focus on our differentiated financial model represented by loan leverage, low payout ratio, and significant free cash flow, which we believe is a major strategic advantage for Primaris REIT. Given our strong results to date and confidence in the strength of our business, we are raising our 2024 cash NOI guidance by $2 million to a range of $267 million to $272 million and our FFO per unit guidance range by $0.02 to a range of $1.63 to $1.66. As a reminder, our guidance does not contemplate future acquisitions or dispositions nor the deployment of the current $25 million of cash on hand. Further details of our 2024 guidance can be found in Section 4 of the MD&A titled Current Business Environment and Outlook.

We continue to strive for best-in-class disclosure and have provided new and advanced information on additional occupancy metrics and the disclosed estimated future contractual rent steps out to 2026. With regards to dispositions, we currently have $126 million of assets held for sale 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 completion of our second GRESB submission in June and have determined 6 core environmental and social metrics for which targets will be developed later in the year. These metrics include energy intensity, green building certifications, and into the employee engagement and satisfaction and our GRESB score. We’re also working towards formalizing the climate strategy, aligning to the proposed CSBF S1 and S2 standards, have initiated various energy savings, other projects, including submetering, and have successfully concluded the implementation of a utility data collection system.

Our operating and financial results for the quarter remained 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 diluted was $0.42 a unit as compared to $0.395 per unit for the same quarter last year, an increase of 6.8%. Our average net debt-to-adjusted EBITDA was 5.7x, unchanged from Q1 and within our range of 4 to 6x. As a reminder, this range forms part of our executive compensation structure with the top end of the range of 6x.

At present, we have nothing drawn on our $600 million credit facility and are ready to capitalize on potential acquisition opportunities. Subsequent to quarter end, we repaid a $49 million mortgage with cash on hand and currently have no debt maturing for the balance of 2024. With unencumbered assets of $3.3 billion, full availability on our $600 million operating line, and no remaining debt maturing in 2024, we have reduced refinancing risk and have access to significant liquidity. As Alex mentioned, we have capacity for more than $1.5 billion of acquisitions and require no financing conditions in these deals. Our total available liquidity today of $635 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. As at quarter end, we have purchased for cancellation 8.8 million units at an average value per unit of approximately $13.79, or an approximate 38.4% discount to NAV of $22.04. This program is very accretive to unitholders, maintaining a conservative financial model and generating free cash flow after distributions and operating capital, a the core focus which we will not deviate from. And with that, I’ll turn the call back to Alex.

Alex Avery

Thank you, Rags. Our business performance is very strong as a result of rising occupancy across our portfolio, which is driving higher recovery ratios and strong leasing spreads. Our acquisition properties are contributing meaningfully to our financial results and are enhancing our operating platform by increasing our relevance with retailers. We expect to see a material acceleration in 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. We have 2 notable investor events coming up in September.

The first is our annual board outreach program, connecting members of our board directly with the investment community in the absence of management. This is considered a governance best practice that is rarely adopted. The second event is great 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 later in September. In addition to touring the asset, we plan to spend some time discussing our leasing and operating strategies, the ins and outs of mall merchandising, mall lease structures, capital plans, retailer trends, tenant performance, and much, much more.

We hope you can join us. To conclude, capital allocation is always top of mind at Primaris. We spend a lot of time talking about the differentiated financial model because of the very significant advantages it offers to our unitholders, including superior FFO and NAV per unit growth as well as the financial flexibility to execute on the REIT’s corporate strategy to grow the scale and quality of our business. We’d now be pleased to answer any questions from the call participants. Operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Sam Damiani from TD Securities.

Sam Damiani

Yes, great quarter. Great to see the guidance raised again. Just on — I guess your commentary talked about a target occupancy of 96%, which I believe is up from 95% previously. Just wondered if you could talk about what parts of the portfolio are driving your confidence to raise that target level?

Patrick Sullivan

Sam. Yes, I mean, historically, we were 95% to 96%. I think we have confidence we can get to the 96% level. There’s a lot of leasing activity. The large-format tenant activity remains very strong, and that’s been driving a lot of the occupancy growth. But on the CRU side, we’re really seeing a lot of activity, a lot of new deals and a lot of space tweaking them. So comfortable throwing out the 96% target.

Sam Damiani

Great. Okay. And maybe just sort of follow-up, looking at the other side of it is just with the sort of macro backdrop that we’re all facing, what are you seeing in terms of your watchlist for tenants? People talking about discretionary retailers, some of them coming under some pressure. Just wondering if you’re seeing any new points of pressure in your portfolio today.

Patrick Sullivan

I’ll take the watchlist. The watchlist hasn’t really changed in any way for us in the last 6 months. There was a big cleanout as we’ve talked about before during the pandemic. There’s tenants that we’ve had our eye on whose sales growth hasn’t kept up with a lot of the other tenants. And not that there’s really any risk around them, but just tenants that we identify is not really being likely be — not likely being able to grow the rents on the renewal.

But in terms of sales overall, we’re still seeing positive sales. I mean — and I think I mentioned it in my speech, the last 2 years has been a significant run-up for tenants in their sales. And some of these tenants have never hit the sales figures in our portfolio that they’re at right now. So a big run-up. Even if there’s a slowdown in the incremental growth in their sales, they’re still well above their historical sales volumes when they last set the rental terms.

So I don’t really see any issue with growing rents in the future.

Operator

The next question comes from Mario Saric from Scotiabank.

Mario Saric

Maybe for Pat. You talked about enhanced pricing power as you approach your target 96% occupancy, which is 300 basis points higher than today. Can you maybe just elaborate on how that works? Like for example, is the pricing power kind of linear in that going from 90% to 94%, going from 93%, 94% is the same as going from 95% to 96%. Can you just talk about what the implications are for leasing spreads and when you expect that to accelerate?

Patrick Sullivan

I’m not sure I expect the leasing spreads to grow materially where they are today. I think we’re getting high-single-digits, and I think that will probably continue even as we get closer to our target. We will be able to — we will have more competition for space, especially in our higher productivity malls, which we’re already realizing right now. Some of the malls like Halifax and Orchard we really have very limited vacancy. So we have a lot of competition for space as it is, which helps drive rents.

But I think it’s linear not so much, I think it will accelerate the closer we get to 96% for sure. Right now, we’ve been tending to hang on to tenants that we would like to, in a perfect world, replace just to maintain occupancy and NOI. But that will not be the case as we get closer to being full.

Raghunath Davloor

I guess that’s where the big lift. There’s not so much on — when you look at renewal spreads, it’s the ability to replace tenants that we believe a low productivity with high productivity tenants. And so on that re-tenanting, we’re going to get a big pickup in spread. So it sort of works its way through differently rather than just looking at pure renewal spreads.

Mario Saric

Got it. Okay. And then my follow-up is just maybe pertaining to that kind of re-merchandising and re-tenanting as that evolves and as the portfolio curation kind of evolves, can you talk about whether you have any updated thoughts on what the appropriate GROC ratios are in the portfolio kind of where they stand today? And any change in terms of where you think those can land over time upon successful kind of execution of your tenant new mix?

Patrick Sullivan

Yes. I mean, gross is a very generic measurement utereally taking into account tenant margins and so forth. But historically, we’ve always been around 14.5% to 15%. Right now, we’re trending in the 12% to 13% range. So I do think we’ll see a return back to where we were historically around 14.5% to 15%.

And we’re very comfortable and I think the retailers are comfortable at that point as well.

Operator

The next question comes from Lorne Kalmar from Desjardins.

Lorne Kalmar

On the recovery side, I think you touched on a couple of times. Could you maybe give us an idea of where the operating cost recovery ratio is now, how that kind of compares to maybe last quarter and year-over-year and how you kind of expect maybe the cadence of timing on it getting back to the historical levels?

Patrick Sullivan

Sure. Lorne, it’s been kind of lumpy. It really depends on what the timing of the tenants converting back to net leases and then the tenants are occupying space and paying us rents. As the pandemic lows, we were probably in the low-70s, and right now, we’re around 80% on the CAM side and getting close to 80% on the tax side. Our historical number on the CAM side is close to 100%.

And on the tax side, it was 92%, 93%. So we still have a long runway to go in terms of getting back to our historical norms, and that will be driven by occupancy and also reducing the variable rent reset. It will come in lumps. There won’t be any kind of linear path to getting there.

Lorne Kalmar

Okay. And then on the follow-up side, you talked about property tax recoveries in the quarter being down versus last year. But I was just wondering, what would be the quantum of that number in the quarterly results? And is that something we should sort of make sure we strip out for the coming quarter?

Patrick Sullivan

The property tax recovery was with a prior year adjustment. So our tax appeal specific property was successful, and then we received a refund. And that’s what we recorded. So it was a onetime event. And Ontario is a very specific market for tax appeals, they happen in arrears, and they take time to settle.

And so there’s no real guidance that we can ever provide as to when this stuff is going to be settled. But we expect there to be further prior year adjustments coming for tax appeals in Ontario as we continue to settle. We’ve only settled probably a couple compared — we’ll probably settle about 20% compared to the Ontario portfolio as a whole.

Alex Avery

It’s nonrecurring, recurring type of kind of like lease termination income that’s lumpy and unpredictable, but it tends to happen fairly regularly.

Patrick Sullivan

And it really is specific to Ontario more than any other province.

Operator

The next question comes from Mark Rothschild from Canaccord Genuity.

Mark Rothschild

The comments about occupancy and the boost to the NOI guidance, given that it’s relatively minor still positive, is this affected at all, or how does this relate to when we see a slowing economy, and in general, things have been slowing down. Are you seeing that at all or is this just maybe population growth is still driving better fundamentals?

Patrick Sullivan

Population growth has certainly been driving fundamentals. The sales at the mall, like I said, that they’re not accelerating at the pace they were before, but it was a tremendously steep curve in terms of growth for a number of tenants in the portfolio over the last 2 years. And there continues to be strong tenant growth in some sectors, in others, it’s leveling off. But really, we haven’t seen a decline. Personally, I’ve actually been waiting for a month where we really see a downturn, but it just hasn’t materialized yet.

Alex Avery

Yes. Because of the sales shock so far ahead, that’s why the drop ratio has come down to below historical averages. And so to the extent that you do see a sort of flattening in retail sales, our financials are likely to reflect continued growth as we narrow that gap between the current GROC ratio and the historical average. So we have quite a bit of embedded growth even if sales were to plateau here.

Mark Rothschild

Okay. Great. Maybe just following up then on Conestoga Mall where you bought the grocery store. Is there more to buy around there? Is this part of — is there going to be some sort of redevelopment or major capital invested into that property, or is this just like one last little thing to do there?

Alex Avery

Yes. I would say it’s more of the latter. It’s always ideal to own the whole property and control the whole property. This was an opportunity where Loblaws was looking to sell their store and recycle their capital into something else. And it’s the kind of thing where the time to buy it is when it’s for sale.

And so they let us know that they were open to selling it, and we thought it would be a strategically logical acquisition to make. And we don’t have any specific plans. But as you know, there’s a light rail station on the site if in the future there were to be a large tenant departure having the extra land and the extra area and controlling the site would give us more flexibility if we wanted to do some redevelopment. But it’s really just more of a — the opportunity was there, and it’s the kind of acquisition where if you didn’t make it at some point in the future, you might be kicking yourself.

Operator

The next question then comes from Brad Sturges from Raymond James.

Brad Sturges

Touching on the progress you guys have made on the preferred rent structures. Obviously, you’ve reduced your exposure quite a bit over the last 12 months or so. How much lower can that exposure go? I guess the question is where does that stabilize? And I guess, what would be the potential timing of how long that could take to get there?

Patrick Sullivan

Brad, yes, we’re about 8.5% now, and historical numbers are around 5% to 6%, and we’d like to get to 5%. I think getting to 5% will probably be a combination of converting a few tenants back to net leases, and it will be others will just simply be replaced. Those are the tenants that really got through the pandemic were put on these leases and really haven’t got back to where they used to be and they’re becoming less relevant. So those will be tenants we target to replace. And that it will be a combination of 2 things that get us there and it will probably take another 12 to 24 months, probably more 24 months.

Brad Sturges

Okay. Great. And just on the same-property guidance of 3% to 4%, I think that range kind of suggests the back half of the year could be a little bit stronger than the first half. Just wondering if there’s key elements of the guidance that we should be thinking of that’s driving, I guess, a little bit better growth in the back half?

Patrick Sullivan

Yes. I think part of that is just some of the lumpiness. I mean we — the headline number this quarter was $1.3 million, but if you remove the prior year tax recoveries from last year and this year, it was 5.9%. And so if you think that that’s the underlying trend in the business, I think you should think along that trajectory for the back half of the year. It’s — there’s always a little bit of noise in all of the financials, but we think on average, 3% to 4% is where it will come in for the full year.

Operator

The next question comes from Matt Kornack from National Bank Financial.

Matt Kornack

Just with regards to the acquisition and disposition market, there’s been a fair bit of press about certain malls for sale and some of your assets for sale. Can you give us a sense as to the pipeline on both of those for you at this point?

Alex Avery

Thanks, Matt. Yes, we have a tremendous amount of discussion going on, on both the acquisition and disposition side. McAllister Place has been listed through a process — a public process with brokers. And we have many other discussions going on, on a number of properties with sort of off-market private discussions. It certainly feels like there is an increase in the capital available to buy property.

And the direct market transaction volumes are picking up very clearly. And so that bodes very well for our disposition program. And from an acquisition perspective, there’s a little bit of seasonality to transactions, particularly with institutions where we sort of have a plan for the year. And as you roll through June and July, if you want to get something done by the end of the year, you kind of need to sit up straight and start getting stuff done. And so we’ve had a lot of discussion going on over the last — specifically the last month or 2.

And multiple different properties that we’re engaged on with multiple different vendors, and we’re optimistic that we’ll be able to get some stuff done this year.

Matt Kornack

Okay. Makes sense. And then just a quick one on Halifax. You saw the expected occupancy gains and a pretty significant one this quarter. Can you confirm if those would have been — there’s higher straight-line rent to see maybe there’s some fixturing, but what the NOI impact would have been for this quarter and what kind of residual NOI impact we’d see in Q3 as a result of that lease-up?

Alex Avery

Yes, we’d have to look and dig into those numbers. We don’t have that off the top of our heads.

Matt Kornack

Would it be possible to just — is there a material amount that would be impacting Q3 relative to Q2, or is this quarter seeing the bulk of the benefit?

Alex Avery

Is there rent commencement?

Patrick Sullivan

Yes. I think almost everybody commenced in…

Raghunath Davloor

Yes, most of them did kick in, in Q3.

Patrick Sullivan

There was also the start of Q2, if I remember right, end of March, right?

Raghunath Davloor

Yes, from the series…

Alex Avery

Yes, most of it should be in there now. So you will get a pickup in Q3 because — sorry, just to finish off, you will get a pickup in Q3 because Q2 may not reflect a full quarter’s worth that is mature, but they’re all in place.

Operator

Next, we have a follow-up question from Sam Damiani from TD Securities.

Sam Damiani

I just wanted to ask about the capital structure. The REIT’s 2.5 years old. It’s grown significantly and yet maintained a very disciplined capital structure, maintained low leverage. And there’s still big acquisition sort of goals for the next sort of near to medium term. But I guess longer term, as the acquisition expectations perhaps are going to be a little bit less in relation to the size of the REIT, how do you envision the sort of longer-term capital structure relative to where it is today?

Alex Avery

I think one of the great benefits of the way that Primaris came to be a stand-alone REIT again with the spin-out and the flexibility to effectively design the REIT from a blank slate, we pretty much put the capital structure exactly where we want it. And in terms of how that evolves, if we’re not in acquisition mode. We do have lots of things that we can reinvest into in the portfolio. We’re — we’ve got some redevelopment work going on at Kildonan Place and at Northland Village and there’s stuff happening at Devonshire. We do, from time to time, have opportunities to renovate or put additions into the properties.

But we also have the flexibility to buy back stock. And right now, I think spin to date were 9.3 million units that we’ve repurchased at almost 40% discount to NAV. And that is wildly accretive to both FFO per unit and NAV per unit. But what’s sometimes lost is that it’s actually beneficial to buy back stock even if you’re at NAV over the long term, if you believe that there’s a lot of growth in your portfolio. And that’s something that we’ll cross that bridge when we get there.

But as it stands right now, if we weren’t focused on acquisitions, we’d probably be leaning more heavily on the NCIB activity. So we really like the low payout ratio, low leverage structure, and think that it ultimately delivers higher FFO per unit growth and NAV per unit growth just by virtue of having a lot more capital retained in the vehicle. And so I don’t anticipate us changing that at any point, frankly.

Operator

Next, we have Sumayya Syed from CIBC.

Sumayya Syed

I just wanted to touch on the margin. It did improve this quarter. And noting the earlier discussion around recoveries, is there any meaningful seasonality in Q2? And also how much of a factor in the margins improving are the leases being converted back to net leases versus occupancy improving?

Patrick Sullivan

I really couldn’t comment on the weighting of which one has put — has benefited the recovery ratios growing more. I think it’s just — it’s a matter of timing of when the transactions actually — when the deals actually convert back to net leases and when the tenant actually opens. Given our pipeline of tenants that are in the committed bucket and the fact we’re still working with tenants to convert leases, I think we’ve got a really good runway to keep this momentum going for the next 24 months.

Raghunath Davloor

Yes. There are 3 elements to the margin that can sort of move that number around. So you’re quite right, there’s some level of seasonality, especially when you’re dealing with property tax recoveries and certain CapEx. So that can move the margin around at the margin, so to speak. There’s obviously the improvement in recoveries, moved the margin around. And then there’s a growth in rents. If the rents grow at a faster pace than expenses, then that, again, will alter the margin. So it’s all 3 sort of go into the mix. So it’s hard to sort of isolate which one of each — how much it drives. We could probably figure out the analysis and look to provide sort of enhanced disclosure going forward.

Alex Avery

What’s really neat about the margin opportunity, if you look at our disclosure, we have the percentage rent in lieu of base rent leases. Those are leases that are in effect right now. So while we haven’t disclosed it, we have visibility to that number continuing to come down by virtue of having already executed deals where in the future, the next lease that commences will be a standard lease form. So that — this is a lagged data set, and we already know that those 90 leases that are left, we’ve already dealt with a number of them. It’s just that they haven’t kicked in yet.

So we have pretty good visibility there and the recovery ratio and the margin expansion also are things that tend to lag. And we’re expecting that this margin improvement that we saw this quarter is sustainable and is part of a trend that we think will continue for multiple quarters into the future.

Sumayya Syed

And then I just want touch on occupancy, specifically, the CRU category is now bumping up against almost 90%. And how much room do you see to grow that? I guess, naturally, it has a bit more turnover there versus the large format segment.

Patrick Sullivan

Yes. I think if I look at our history, we’re probably 3% to 4% growth in the CRU side, 90% to 94%.

Operator

Next is the question from Mario Saric from Scotiabank.

Mario Saric

Sorry, just one follow-up to the follow-up earlier on coming back to the GROC ratio of the past. Based on your expenses experience, have you seen in the past GROC ratios move up during periods where tenant sales are flattening, flat or even decelerating a little bit?

Patrick Sullivan

Yes, I have, because there’s a — generally, when the lease — when the rents get set, say, 5 years ago, that tenant sales were at a certain level, but sales go up over time and then they might flatten out. But then we have a catch-up on the rent to reset their number. So the answer is yes, they will move up over time. But even if tenant sales flatten or even slightly decline because the tenant is able to pay more, given where their sales were set when they first entered into the lease.

Operator

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

Claire Mahaney

Thank you, operator. With no further questions, we’ll close today’s call. On behalf of the Primaris team, we thank you all for participating and look forward to speaking with many of you at Investor Day [Indiscernible] in September. Thank you, and have a great long weekend.

Operator

Thank you. You may now disconnect your lines. Thank you.