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Executives

Edward Sonshine – Chief Executive Officer

Raghunath Davloor – Executive Vice President, Corporate Secretary and Chief Financial Officer

Frederic A. Waks – President and Chief Operating Officer

Analysts

Heather Kirk – BMO Capital Markets

Pammi S. Bir – Scotia Capital Markets

Alex D. Avery – CIBC World Markets, Inc.

Michael Smith – Macquarie Capital Markets Canada Ltd.

Sam Damiani – TD Securities

Riocan Real Estate Investment Trust (OTCPK:RIOCF) Q3 2013 Earnings Conference Call November 7, 2013 9:00 AM ET

Operator

Good morning and welcome to RioCan Real Estate Investment Trust Third Quarter 2013 Conference Call for Thursday, November 07, 2013. Your host for today will be Mr. Edward Sonshine. Mr. Sonshine, please go ahead.

Edward Sonshine

Thank you very much and welcome to our Q3 conference call. Before I proceed any further, I will the read the pro forma or required warning. So in talking about our financial and operating performance and responding to your questions, we may make forward-looking statements, including statements concerning RioCan’s objectives, its strategies to achieve those objectives, as well as statements with respect to management’s beliefs, plans, estimates, and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts.

These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. Additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these statements can be found in the financial statements for the period ending September 30, 2013 and Management’s Discussion and Analysis related thereto, together with RioCan’s Annual Information Form that are all available on our website and at www.sedar.com.

I think they get me that, just to make that wake me up or probably to sleep a much or which but it need to be said. Anyway here with me today are of course, Fred Waks, our President and Chief Operating Officer, Rag Davloor, our Executive Vice President and Chief Financial Officer and to kick it off, I think I’ll turn it over to Rag to bring himself on our financial performance.

Raghunath Davloor

Thanks Ed, and good morning everyone. I will just provide a briefer overview of the third quarter financial results. For the third quarter, RioCan reported operating FFO of $124 million, an increase of $9 million, or 8% compared to operating FFO of $115 million for the third quarter of 2012. On a per unit basis, operating FFO per share increased $0.01, or 3% to $0.41 in Q3 2013, compared to $0.40 per unit in 2012.

The increase is primarily due to the increased NOI from rental properties of $15 million, which is due to acquisitions, same-store growth of 2.2% in Canada, and 0.9% in the U.S., and the completion of greenfield development, this was offset by loss NOI from dispositions of $6 million, lower lease cancellation fees of $6.5 million in the prior quarter, which was related to Zellers and AMC, and lower fee income of $1.4 million due to timing of development fees.

Interest expense, G&A cost, and other expenses relatively flat on a year-over-year basis. Looking forward, the quarterly NOI run rate as of September 30, adjusted to include acquisitions and dispositions that have closed during the quarter is approximately $192 million.

For the fourth quarter, we expect same-store growth to be approximately 3% with the full-year 2013 same-store growth of approximately 1.5%. For 2014, based on our initial estimates, we expect same-store growth to be approximately 2%. Property and asset management fees are expected to be approximately $3.5 million for Q4, interest income on a quarterly basis is also expected to be $3.5 million. G&A is expected to be approximately $47 million for the year, for Q4, we expect G&A to be between $17 million and $18 million.

During the most recent quarter, RioCan completed a total of seven income property acquisitions in Canada and the U.S. for $97 million and a weighted average cap rate of 5.9%. Subsequent to the quarter end, RioCan completed the resolution of the JVs with RPAI and Dunhill, including Kimco's share of Las Palmas Marketplace. RioCan acquired its partner interest and 14 properties in the U.S. at a total purchase price of $212 million, representing the weighted average cap rate of 6.6%.

During the quarter, RioCan opened a regional office in Dallas and we expect to achieve additional efficiencies to managing the properties ourselves rather than through third-party managers. We now have regional offices in New Jersey and Texas. Year-to-date RioCan has acquired interest in 29 income producing properties in Canada and the U.S. aggregating 2.8 million square feet at a total purchase price of $783 million and weighted average cap rate of 5.6%.

RioCan has five income properties under contract where conditions have been waived at a weighted average cap rate of 5.9% and the purchase price of $130 million. Including these properties and the firm contract is a 10% interest in Ingram Hills and 20% interest in Cinco Ranch both in Texas held by Sterling. When completed RioCan will own a 100% interest in all, but one of the 51 U.S. properties owned by RioCan.

In the U.S., we completed the sale of five properties to RPAI on October 1, for proceeds of $103 million as part of the dissolution of the JV and a weighted average cap rate of 6.8%. The debt assumed by RPI on these properties was $54 million.

Regarding RioCan’s Canadian disposition pipeline, RioCan had dispositions of $16 million during the quarter also with these properties are sold. Year-to-date RioCan is completed dispositions of 10 income properties aggregating $401 million comprising approximately 2.1 million square feet and weighted average cap rate is 6.2%. The debt associated with these properties was $67 million.

RioCan has one property disposition on the firm contract with conditions have been laid at a sale price of $21 million which is and this asset is unencumbered. Additionally RioCan has two property dispositions on the conditional contracts were conditions have not yet been laid at a total sale price of $194 million. There is approximately $92 million of mortgage financing associated with these properties.

Finally, the two other properties of RioCan is currently marketing for sale that had IFRS recurring value of $64 million and have related mortgage financing of $7 million. We are under no obligation to proceed with such proportionate dispositions which if completed will be down to facilitate, RioCan objective apparent it’s portfolio and recycling capital.

On the IFRS of September 30, 2013 on proportionate consolidation basis, RioCan’s income properties will valued to $12.9 billion based on the weighted average cap rate of 5.91% which reflects a decrease of 2 basis points during the third quarter. during the third quarter RioCan recognize the fair value gain of $5 million, the primary reason for the decrease in cap rates is due to the increased weighting on the portfolio and the major markets, as a results of recent acquisition and disposition activities and an upward judgment to the value of two properties that are under contract to reflect the expected sale price.

Financing continues to remain available at favorable terms despite the recent volatility in the underlying Canada yields and the Trust continues to experience interest savings on our refinancings. Subsequent to quarter end RioCan increased one of its operating facilitates by an additional $60 million. And we are currently negotiations to increase another one of our faculties by a further $50 million.

The term on these facilities, it is expected to be extended to three years. During the third quarter RioCan’s coverage metrics continue to improve, the ratios on a proportionate consolidation basis for the quarter were as follows; interest coverage at 3.13 times, debt service coverage ratio at 2.27 times, and fixed charge coverage ratio which includes preferred and common distributions of 1.1 times.

RioCan’s debt to total assets ratio on a proportionate basis was 44.7% as compared to 43.6% at year end. RioCan’s other measure of leverage, net operating debt to operating EBITDA was 7.5 times for the quarter.

We expect these ratios will improve once a propose dispositions are completed and also through organic growth and the completion of development projects. As of September 30, RioCan had a 106 properties were unencumbered with a fair value of approximately $2 billion which represents 139% coverage of its unsecured debentures.

As we have previously stated, it is our objective to continue to grow the size of the unencumbered pool. During the quarter RioCan announced its load of intension to make a normal course issuer bid, proportion of its units as appropriate opportunities raised from time-to-time.

During the quarter RioCan acquired just over a 970, 000 units at an average price of $43 – $24.3 through the NCIB program.

Overall, we are pleased with our results and the positioning of RioCan’s capital structure. We continue to strengthen the balance sheet and credit metrics which provides us access to capital for both debts and equity to fund our ongoing acquisition and development platforms.

Fred will now provide an oversight on our operations. Thank you so much.

Frederic A. Waks

Over the first five months of 2013, RioCan completed 288 million lease transactions till going approximately 100,125,000 as compared to 1.2 million. Although we had fewer deals done in slightly under 19,000 square-feet. Revenues were up approximately $2 million speaking to the quality and after cutting of the portfolio that we have.

Average rents for those deals was $19.30 as compared to $16.24 for the ensuing year. National tenancies were approximately as same as last year 72% to 73% of all these deals, again ranging $18.94 as compared to $15.28.

We’re seeing many regulatory retailers now looking at new locations in Canada from the U.S., including J. Crew, Chico's, Dress Barn, Eileen Fisher, Ann Taylor, Tory Birch, Club Monaco. The gap is also physician to open up their yoga concept in Atlanta and Canada in 2015. Our limited branch is extremely busy in Canada looking at new locations for Victoria Secret, Pink, Bath an Body Works and Henry Bendel. H&M, Microsoft Support, Forever are extremely busy in the mall sector as well. As well as America Eagle is looking at new format retail and open air concepts as of this date.

In terms of rates and what we’re looking at in the urban side of things we averaged $40 per square foot in terms of our urban locations in Canada and that’s approximately about 80% higher than our average so they’re moving to the urban market is extremely viable for these tenancies.

In looking at our renewals our renewal attention rate for the quarter remains a very strong 91% with average rents increasing by $3.11 this year as compared to $3.06.

Looking at specific categories of those renewals they range from approximately 12% renew format retail upto 20% for urban retail. In terms of looking at our vacancies, our vacancies were up slightly from 1.8% to 1.91% for the nine months ending. A lot of that or a huge version was that it was because of the Zellers 8 locations that we took back and 8 locations that Canadian tire in terms of the sports mart repositioned. About 1,271,200 are attributed to these vacancies.

In terms of looking at our occupancy we are back to 97% and that basically due to both the backfilling of these source that we talked about. Last year we were at 37% backfilled at this juncture. This year we are at about 46%. Our economic occupancy is running at 95.5%., so in putting that in terms of the next 12 months we’re going to see 716,000 square feet coming on stream. These are site contracts with 17 million of annual growth revenue to be counted.

In terms of our top 10 that is interesting how things are changing with the consolidation, I believe Mr. Sonshine said that we may be down to do tendencies at some point in time, we maybe getting there.

Loblaws will become our largest single tenants after their merger with the Shoppers. They want 83 locations with us and that’s moving them from sixth place, Cineplex with their consolidation will move from – to fourth from third. Sobey’s what we will have 34 locations they will come from 16 to 9 and Canada will move now into our top 10 going from 13th to 10th place after the consolidation.

In terms of the U.S., we continue to have strong metrics there. We are very pleased with the internalization of management. We are running at a strong 97.4% occupancy with 86% being from our national tenancies. Giant Foods continues to be our largest singe tenant with now that they are on – now they are under 9.93% or under 10%.

We continue to have strong leasing metrics. We've done 34 new deals so far this year approximately 83,000 square feet at an average rent of $22 per square foot. And our renewal retention rate so far is 96.7, which is extremely high by any standard in North America.

Edward Sonshine

Fred, thank you very much. Rags, thank you. It’s always interesting you know our mentor over here, use to always been at the only constant and retail real estate has change and a change in many ways. Not just in the consolidation of tenancies is something that continues and something that I think, I’m going to be talking a little about as to how we are addressing.

Rags and Fred, have brought just date on Finance and Operations. As I commented in last quarter’s conference call, our operating FFO for the three months ending September 30 of $0.41 is a base number, of course with no unusual fees or surrender payments. And while Q4 will be quite satisfactory resulting in 2013 being a year that we hear Riocan will be quite proud of.

Our focus, as we get into November is already on 2014 and quite frankly we’re focusing on the next five years. Our acquisitions provide immediate growth if bought in finance growth. We believe that this source of growth will be more muted as we go through the next few years. No one took more advantage of what in hindsight was a golden time for acquisitions.

Being the period between 2009 and in the beginning of 2013, then Riocan we acquired over a $4 billion dollars of wonderful assets, but the largest source of financing for those acquisitions was equity, which comprised a total, of about $2.6 billion out of the four. For more about that strategy a bit later.

The world of business I mentioned already is rapidly and ever changing. That change being the only constant. The world of REITs and habit changes a bit more slowly. But it does change. One of our prime goals here is to anticipate change and position Riocan to take advantage of it. For the benefit of our unit holders.

I believe this is something we’ve done quite well over the last 20 years and I’m confident that the strategies, we've already adopted and put into place will position us equally well for the future. The first of these strategies is our development program, which have been ongoing in different formats in different ways for the last 15 years and so. But we've sharpen the focus of our development group over a last couple of years. So as to concentrate on mixed used urban projects while not loosing side of exciting conventional retail opportunities.

Fred mentioned that type of rents that tenants are able to pay in the urban formats and this clearly is what's driving this as well as the movement of demographics. As they are all a good projects that we highlighted in our press release this morning provide only a sampling of what we had underway.

Building on the success we’ve experienced after purchasing the Yonge Eglinton Center over six years ago. We began assembling with our partners Metropia and Bazis, the Northeast corner of the Yonge Eglinton. For those not familiar with Yonge Eglinton Centre sits on the Northwest corner. Once we owned most of the block, we succeeded in achieving zoning for two residential towers. One of 58 stories of the Corner and the second of 36 stories fronting Roehampton which is the First Street North of Eglinton. These will sit on a three story podium of retail and office and all together comprised almost one million square feet of space to be built out of total cost including land of about $350 million.

Even in these slower sale times, the Corner building consisting of 623 suites has been 90% sold undoubtedly due to its remarkable design but even better location. The retail and office is largely already leased to the Toronto-Dominion Bank. The northerly residential building will contained about 208 suites and will be retained as a rental apartment building, so as to create a new source of cash flow for Riocan. We expect to commence construction of this project in early 2014 and will of course include and improve tunnel connection to Riocan Yonge Eglinton Center, which is itself undergoing expansion and improvement.

We purchased the Yonge Sheppard Centre with our partner KingSett at last year and have now completed and submitting – submitted for zoning approval. Plans that are including retail expansion of 110,000 square feet and a new residential tower of 290,000 square feet. This mixed used development that the intersection of two subway lines will redefine shopping at the heart of one of the densest areas of Toronto. In our press release we've commented on some of the tenants we’ve already signed up for this exciting project.

The more conventional opportunities are still occasionally available. The Sage Hill center in Northwest Calgary is a great example. Purchased at the beginning of this year with our partner KingSett, we already have our municipal approvals in place and are commencing grading and servicing shortly. Anchored by a Super Walmart and a Loblaws Foodstore, we are 72% pre-leased and expect that by the time physical construction starts in next spring, we will be substantially fully leased.

But these as I said are only a few examples of projects that will be coming on stream over the next few years providing a continuous stream of growth in operating FFO. That coming on steam will kick off as early as spring of this coming year 2014 with the opening at the end of March of the Stockyards project here in Toronto. But we haven’t ignored our current portfolio of 300 properties in Canada, most of which are in the major markets of Canada. We are busy creating a pipeline of growth and intensification initiatives to ensure that several come on stream every year.

A small example of what we have underway is happening at our Colossus shopping center at the intersection of two highways in the part of Toronto actually referred to as Woodbridge. There we have had arona for almost the project was built in over 10 years actually 14 years ago. And we have now completed negotiations with Rona to accept their surrender at the end of this year and we have already but it’s conditional, but we've entered into a transaction with target to replace the Rona actually on a land lease will be demolishing the Rona and Tiger will be building a new store and a result of the whole process we’re springing in some additional 28,000 square feet of conventional retail adjacent to the new target store.

Overlying all this is our commitment to continuing to improve our leverage methods. They are very good now but we want them to be even better. By continuing the disposition program in secondary markets, while creating new cash flows in urban locations. We are confident that we can achieve a lower leverage together with a higher quality portfolio, while at the same time maintaining more than acceptable growth.

It sounds easy when you say it fast, it’s not we are well underway in that process and we have no doubt that we will achieve all of the goals I enunciated above over the next few years.

Thank you very much and I’d now like to open it up to questions.

Question-and-Answer Session

Operator

Thank you, Mr. Sonshine. We will now take questions from the telephone lines. (Operator Instructions) Our first question is from Heather Kirk with BMO Capital Markets. Please go ahead.

Heather Kirk – BMO Capital Markets

Good morning. And just on the development of that you’ve highlighted in a little bit more detail. It seems like there is, this is sort of part of a much larger potential program. How do you look out over the next five years? How much do you expect to be spending and perhaps delivering into income producing on an annual basis?

Edward Sonshine

Obviously that I can tell you we have the spent, pretty well estimated and typically that will be our quality investment, will be $250 million to $300 million per year over the next five years for a total at our share of about a $1.5 billion. You can now part of that of course will be finance that’s on a 100% cost basis for RioCan share, typically these transactions and it’s to give you an exact metric. Because some of it’s condominiums as I've mentioned again [indiscernible] center.

Although we hope not too much will be condominiums some of it’s rent full housing, we expect that we’ll be at a slightly lower yield. But certainly have nice growth. But overall, I would guesstimate that it will contribute between 7% and 8% yield on an annual basis staring next year on the gross amount, that will be heightened a little bit by the use of some financing obviously lower than we've used in the past. But hopefully that will give you enough to start building a model on whether it will contribute.

Heather Kirk - BMO Capital Markets

Okay and you’ve also talked about the urban I am just wondering how big of a, how do you sell off assets? Is the idea to get more waiting to the urban markets and how much do you see that? I think you are probably under 10% right now in terms of the overall portfolio. What potential size does that have over the next five years?

Raghunath Davloor

Yeah. I’m not sure what your 10% refers too, I mean, urban I suppose what are you referring to this what I’ll call really serious massing call itself is the form here in Toronto perhaps, but there is we consider north of 412 to like Yonge Sheppard Centre that I mentioned, but our major market, I will answer it in a couple of ways.

Our major market assets are now over 72%. We expect that 72% to continue to rise, probably to 80% if not a little bit better as we continue sales of properties to secondary markets and developments in sometimes acquisition in major markets.

As far as what I think you are referring to either as really urban assets like the one we’re sitting in right now. I can see that 10% doubling over in the next five years when you start to looking at the projects like a couple of the ones I've mentioned plus the ones that what we call downtown less the center difference Spadina that we hope will get going in a couple of years and others that we’re doing in cities like Calgary, where we acquired a property actually just early this year which is in the area of Calgary call the East Village which is within the stones throw of the [indiscernible] and corner to City Hall where I’m not sure exactly what we’re going to build yet. We know it’s going to contain at least a couple of stories at retail, because that’s what we bought before, we've already leased 100,000 square-feet to a food operator.

But we expect that will have as much as upwards of 500,000 square-feet of mixed use attached to it as we see the demand that is shaping up has word of our project there gets around. So I would hope that our urban assets will certainly climb over the next five years to at least 20% that’s not higher.

Heather Kirk – BMO Capital Markets

Okay and this one small detail question and maybe I am looking at this in a run rate with respect to leverage. You call operating debt to adjusted EBITDA and consolidated data debt to EBITDA. I would have thought that the operating debt would be lower, that metric will be lower at 732 versus 702 and I’m just – are you putting less leverage on the – does that mean like you are putting less leverage on your that all of your projects or?

Frederic A. Waks

No, the way we allocate it as we just look at the overall leverage and just to be proportionate. So we are sitting at 44% leverage, we just proportionally allocate our debt, overall debt to 44% to the IPP and 44% to the development projects.

Raghunath Davloor

Yes, I just, I mean that’s the technical answer. That is the correct answer to your question Heather, but typically subject to the requirements of our partners, because we tried to be sensitive to those. We don’t use much leverage on our development projects that are certainly until we’re well into construction, we don’t use any of the northeast corner of Yonge and Eglinton where I think the total investment of the deal today, it is probably about $65 million, there is no debt on that, to say deal we are into close to $40 million, there is no debt on that. So certainly, the leverage typically is lower at the fund end of the development projects and then rises of course as we start to build up.

Heather Kirk – BMO Capital Markets

Okay, great, thanks.

Raghunath Davloor

Thank you, Heather.

Operator

Thank you. Our next question is from Pammi Bir with Scotia Capital. Please, go ahead.

Pammi S. Bir – Scotia Capital Markets

Thanks and good morning. Just with respect to the asset sales and recycling capital there, certainly there is a balance between trying to manage the short-term dilution on FFO and AFFO. But is there likely to be more than the, I think, $290 million that you got for sale post Q3 and how much of your portfolio today would you consider non-core?

Raghunath Davloor

Happily not that much, I would say and by the way, some of the stuff we are selling, we do get pretty good cap rates. In fact the current, I mean it’s under the stuff under contract that we expect to close over the next few months is actually the cap rate of 5.5%. So depending on the success of the program, it’s really not that bad.

But I would say that we’ve probably prepared to sell it. We would do this very judiciously and over time. Upto – something less than 10% of our portfolio it’s not that much anymore. We’ve done some pretty historic for us disposition programs, we did our first major disposition program back in 2005.

The bulk of which actually constitutes one of our relative renewable reeds that starts within our – but that disposition in that time we got little rid of lot of what I considered a really treasury assets that we expected over the next five to ten years would be going backwards.

In income, now the types of assets we are selling, we don’t really have too many more of those. The ones that we had we basically got rid of this year. and the once now, that we are looking at the disposition programs are the once that we are looking at really at slow growth, that we looked out ten years and say because I really think you do have to look out ten years and say, okay, what’s going to happen ten years as a result of changing demographics, as results of the rise in internet sales.

What’s going to happen to these shopping centers and where we do those kind of in-depth dives on every one of our 350 properties when we go away every February. And we don’t have that many, might we sell 20 to 25 and that’s why I say it’s less than 10% over the course of next 4 years or 5 years, probably that would be the right number.

Pammi S. Bir – Scotia Capital Markets

Okay. And then just in terms of the distribution, maybe returning to that for a second, might of the higher cost of capital, what are the board’s thoughts here with respect to an increase. I seem to recall a goal of being in a position – trying to get to a position for annual hikes, but given obviously the change in the market, how do you feel about that objective going forward?

Raghunath Davloor

Well we did do a hike this year, as you know, I think it was right at the beginning of the year if I’m not mistaken, and we fully expect that before the end of 2014, we’ll probably be able to do another modest hike offering is being well and I expect that will be. Having said that, we want to keep making a great balance sheet even better. There is only three ways of raising capital, then I’m aware. One is issuing equity, two is making a – undergoing dispositions and the three is increasing your retained earnings, which is by keeping getting your distribution to be in lower and lower percentage of your AFFO.

We have made tremendous drives over that, over the last few years. We have a much, we start a long trip I head of its there. I think we are down to as of this quarter rates about 95%, AFFO in distributions our goal and we think we can achieve it fairly quickly, our immediate goals to get that under 90%. And I think ultimately we want to get it closer to 80% of AFFO and that will take a few years, but we will get there. And to do that, our equal goal is to do modest increases on an annual basis, to our distribution. But they will be a percentage of the growth, that we experienced and they will be a relatively modest percentage of that growth. So that we can achieve the goals are highlighted. But we do want to keep our record that we loss for a few years of annual increases as modest as they maybe.

Pammi S. Bir – Scotia Capital Markets

Okay, and then maybe just one last one, in the past I think you’ve talked about targeting around 5% or so in terms of annual FFO growth. Looking ahead – given some of the objectives of getting the leverage down and focusing more in development over the next few years and you are likely be generating lees in terms of refinancing savings, are you still comfortable with that target or you think you can do better is it up or down from there, any colors on that?

Edward Sonshine

Yes, I would say that 5% goal is a very achievable goal and it’s one that we are comfortable with talking about publicly. Certainly, even with the dispositions, even with the very small increase in financing costs and the slight expansion of our development program, based on some of the things Fred has told you, and where we can see ourselves. We are very comfortable continuing to forecast the 5% per unit growth.

Pammi S. Bir – Scotia Capital Markets

Okay, great thank you.

Operator

Thank you. Our next question is from Alex Avery with CIBC, please go ahead.

Alex D. Avery – CIBC World Markets, Inc.

Thanks, I just wanted to touch on one small thing on the – I guess the new development purchase that you stuck on Bayview Avenue 1860, Bayview when you look at that sites, the location and proximity to the new transit that’s going to go in and seems like that development plan is pretty low utilization of that site. Are there I guess any long term expectations for further, density there or is being a built in a way that I could be built on top off?

Edward Sonshine

What we found out for money, it can build on top of anything. One of the things we’ve learned over the years, but the immediate goal there and it’s going to be a fabulous development, it’s virtually all pre-lease down, shower should be going into the ground, probably any minute literally.

I think the foundation permits have already been issued, and it will be a property that it’s going be two storey retail initial and one of those delightful things that we probably it’s going to talking about Alex it for both years 10 or 15 years from now, to say okay.

How do we add 20 story’s to this thing, and it won’t be that hard.

Alex D. Avery – CIBC World Markets, Inc.

Okay, but I guess the density is not permitted at that site at this point?

Edward Sonshine

Yes, these home owners that live all around that, they can something be a little testy.

Alex D. Avery – CIBC World Markets, Inc.

Okay, and then just.

Edward Sonshine

Alex, we took the course of least residence at an acceptable return to get it done quick, we do that sometimes.

Alex D. Avery – CIBC World Markets, Inc.

On a going in basis, that’s accretive and lots of long term?

Edward Sonshine

Absolutely, absolutely.

Alex D. Avery – CIBC World Markets, Inc.

So in the press release, you went through some of the leasing and operational highlights and just looking at the – I guess the leasing spreads that you’ve achieved in Canada versus the leasing spreads that you have achieved in the U.S. I’m just trying to reconcile, I guess your strategy in Canada of divesting lower growth assets and reinvesting in higher growth assets then how that plays into, I guess the spread between the type of growth that you are getting in Canada versus the U.S. and I guess just trying to tie that all together or any guidance you can give us there?

Frederic A. Waks

I don’t think I can give you numerical guidance. I wouldn’t for too much on one quarter or even nine months. I think we went into the United States on a relatively cautious basis. We expected to be buying lower growth assets that had good security and good – that had no change to go backwards. I think we achieved that goal.

However, now that we’ve taken over management ourselves, Fred and I, specifically and we’re down in Texas together with some other executives three weeks ago. Fred was down in the northeast in our office in New Jersey just last week, and I think what you’ll see – it won’t take a year. It will take us well into 2014. But I think you may see growth accelerating in our American portfolio now that we can sort of apply the Riocan way of doing things.

We identified, Fred and I down in Texas specifically, really a raft of opportunities that quite frankly our third party manager we felt just was not taking advantage of. And we’re quite excited by the growth prospects next year in our American portfolio. We think it’s going to better than even we expected when we bought them.

Alex Avery – CIBC World Markets

And I guess at the very least, you got in at a very good cost basis?

Frederic A. Waks

I think if you look and I guess our IFRS values will probably indicate it, the value we created for our unitholders because of our timing and the way we went into it was several hundred million dollars. I’m not quite sure the number at hand, but it’s at least that and when you take into account the exchange rates it’s even more, but strictly functioning we create a great value, which lively went with an omen of caution. But now we’re setting the trend into both vehicle.

Alex Avery – CIBC World Markets

That’s great. Thank you.

Frederic A. Waks

Thank you, Alex.

Operator

Thank you. Our next question is from Michael Smith with Macquarie. Please go ahead.

Michael Smith – Macquarie Capital Markets Canada Ltd.

Thank you. Just sticking to the U.S. portfolio, it’s very clear in Canada that you’re focused on urban. What are your thoughts on the U.S. strategy vis-à-vis urban versus suburban?

Frederic A. Waks

Well, it’s a tail of two regions quite frankly. In the Northeast, while we would very much like to be more urban, it’s a very different area. First of all, to start buying in New York or Boston or even Philadelphia, in the urban parts of those cities is very difficult. When you look at the Northeast, particularly where we are it’s so dense overall. I think the number is some silly number it like in about five states including like Pennsylvania and New York, Massachusetts.

There’s like 60 million people. So when you drive those areas you’re never out of a suburban area almost. So it’s a little bit different and I think we’re going to stay largely suburban in the Northeast. In Texas, although sometimes I start to say, how can I say that, but Texas in a demographic sense is been built up a little more like Canada. In other words it’s got four major markets consisting of Dallas, San Antonio, Austin and Houston.

Now, while we aren’t urban in the same sense that we are here in Toronto where we’re really in a more very dense area, those cities have not yet developed in the same way as Toronto has. So while we’re in the big cities and I think we’re well positioned, should they develop much more like Tornado, it’s very different. I would color strategy there more major market rather than urban and in the northeast more secondary suburban market and all three markets, we approach them little bit differently?

Michael Smith – Macquarie Capital Markets Canada Ltd.

Okay. Thank you. Just on your 208-unit rental apartment building that you’re doing at Yonge and Eglinton….

Raghunath Davloor

Yes.

Michael Smith – Macquarie Capital Markets Canada Ltd.

Can you just talk about, or give us some color on the economics of the apartment versus condo?

Raghunath Davloor

Yes, it’s I mean we are a bit placing new ground I’m not sure how many new apartment buildings, rental apartment buildings have been developed in the GTA in the last 40 years, I’m sure I could count them on one hand. But based on the information we are using – we are using today’s numbers as far as rents quite frankly. We think, we can generate a yield that’s in the area of 5.5% going in and that’s a gold shield obviously with that leverage, and of course, new build apartments are exempt from any rent controls. The market is the only thing that drives it.

By and large you are competing against individual condominium owners were in at a much higher cost base than we are and we think it’s going to be a great market for us. If you – and a great product for us. The key of course is having in the right location and this particular rental building will not only be brand new, be part of a quite architecturally stunning complex and it will be connected to the subway without ever going outside. In fact, to not only the Yonge Street subway, but to the Eglinton cross town road as well.

Dare I say it shopping, entertainment restaurants at RioCan’s entertainment center by a very nice tunnel underground. So I think it’s a unique opportunity, it’s going to be interesting for us to see how the economics play out because if they play out the way we fully expect right now. It will be not be in a last rental building, we built it will only be the first of what we hopeful be quite of few

Michael Smith – Macquarie Capital Markets Canada Ltd.

So, and other maybe the globe site, it’s the economics are more or less the same?

Raghunath Davloor

What that is our intension and hope right now, obviously it’s a very highly desirable residential area as witnessed by the enormous number of condominium buildings, built around it and to the south of it. What our researchers shown us, it’s a simple thing, those of us who own our own home is going to always think about it. But to the rental population, which comprise well over a half of the population in metropolitan Toronto, one of the things they don’t get when they lease a condominium is security of tenure.

And they don’t get an institutional landlord either, when I say security of tenure under the legislation as I understand it. Any time a condominium owner wants to sell his unit or occupy himself or have his family. He can give you – he can give the tenant notice and the tenant has to move within a relatively short time. Of course in a rental building, they operated as a rental building, you can stay there until you are ready to leave and you don’t have to worry about getting that notice to say, move out.

So it’s not only an advantage of newness and professional operation, it’s an advantage of security of tenure and we think that’s going to translate into phenomenal success. And yes, we want to build it, I’ll recall downtown west, it’s been either front yes. Would we want to build them at Yonge Sheppard? Yes.

Michael Smith – Macquarie Capital Markets Canada Ltd.

Okay. Thank you. Last question, you talked about 5% FFO growth being very achievable.

Raghunath Davloor

Yes.

Michael Smith – Macquarie Capital Markets Canada Ltd.

What would you say on the same property NOI growth was fairly achievable, I think five year kind of timeframe?

Raghunath Davloor

2%.

Michael Smith – Macquarie Capital Markets Canada Ltd.

2%.

Raghunath Davloor

2% we think the other 3% will come from a variety of sources, part of that will be continuing acquisition or I’m sorry, it could have continuing acquisitions, maybe primarily in the United States over the next couple of years, but continuing acquisitions, part of it will be from benefits in financing and part of that will be just from more efficient operations.

Frederic A. Waks

Is it the – is it the 2% NOI growth same store which could go size 2.5 but we think the range is 2% to 2.5% is unlevered. So obviously when you put the leverage on you're looking at 4% FFO growth depending on the level of leverage going 2.5 to 4, so getting to 5% FFO growth per unit is not a stretch.

Michael Smith – Macquarie Capital Markets Canada Ltd.

Yes.

Raghunath Davloor

Yes it is a number we are just confident of talking about.

Michael Smith – Macquarie Capital Markets Canada Ltd.

Okay thank you.

Raghunath Davloor

Thank you.

Operator

Thank you. (Operator Instructions) Our next question is from Sam Damiani with TD Securities. Please go ahead.

Sam Damiani – TD Securities

Thank you, good morning everyone.

Raghunath Davloor

Good morning Sam.

Sam Damiani – TD Securities

Just on the NorthEast Yonge and Eglinton there, two questions, what do you expect in the terms of the yield on the retail office components and what’s the timing of the construction of the rental building?

Raghunath Davloor

Okay, construction of the whole projects is expected to start quite frankly all at once. We’re going to build a whole thing in one phase. And that will probably start by April, May of 2014. We’re in the process of finalizing the actual working drawings, hope to be going and filing for permit soon. So you can tell me how long it will take for City Hall to approve it, but I would say late spring 2014 is pretty safe. The cap rate on the yield on the retail and office is a bit of a sensitive issue.

Sensitive only to our partners, because part of the original joint venture agreement that we entered into and if they’re listening in, I hope pardon me, is that we would have the right to buy their 50% interest in the retail and office component at a 7% cap rate. Now this was done a few years ago obviously and that’s – we will enjoy a 7% initial cap rate on what is largely a TD Bank lease at the corner of the Yonge and Eglinton.

Sam Damiani – TD Securities

Not a bad credit.

Raghunath Davloor

No, no I’m sure you’d agreed that is pretty good.

Sam Damiani – TD Securities

[indiscernible] this morning so that is good sign.

Raghunath Davloor

Yes, the whole project should be completed, we’re hopeful, I mean, again with construction and especially when you are not through the start by 2017.

Sam Damiani – TD Securities

Great, just switching over to sort of bigger picture you’ve talked about selling some non-core moving more into urban, you had a $14 billion asset based property, is this going to get to $20 billion over the next 10 years, would you really see a better strategy of narrowing the focus on these urban locations?

Raghunath Davloor

Well.

Sam Damiani – TD Securities

Well maintaining a static asset base and I’m asking the question both on today’s cost of capital and assuming your price went up to $30?

Raghunath Davloor

What the – we've notwithstanding that we have got to this $14 billion we've never really grown for the sake of growing. We grow a lot being okay. Rights made a phase when I said maybe in our first five years but I wasn’t necessarily true but I’m not going to dip up most of my speech for the 20th anniversary right here. So I say this, I've got to save a few things. But you know what? For us to get to $20 billion 10 years from now is probably not a big deal.

When you look at the investments we are making in development and I think we will get there more by developments and by acquisition. Having said that, I mean, you know, what 10 year is a long time. You buy net purchase of $300 million or $400 million a year. That 3 billion or 4 billion you do some development along the way. It’s sure will be 20 billion 10 years from now.

Sam Damiani – TD Securities

Okay. Just lastly on the Eagles Landing, kind of an interesting slide there with really no visibility right at the corner…

Raghunath Davloor

Yes.

Sam Damiani – TD Securities

Is there any opportunity to fix land?

Raghunath Davloor

That’s the only reason we bought it quite frankly. And you are right, it’s an oddly build property. It has two things going forward from our perspective. First thing is, we bought the existing income in place at a - I think about a 6.2% cap rate.

Sam Damiani – TD Securities

All right.

Raghunath Davloor

Right. So we’re starting from a very good base, that’s unlever deal. And I can’t remember the exact amount of the vacancy as well as some tenants on reduced rent, but its fairly significant. And we’re fairly confident that once our people are in charge of that, which I think is closing probably today or yesterday, oh no, we postponed it into next week, right. Once we get a hold of it and we're well advanced and already dealing with some of the issues, we think we can get that up over 7%.

I would say within a year, which is why we bought it. It is an odd-looking property. It's certainly not the way we would have built it. But having said that with the population growth that’s taken place in the surrounding areas, it’s actually quite incredible how much growth has happened. So almost despite the configuration of the property the individual tenants win, when the right tenants are there are doing better and better.

Sam Damiani – TD Securities

So the Google Street View shows a Metro there. Now, it's a Yummy Market or whatever, is that a sub-Metro or an independent?

Raghunath Davloor

No, that an independent that Metro sub-leased to. So right now we have the – I think the best of both worlds. We have a Metro covenant for, I don't know about 15 or 16 years. And we have a sub-tenants who is actually paying, I think profit to Metro, good for them. But who is very attuned to the local demographic. And from what information we have are doing – they're hitting sales right out of the ballpark. I think it's their second store, Fred, Yummy's, sorry, and they focus on more of an Eastern European demographic.

Sam Damiani – TD Securities

Great. Thank you.

Raghunath Davloor

Thank you

Operator

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

Edward Sonshine

Thank you very much Valerie. Anyway, thank you all of listening into our third quarter conference call. If I don’t see you before that either our – it’s hard to believe it’s been 20 years of doing this. And actually it hasn’t been, because I think the first five years, we didn’t do conference calls. We figured it out about 15 years ago that we should, some others still haven’t. But I will look forward with equal relish to talking to you in February of 2014. Thank you again for listening in. Bye-bye.

Operator

Thank you, gentlemen. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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