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Executives

Edward Sonshine - President and CEO

Fred Waks - President and COO

Rags Davloor - EVP & Chief Financial Officer

Analysts

Pammi Bir - Scotia Capital

Sam Damiani - TD Securities

Heather Kirk - BMO Capital Markets

Jason White - Green Street Advisors

Neil Downey - RBC Capital Markets

RioCan Real Estate Investment Trust (OTCPK:RIOCF) Q4 2013 Results Earnings Conference Call February 13, 2014 9:00 AM ET

Operator

All participants thank you for standing by. Your conference is ready to begin. Good morning and welcome to RioCan Real Estate Investment Trust Fourth Quarter 2013 Conference Call for Thursday, February 13, 2014. Your host for today will be Edward Sonshine. Please go ahead Mr. Sonshine.

Edward Sonshine

Thank you very much and welcome to our year-end for 2013 conference call. I think they keep making this morning longer, but I have to read it to you, and talking about our financial and operating performance and then 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 subjects to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. And discussing our financial and operating performance and responding to your questions we will also be referring referencing certain financial measures that are not generally accepted accounting principle measures, GAAP under IFRS. These measures do not have any standardize definitions prescribed by IFRS and are therefore unlikely be comparable to similar measures presented by other report issuers.

Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance, liquidity, cash flows and profitability. RioCan’s management uses these measures to aid and assessing the Trust’s underlying core performance and provides these additional measures so that investors may do the same.

Additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward-looking statement together with details on our use of non-GAAP financial measures, can be found in the financial statements for the period ending December 31, 2013 and Management’s Discussion and Analysis related thereto as applicable together with RioCan’s current Annual Information Form that are all available on our website and at www.sedar.com.

That brings to a conclusion, no I am kidding, but I can understand why some people still want to do this. So here we are with me are Fred Waks our President and Chief Operating Officer and Rags Davloor our Executive Vice President, and Chief Financial Officer. And to start with the financial side of the world I will turn the call over to Rags now.

Rags Davloor

Thanks Ed and good morning everyone. We are pleased to review our 2013 year-end results that were released earlier this morning. For the fourth quarter RioCan reported operating FFO of $124 million an increase of $8 million or 7% compared to operating FFO of $116 million for Q4 2012.

On a per unit basis operating FFO increased by $0.02 by 5% to $0.41 in Q4 2013 as compared to $0.39 per unit in 2012. The increase is primarily due to increased NOI from rental properties of $10 million to do the acquisitions net of dispositions. Same-store growth of 2.7% in Canada and 1.7% in the U.S. portfolio. And the completion of Greenfield developments partially offset by higher G&A cost of approximately $1 million due to higher GSP tax recovery that received in the prior year.

For the year operating FFO was $492 million an increase of $52 million or 12% compared to operating FFO of $440 million for 2012. On a per unit basis operating FFO increased by $0.11 or 7% to $1.63 in 2013 compared to $1.52 in 2012. The increase is primarily due to increased NOI from rental properties of $54 million which is due to acquisition net of dispose. Same store growth of 1.7% and 1.2% for the Canadian and U.S. portfolio respectively and the completion of Greenfield development.

As well other revenue increased by $3 million due to higher fees related to development activity on joint ventures and higher interest income. These gains were partially offset by lower lease cancellation fees of $3.5 million which arose last year from the Zellers and AMC favors buyouts and higher G&A cost of $5 million primarily due to higher unit based conversation for the year, cost incurred in the establishment of the U.S. operating platforms and the favorable GSP tax recovery in the prior year.

Looking forward the quarterly NOI run rate as of December 31, 2013 adjusted to include acquisitions and dispositions that have closed during the quarter is approximately $190 million. For the first quarter, we expect same-store growth to be in the range of two and three quarters, 2.75% to 3%. For the year we expect same-store growth to be approximately 2%. Property and asset management fees are expected to be approximately $3.5 million in Q1. Interest income in the first quarter is expected to be approximately $2.6 million.

G&A is expected to be approximately $50 million for the year. This increase is primarily due to the full year impact of the U.S. platforms and higher IT cost. We expect Q1 G&A to be approximately $11 million.

During the most recent quarter RioCan completed the total of 16 income property acquisitions in Canada and the U.S. for $274 million and a weighted average cap rate is 6.5%. These acquisitions included the solution of RioCan’s joint ventures with our partners in Texas.

For the year RioCan applied interest from income properties in Canada and the U.S. Aggregating 3 million square feet for total purchased price of approximately $849 million and then weighted average cap rate of 5.7%. RioCan’s Wellington property in the U.S. under contract where conditions have been laid at a cap rate of 8% and the purchase price of $9 million.

In the U.S. we also completed the sale of five properties to RPAI on October 1 for proceeds of the $103 million as part of the dissolution of the joint venture at a weighted average cap rate of 6.8%. With that assumed by RPAI on these properties was $54 million.

Regarding Canadian dispositions, RioCan had five dispositions of $226 million during the quarter with debt associated on these properties of $93 million. For the year RioCan completed dispositions of 13 properties aggregating $616 million comprising of approximately 2.8 million square feet and weighted average cap rate of 5.9%. The debt associated with these properties was $160 million.

Subsequent to year end RioCan completed the sale of two properties and the total sales price of $48 million. RioCan has one property disposition on the firm contract where conditions have been laid at a sale price of $5 million which was low debt associated with it.

Under IFRS at December 31, RioCan's investment properties would value to $13.1 billion on a proportionate basis, based on the weighted average cap rate of 5.91% which was unchanged compared to the third quarter.

Financing continues to remain available at favorable terms, however we are seeing considerable volatility in the underlying Canada yields and spreads especially with respect to unsecured spreads. Subsequent to year end RioCan completed the offering of $150 million Series U debentures that carry a coupon of 3.62% that mature in June 2020. The Trust continues to experience interest savings on our refinancings with the average rate of RioCan's maturing debt in 2014 being 4.62%.

In the fourth quarter of 2013, RioCan renegotiated the terms of two of its operating lines by increasing the capacity on these facilities by an additional $110 million extending the maturity dates to the end of 2016 and reducing the interest rate spreads to BA’s plus 125 from BA’s plus 150. Also subsequent to year-end, RioCan renegotiated a third facility and added a four.

The pre-existing line was increased from $100 million to $130 million and the new facility has capacity of $75 million with the same pricing as the other facilities and they mature in June 2017. These facilities bring RioCan’s aggregated operating facilities for $640 million. Currently $40 million is drawn on these facilities by way letters of credit to support our development activities.

In the fourth quarter RioCan’s coverage metrics continue to improve over the prior quarter. The ratios on a proportionate consolidation basis for the quarter were as follows; interest coverage of 3.1 times for the quarter and 2.83 for the year, debt service coverage of 2.26 times for the quarter and 2.1 times for the year, fixed charge coverage which includes the dividend from both common and preferred shares of 1.1 times for the quarter and 1.06 for the year. RioCan’s debt to total assets ratio on a proportionate consolidation basis was 44% as compared to 43.6% at December 31, 2012. Net operating debt to operating EBITDA was 7.5 times for the quarter and 7.2 times for the year. We expect these ratios will improve overtime to organic growth and the completion of development projects.

Our payout ratio on an FFO basis was 95% for the quarter and also for the year. It is our objective to bring this ratio to below 90%. As at December 31, 2013, RioCan had 103 properties were unencumbered with the fair value of approximately $2.1 billion, which represents 142% of RioCan’s unsecured debentures. As we previously stated, it is our objective to continue to grow the size of the unencumbered [growth].

Overall, we’re pleased with our results and continue to improve our capital structure, which provides us access to capital for both debt and equity to fund the RioCan’s ongoing acquisitions and development platforms.

Fred will now provide further insights into the operations.

Fred Waks

Thank you very much Rags. Operations at year-end 2013 are as follows. Leasing, we had a very booing year of doing approximately 1.5 million square feet as compared to 1.7 square feet in the previous year. However, our net rent was up $28.5 million as compared to $27.5 million due to the fact that our average rents were $18.97 as compared to $15.95. Of that 70% or just over 70% were national tenants averaging $19.56 this year as compared to $14.89.

There continues to be a very booing market in terms of our urban opportunities doing deals with the like of TJX, Michaels, TJX by the way being winners in HomeSense. Michaels and Bed, Bath & Beyond are up. Mall leasing is extremely active as well doing deals with the likes of Sephora, Pandora, Victoria’s Secret and Georgian Mall and repositioning before starting in Oakville Place which we’ll be able to announce in next couple of quarters.

Other tenants such as Club Monaco, (inaudible) Chico's, [Black Market] on the Boston, [Rocker], Michael Kors, Tory Birch all the limited brands, Ted Baker are all extremely active as (inaudible).

In terms of our own deals in terms of our own properties that we have done several deals this year with Dollarama, Tim Hortons, [Michael Kors Jewellery], national tenancies for GMC, TD, Canada Trust, LA Fitness, Staples, Winners and SportCheck. The Tanger Outlets we’ve also broken new brands with tenancies that are extremely beneficial to Trust’s holidays which were malls as well with the likes of Coach, GAP, Banana Republic, American Eagle, Puma, Famous Footwear, [Hager] -- and a couple of LOIs with [Polar].

In terms of our lease renewals we were 88% renewal retention as compared to 89.7%, but if you are to take the Zellers renewals into effect, we’re actually at 92% with the average rent of about $3.20 a foot as compared to $3.29 the previous year.

New format retail was basically down at 9.7%, grocery anchored at 12% and closed 11.2%, non-grocery anchored 13.1%, urban retail at 14% and office predominantly in this building with all the work has been at almost 25%.

In terms of number of tenancies budgeted and unbudgeted vacancies, we were at $28.5 million as compared to $24.5 million or 2.39% as compared to 2.13%. Again that pertains to a lot of Zeller noise and that was about 653,000 square feet of that total. And of course we reported in the past that in terms of the backfill of what we’ve been able to do there.

Occupancy is at 96.9% versus 97% the previous quarter or 97.4% the previous. The 1 basis point decrease is due to basically a earn-out that we in Texas where we took on 40,000 square feet of very leasable space to re-attain at zero cost.

In terms of our top 10, we continue to have Wal- Mart leased until 83 weeks now and the Loblaw Shoppers Drug Mart acquisition occurs, Canadian Tire, Cineplex, Metro, Winners, Loblaw to target Staples, Shoppers and [Kara], our top 10 equates to 25% of our portfolio revenue.

In the United States we are slightly down due to that 40,000 square feet with of course a smaller base. We are at 96.8% as compared to 97.4% with 52% of our GLA is coming out of Texas and 54% of our annualized risk there coming out of Texas. We have done 36 lease renewals at an average rate of $21.96. And basically our lease renewal retention in the States is a very strong 96.9%.

Ed, over to you.

Edward Sonshine

Thanks Fred, thank you Rags. Real estate is a long-term business, but being public means we need to deliver steady and growing quarterly cash flows. I really believe that RioCan is uniquely positioned to deliver both of these, over long-term growth and predictable and growing quarterly cash flows for many years into the future.

Our large and well diversified portfolio under the supported care of our leasing operations and asset management professionals is quite capable of delivering reliable and growing cash flow even without much new in the way of acquisitions. And unless by (inaudible) was taken, which it could be, our net acquisitions in 2013 on North American basis are about a $140 million, which at the end of the day for a $14 billion company is not much and yet we're going to -- we're quite confident about our continuing growth and in an environment where acquisitions because of the way capital markets have gone to more important, because of the way cap rates which continue to remain remarkably low. I think we're in a world where we all have to get used to living without major acquisitions. And I think we're uniquely able to do that and still get the growth.

Our development and redevelopment program will create a crescendo of growth over the next five years. Starting slowly in 2014 with the completion of stockyards and accelerating next year with the completion of such projects as the expansion and renovation of the Ingram Center, the completion of Sage Hill in Calgary, the expansion of our Colossus Shopping Center and the finishing of the first phases of the 1 million square foot development we're undertaking in the East Hill Center in Calgary. And I promise you the ones I mentioned will constitute just a good start.

As the decade unfolds, our various Greenfield and redevelopment opportunities will move the dial on even a big clock like RioCan, some we have been quietly working on for years and others will only come clear overtime as we figure out how to create the most value out of each particular property.

Included in this value creation exercise will be the commencement of the building of a residential rental portfolio, which we are confident will number in the thousands of newly built units within the next five years. This initiative and to purpose built rental apartments is possible now because of increasing rents in the right locations and the ability to construct much more efficient buildings than has been the case in the past. Happily for us, we already own land in some of most desirable locations in Toronto and Calgary, the two cities where we will focus these efforts. Land is of course that it sits under our existing shopping centers.

I want to leave a lot of time for questions, so I’ll end here by simply saying that we fully expect to see at least 5% OFFO per unit growth in 2014 and then quite frankly to see that number move up in two, three years.

Thank you. I actually got, eyebrow raise on that and I am going to open it up for questions.

Question-and-Answer Session

Operator

Thank you. We’ll now take questions from the telephone lines. (Operator Instructions). We have a question from Pammi Bir from Scotia Capital. Please go ahead.

Pammi Bir - Scotia Capital

Thanks and good morning.

Edward Sonshine

Good morning, Pammi.

Pammi Bir - Scotia Capital

Ed, I think you touched on this last quarter, again maybe just going back to some of your remarks you just made, but given your targets in terms of raising your major market exposure, can you give us an update on the capital recycling program and the potential magnitude of additional sales this year versus say the acquisition outlook?

Edward Sonshine

I think that the big bulge of disposition was in fact last year, because included in some of them was of course was the sort of reordering of our American partnerships and that included it. And we sold some big properties in places like Thunder Bay, Edmonton and Quebec City and of course reduced our exposure to Quebec in general including the year selling [Penn 30] and then another property in Quebec City that is being sold, I think has closed actually in 2014.

While I can’t give you the exact magnitude of the disposition program because really we’re all headed to an offset in a couple of days and that sort of becomes clear to us as we complete that process. I think it will be diminished from last year for couple of reasons, the biggest one being that we have actually already sold a lot of the properties that we consider to be low growth. There is nothing wrong with having the best shopping center in the secondary market and that’s sort of where we have skinny down the bulk of our portfolio in those secondary markets. And I think the growth in our major market exposure will come through the completion of the significant development and redevelopment program that we’ve got going, all of which of course are in places like Ottawa, Toronto and Calgary.

Pammi Bir - Scotia Capital

Okay. And then -- it’s helpful, maybe just going back to your comment about growing the rental unit portion of your business into the thousands. I mean what are we thinking about in terms of overall NOI exposure over the next several years. And have you thought that far out in terms of what the magnitude could be there?

Edward Sonshine

I haven’t really thought about the NOI side of it. I mean we’re looking at like I say, none of the properties that we have in our minds right now will surprise you and there will be locations like Yonge and Eglinton, like Yonge and Sheppard, Bayview and Eglinton, Layered and Eglinton and of course Front and Spadina. So these are all locations we already know about. Each of these things probably will cost, I can tell you from a commitment point of view before we look at partners and other tools, we’ll consider in these various situations. You are probably looking at probably $600 million of development. And if one applies let’s say a 5 to 5.5 sort of initial return on that, you are probably talking at least $30 million worth on a 100% basis of NOI. I have just done that calculation for the first time as we speak. But then don’t go into it.

Pammi Bir - Scotia Capital

Okay. And then would the intention still be to use I guess how much of that would be all RioCan versus your partners?

Edward Sonshine

That’s the question I just can’t answer right now Pammi. I would assume it will be at least half. But some of the properties we own 100% of right now like Sunnybrook, others we already have partners. But you never know where that’s going to go and who you are going to end up with. But it is our intention right now to be the operating partner in these situations as opposed to being the investor partner.

Pammi Bir - Scotia Capital

Okay. And just maybe one last one; Rags, going back to your comments on reducing leverage over time what are your targets with respect to the timing on getting debt to EBITDA down to the targets that you mentioned and maybe the path to get there between NOI and EBITDA growth versus using the equity markets?

Rags Davloor

Yes, I think we are looking at a full year time horizon. And we are going to have to do a lot of little things right, so equity markets is not something where we are really considering hard at this point. I think we trying to get the balance on the disposition programs and going to work through that. But as these properties developments also come on stream and the cash flows, the organic growth comes on stream; we will just start to see a steady improvement.

Pammi Bir - Scotia Capital

So that 6.5 time’s net operating debt to EBITDA is sort of a three year time horizon?

Rags Davloor

Yeah. And as we also lower our payout ratio that obviously helps because we couldn’t apply some of the retained cash to lower that leverage.

Edward Sonshine

Yes, let me be clear. We are lowering our payout ratio by increasing our income not by lowering the distribution.

Pammi Bir - Scotia Capital

Right. Okay, thank you.

Operator

Thank you. The next question is from Sam Damiani from TD Securities. Please go ahead.

Sam Damiani - TD Securities

Thanks, good morning, everyone.

Edward Sonshine

Good morning.

Sam Damiani - TD Securities

Just on the development yields, in the MD&A you quoted target yields ranging from 7% to 11%, could you just clarify whether or not those are unlevered or levered yields, and where within that range you figure the weighted average probably is?

Edward Sonshine

Those are unlevered yields first and foremost. And I would say you are probably looking -- by the big difference is the typically the land cost, where it’s land -- you know that either we bought a long time ago or it’s extraneous to something else we already got, the yields are a little better. But I would say, if we can average 7.5 rate I will be very pleased, it’s just the lower end of that range.

Sam Damiani - TD Securities

Sure. And Fred, you’ve mentioned got to a place, potentially whether going some sort of redevelopment or repositioning later on this year, could you provide a little bit of color on that and if perhaps the [Series store] might be included?

Fred Waks

The [Series store] is not included at this juncture, but we are…

Edward Sonshine

We don’t own the [Series store] if I’m not mistaken.

Fred Waks

We do.

Edward Sonshine

We do on that one. Okay, sorry.

Fred Waks

We did not have -- we approached [Series] initially and they were flushed with cash, and I don’t like to negotiate, or RioCan doesn’t like to negotiate when someone is in the position where they don’t know what to do with the money they have right now. But we are looking to do a complete retrofit of the center and we are dealing with a new anchor. And I hope to be able to announce that anchor by the next conference call. And it will be a game changer we believe for the center.

Sam Damiani - TD Securities

Are new anchor to go where the parking is, or…

Fred Waks

It has to go within the existing compliance of the envelope of the building, but it is not going to the [Series] space. And I can't talk much more about it, Sam.

Sam Damiani - TD Securities

Okay, I look forward to that. Just lastly on the rental residential strategy, you outlaid Ed, is the rational from a strategic perspective mostly because you have these lands on your interesting properties that can accommodate this or is this some other reason that you want to add rental residential to the portfolio from a risk point of view or just a diversification point of view.

Edward Sonshine

I would say it's probably all of the above, Sam. All those three factors came into that strategic decision, diversification, safety and a changing environment and the fact that it comes down to residential density which we have a lot of and actually over the course of this year, we're actually going to catalog it. (Inaudible) know how much we have in various locations. We’d rather create ongoing rental income and sell condominiums which are one time hits and that's not a business we want to be in. So, it just seems to us it's a better used than making short-term profits, creating long-term cash flows is much superior.

Sam Damiani - TD Securities

Any other specific projects where you're changing from a condo strategy to a rental strategy, because of the changing condominium sales market?

Edward Sonshine

Well, I don't think it's -- partly it's the condominium change markets, but giving example one that we have mentioned I guess at least sideways previously is across the street here the northeast corner of Yonge Eglinton. The southerly tower which is going to be at least 58 stories, and contain about 630 units while we sold 560 of them and we sold few months away from commencing demolition. So it’s a huge success. The market in a really good location is actually is surprisingly violent and strong.

Now withstanding that the northerly tower which I think we’re going to end up with about 430 units in a 36 story building, it’s our preference to keep that as rental and that it all be hooked-up into the underground and we just think it’s going to be a support rental project and we preferred it to that. So it’s nothing to do with any proceeds up in this condo market.

Sam Damiani - TD Securities

And just finally would the strategy include going out and buying existing residential rental properties or building or growing a piece of land for the sole purpose of building residential?

Edward Sonshine

Likely not. That certainly is not in our plans that we really are going to restrict ourselves to things we already own to grow by rentals and properties. And what it’s if you talk to Tom Schwartz of CAPREIT, they are pretty tough to buy or buying 40 or 50 year old buildings and there is I wouldn’t be surprised if Tom is banging around Ireland and the rest of the Europe because they are just too hard to buy here. So we have no intention of competing in that market. We think our unique situation and our added value here is that we already own land in great locations. So why not build on.

Sam Damiani - TD Securities

Great. I’ll turn it back. Thank you.

Edward Sonshine

Thank you.

Operator

Thank you. The next question is from Heather Kirk from BMO Capital Markets. Please go ahead.

Heather Kirk - BMO Capital Markets

Going back to your comments on the payout, you’ve historically been pretty consistent about increasing the distribution. As you look to reach those targets with some routine cash, which you consider holding off on increases or are you committed to (inaudible)?

Edward Sonshine

Well I am great believer in delivering to our unitholders what I think they really want which is ever growing distributions. We have moderated. We did go I think a year or two without increasing maybe 3, I can’t recall exactly. We did, our last increase was a $0.03 increase and I think we’re now at the position and I hope to go to the Board before the end of this year and recommend a small increase again. But nonetheless it’s a record we want to keep intact of or restart and doing small increases. I think the difference is the increases will just be a fraction of our growth and by that we’ll accomplish both, keeping our unitholders happy not that they’re said but happier and building towards the levels that we want to be on the payout ratio and our capital structure. Okay?

Heather Kirk - BMO Capital Markets

Yes. Turning to the U.S. the retail sales numbers have been not great in the last period of time. You’ve recently taken in the management platform. Can you just comment on what you are seeing in terms of the leasing market and how that internalization is playing out?

Edward Sonshine

Yes. The internalization is playing out great. I mean things are working. We have a lot more confidence in the leasing [powers] of our people in the field down there and in the Northeast and in Texas under the very, very direct supervision of our leasing professionals here in Toronto because at the end of the day the bulk of the tenants, of the same tenants we’re dealing with on a North American basis. So we think we’re going to do very well all the proof we’ll be in the putting and it is early days, but as Fred mentioned we took over about 40 odd thousand square feet of what was earn-out space and our predecessors who were managing it, which were our former partners never were able to lease that 40 odd thousand square feet of space. We’ve had entire team down including Fred and myself to look at that space, it’s great and it’s just a question of really focus.

So, from an operation’s point of view, it’s working great. And I think from a value improvement point of view, you will see the results of that by the end of this year, I think it will be great.

And you know what, retail sales are number that goes out. I think the more important number in the United States is the fact that the amount of new development is probably over the last five years at an all time low since World War II. We expect that to continue. And if -- and to judge it by the way cap rates are going in the United States as we do put our bids out there and the cap rate environment in the United States, if I mean I find it almost astonishing is actually becoming more aggressive on the low side than it is here in Canada, which is really a rebalancing of the way it historically is.

Historically cap rates in the United States on similar properties were always a little bit lower than they were here. That changed over the last five years and now what we can see is its changing back again and you are getting good demand from tenants in certain segments and at the same time, there is no new product being built. So, it’s a pretty good situation down there from what we can see right now.

Heather Kirk - BMO Capital Markets

So, would your expectation then be that we would see continued compression on U.S. portfolio cap rates?

Edward Sonshine

Yes.

Heather Kirk - BMO Capital Markets

Okay. Thank you.

Edward Sonshine

Thank you.

Operator

Thank you. The next question is from Jason White from Green Street Advisors. Please go ahead.

Jason White - Green Street Advisors

Good morning.

Edward Sonshine

Good morning.

Jason White - Green Street Advisors

I like to question about the same-store NOI growth across Canada. Can you give a sense of at the high-end at the low-end what that looks like across your portfolio or is it a pretty consistent number kind of throughout the portfolio?

Rags Davloor

Well, I think the bulk of the growth where we see in the high growth is in Calgary in the GTA, there is no doubt and probably auto would come in next, but we haven’t broken down by region. But just looking at the renewals or what type of niche we get in the various regions, there is no question that’s what’s pushing up the same-store growth.

Jason White - Green Street Advisors

Okay. What about in terms of quality, do you see -- so your best centers it’s a 4% some your laagered centers are flat to slightly negative or what’s the range?

Edward Sonshine

I would say that negative is not really a word...

Fred Waks

We sold those.

Edward Sonshine

We roughly sold those out that was last year. Flat would be with that we get, but I would say as you are seeing same-store in closer to over five in our better centers and particularly as Rag said, Calgary and the GTA.

Jason White - Green Street Advisors

Okay. And what about if you look at the U.S. and look at some of your peers, they think with occupancy stabilize they can still generate some call it 2% to 3% same-store NOI growth and your portfolio is highly leased, but doesn’t generate the same amount of growth. Can you speak to that -- between what you are seeing and what others saying they expect?

Edward Sonshine

Yes, you have to appreciate. When we made our initial four into the United States, we really opted for safety and stability rather than growth prospects so that not surprising our growth would be at the lower-end of the range, you call it more like 2% rather than higher. And that was the trade-off for us and really focusing on long-term leases primarily with grocery stores where there ain't a lot of built in growth.

Jason White - Green Street Advisors

Okay, that's fair. Thank you.

Edward Sonshine

That product down there.

Jason White - Green Street Advisors

All right. Thanks for the time guys.

Edward Sonshine

Thank you.

Operator

(Operator Instructions). The next question is from Sam Damiani from TD Securities. Please go ahead.

Sam Damiani - TD Securities

Thanks, just a couple of little ones or maybe a little more than a couple. So, in your same-store growth outlook for this year, Rags are you including occupancy increases there or is it all briefly coming to the rental growth?

Rags Davloor

It's primarily rental growth.

Sam Damiani - TD Securities

Okay. And in the fourth quarter FFO there was a transaction expense recovery, is that included in FFO or it's just wasn't clear from the…

Rags Davloor

No, no it isn't. What we had is when we unwound the U.S. structure; we did have an FFO gain that got move from OCI into income. And because it was related to the disposition of the assets, we isolated to the transaction gave in last color.

Sam Damiani - TD Securities

Okay. And then just with the recent spin-off on REITs by Canadian Tire and Loblaw, you've seen now I guess two -- albeit small transactions of them, exercising purchase options on properties in your portfolio. Do many leases with these tenants include these purchase options and do you see a lot more of this happening in the future?

Edward Sonshine

To my knowledge, the one that Canadian Tire exercised that I guess closing this quarter, to my knowledge it's the only one we have. I think we do have several with Loblaws and some of our leases maybe three or four, Freddie, but they stretch out like over the next 10 years. There is nothing that…

Fred Waks

There is fairly not a margin percentage of what we have.

Edward Sonshine

No, it’s tiny, but with when Canadian tire, I don’t think we have any as far as I know. And with [Loblaw’s] there might be three or four out of the, I don’t know how many stores we have with them.

Sam Damiani - TD Securities

Okay. And just finally Best Buy and Staples those types of tenants under a little bit of pressure with net retailing. What are you seeing in terms of trends in those types of retailers and what do you expect for the next couple of years?

Edward Sonshine

What we are seeing is downsizing rather than leaving. The Staples, whereas a few years ago Fred their standard box was 25,000 feet, depending on the market now, their standard box is 12,000 to 15,000 feet and Best Buy is probably even, bottle in downsize I would guess. But what we are seeing is in working with those tenants. And by the way both of them are still doing new stores, which is quite interesting. Every time I see a new Staple store or -- but in the smaller size. Happily there is sort of non-internet affected users ranging from medical facilities to restaurants to gyms to I’ll call it beauty establishments from nail places to hair places to spas that are more than anxious to take up that space that quite frankly gets freed up through this process.

But I think that downsizing process will continue and may even affect other sectors, I don’t know.

Sam Damiani - TD Securities

Okay. Thank you.

Edward Sonshine

Thank you.

Operator

Thank you. The next question is from Neil Downey from RBC Capital Markets. Please go ahead.

Neil Downey - RBC Capital Markets

Good morning all.

Edward Sonshine

Good morning

Fred Waks

Good morning.

Neil Downey - RBC Capital Markets

Ed, RioCan has a long history of partnering and collaborating and I guess one of the most recent examples in the last couple of years is with Diamond and Allied, in terms of different organization is coming together to benefit from the complementary skill sets that each brings. With the idea of entering into a new business really being rental residential, you suggested that you want to be the operating partner? A few moments ago, you mentioned Tom Schwartz and [Keith Reed] and there is a great example of a very good operator in the apartment business. So can you just elaborate a little bit in terms of your thought about being self-managed versus partnering with someone else, is it as simple as trying to limit the number of cooks in the kitchen so to speak?

Edward Sonshine

Let me put it this way, Neil. We’re always opened to partners and we have them across a range, ranging from institutions like relatively passive institutions like CPP and Sunlight to very active partnerships like those with Allied and Diamond and Trinity. But when you want to go into any discussion whether it’s with Tom Schwartz or Boardwalk or anybody else in this business and there are lot of experts in this business, I think you don’t want to go into at anybody thinking need a partner. So, you take my remarks somewhat that way. And you know what? Both Freddie and I know a lot of guys who maybe aren’t the brightest lights in the firm that manage apartment buildings very well, it’s not that hard to do.

Neil Downey - RBC Capital Markets

Okay. So time will tell I guess.

Edward Sonshine

Exactly.

Neil Downey - RBC Capital Markets

Thank you.

Operator

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

Edward Sonshine

Well, you know what? Our disclosure keeps getting better and better and I’d like to compliment Rags and Christian Green and their all crew because currently our disclosure is there. We won a investor relations award at the recent competition I guess just last week. So that’s I am going to say is we’re probably responsible for the terrific questions rather than the fact that there is no interest. Thank you again. And we’ll talk to you in a few months if not sooner. Thanks, bye-bye.

Operator

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

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