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Executives

Edward Sonshine - President and CEO

Raghunath Davloor - SVP, CFO and Corporate Secretary

Fred Waks - EVP and COO

Analysts

Sam Damiani - TD Newcrest

Dennis Mitchell - Sentry Select

Michael Smith -Macquarie

Mandy Samols - Raymond James

Karine MacIndoe - BMO Capital Markets

Pammi Bir - Scotia Capital

Neil Downey - RBC

Heather Kirk - National Bank Financial

Jim Sullivan - Green Street Advisors

RioCan Real Estate Investment Trust (OTCPK:RIOCF) Q1 2010 Earnings Call April 30, 2010 10:00 AM ET

Operator

Good morning and welcome to the RioCan Real Estate Investment Trust First Quarter 2010 Earnings Call for Friday, April 30, 2010. Your host for today will be Mr. Edward Sonshine. Mr. Sonshine, please go ahead, sir.

Edward Sonshine

Thank you and good morning everyone and welcome to the first quarter conference call of RioCan. Here with me is Davloor, our CFO and Fred Waks, our Chief Operating Officer. We will follow the usual format although maybe in future quarters, we will shake it up a bit just to see if everybody is listening.

Before we get started and Rag will go first, as I mentioned, as usual, I would like to say that in talking about our financial and operating performance and in 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 estimates and assumptions and they are subject to risks and uncertainties that could cause our actual results to different 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 apply in making these statements can be found in the unaudited interim financial statement for the period ending March 31, 2010 and management's discussion and analysis together with RioCan's current annual information form are all available on our website and at cedar.com.

Now that the lawyers keep increasing that warning, I am going to turn it over to Rag and ask him to give out the time that the warnings took.

Raghunath Davloor

Thanks Ed. I am going to keep my comments a lot briefer this time now after the feedback I got last time. So, good morning everyone.

In the first quarter we experienced strengthening in our financial results that reflect the impact of the acquisitions that we completed late in 2009 and the first quarter of this year, as well as the strengthened NOI on the portfolio resulting on the performance of our tenants during the first quarter.

In the first quarter we RioCan completed four acquisitions in Canada and three in the US with an aggregate purchase price of $205 million at RioCan's interest and a weighted average cap rate of 8.1%.

In the past few days, RioCan has completed the acquisition of two of the three remaining US properties from Cedar with the final property expected to close in the second quarter of this year.

RioCan reported FFO for the first quarter of $86.4 million or $0.36 per unit compared to $70.6 million or $0.32 per unit in the same period in 2009. A $15.8 million increase in FFO is primarily due to the following factors. Increased NOI from rental properties of $19 million, due to acquisitions, same property growth of 4.2% on the completion of green field development, increased gains on property held for resale of $7 million, offset by decreased fees and other income of $2 million and increased interest expense of $8.6 million.

Same-store net operating income increased by 3.1% for the first quarter as compared to the same periods in '09 due to the following factors, recent activity in fixed rent steps has positively impacted NOI by $1.2 million, adjustments for tenant recovery which positively impacted NOI by $0.9 million and reduced bad debt expense of $0.8 million.

We also finally saw a reduced maintenance CapEx, that were expensed for $0.5 million offset by reduced NOI due to vacancies incurred in '09 of approximately $0.8 million.

On a sequential basis, same property NOI increased by 1.8% over the fourth quarter with a same NOI also increasing 1.8%, primarily due to decreased bad debt expense in the first quarter of $1 million and $1.1 million in decreased provisions in connection with gross tenants and positive leasing activity.

Welcoming ahead to the rest of the year, there are a number of factors that we expect will positively impact RioCan's, results, the NOI run rate for Q1, excluding any leased buyouts is currently tracking at approximately $131 million.

Growth will come from that possession with completion of developments and rental growth. Same-store growth for the year is expected to be approximately to 3%, with same property growth expected to be in the range of 3.5%. A number of RioCan's greenfield developments are scheduled to come online, in 2010, and will begin to contribute to RioCan’s FFO in the later half of the year. Occupancy is expected to increase by 20 to 30 basis points in the second quarter and by approximately 100 basis points by the end of the year.

Proxy and asset management fees are expected to run at $3 million to 3.5 million. Interest income for the first quarter is within expectations of $4 million to $4.5 million per quarter. Dividends from Cedar which was not recorded in the first quarter should be approximately $850,000 per quarter. We expect G&A per quarter for the remaining of 2010 to be between $6.5 million to $8 million per quarter, being significantly impacted by IFRS implementation costs and restructuring costs, which are budgeted to b e approximately $3 million for the year. We expect that these costs will be heavily weighted till the second half of the year.

Now turning to our capital structure. RioCan successfully generated $250 million in mortgage financing at the average of 5% generating net proceeds of approximately $171 million. For the balance of the year, we have approximately $250 million of principal maturities and amortization at the weighted average interest rate of just under 7%. We are currently securing our debt financing with at or below 5% which will lead to substantial interest saving.

RioCan acknowledged its secured debenture is maturing in 2010. Subsequent to quarter end, we renegotiated our two primary lines of credit with the two banks to increase the maximum that can be borrowed by $80 million to an aggregate of $300 million and have extended their term to three years.

Going forward, RioCan intends to reduce the dilution caused by holding large amounts of cash by using its lines to credit access cash needed on a short term basis. During the first quarter, our interest coverage ratio was 2.3 times and debt service coverage was 1.8 times. Based on Q1 annualized, these ratios will improve to 2.5 times and 1.9 times respectively.

RioCan's debt to aggregate asset ratio was 56.8% as compared to 55.6% in December 31, ‘09 well below our cyclical threshold imposed by Declaration of Trust. Net of cash the debt to aggregate asset ratio is 56.2%.

This capacity along with cash on hand the maintenance of a held DRIP participation rate of 17.9% or approximately $15 million per quarter increased availability under our credit facilities along with the significant improved of unencumbered assets provides RioCan ample liquidity.

We are well position to take advantage of the opportunities as it become available. Our portfolios performing extremely well and our operating metrics are strong.

I will now hand it over to Fred, who will discuss the operation side.

Fred Waks

For the three months ending March 2010, we have done 80 new deals as compared to 84 320,000 square feet as average rate of 16.6-ish which is slightly down about $0.25 from the previous year and primary is because in the first quarter of last year we are doing re-letting (inaudible) things in locations such as Calgary and GTA.

In terms of lease renewals we have done 132 as compared to 133 with renewal retention of 85.6% as compared to 91.7% the previous year with an increase of almost $0.50 per foot to a $1.85 per square foot.

Now in the renewals our average renewal rates are as follows basically. They increased by 10.5% for (inaudible) or $2 a foot, non-anchor a 10.1% of $1.85 and our whole renewals were $1.45, which were inclusive of all categories from new format to urban retail.

In new leasing as well we are proud to say that we have done three new deals with TJX Winners with a new concept yet to be named in RioCan Warden, RioCan Durham, RioCan Colossus Centre. We have also done a deal with (inaudible) board approved for 30,000 square feet in (Belpark).

Our unbudgeted vacancy, which is of very good gauge as to the actual condition of the leasing business is actually quite strong and much more so than we initially anticipated with only 30 vacancies unbudgeted this year as compared to 61 with an aggregate of 93,000 square feet as compared to 440,000 in the previous year, a reflection of the economy or 0.28 as compared to 9.1 of the entire portfolio.

Till the year-to-date, vacancies were slightly higher in terms of budgeted vacancies, 219 as compared to 115, which all goes to looking at our portfolio occupancy, which is 97% as compared to 97.4 with an economic occupancy being at 95.8 and it adheres some time to just pair down and look at what that entails. That is basically looking at a budgeted vacancies as well as the couple of very large lease buyouts and let me just give you a quick update as to what’s happening on that space.

(inaudible) whole with 50,000 square feet we are presently negotiating with two national tenancies getting out of the club business and part expansion of one of our other national tenancies that were in the project right now. [Belpark Metro] we have released to Bath, Bed and Beyond; (inaudible) solutions we have released 20,000 square feet of Sport Chek; Heart Lake, we have released for the region of (inaudible). That was 20,000 square feet and Lazy Boy in Brampton, we have released to Dollarama.

In terms of the lease buyout that we did, one of them was in our Colossus Centre, office place which has deemed to be closing their operations in Canada. We have replaced them with one of those new concept winter stores, as I said and in Lawrence Square, Hudson's Bay Company downsized and we have a done a deal already with the City of Toronto and in both cases, at rent that were within the range of higher than the previous deals. In terms of top ten, Galaxy and Metro are basically neck and neck at 4.9%.

Let's just look quickly at what's happening with our retail portfolio in the States. Our acquisition or occupancy rate was 95%. It is now presently at 96%. That goes towards the quality and tenant mix and locations that we are able to acquire in the last quarter first quarters of this year. Interesting enough, our renewals are up $1.35 a foot, or 10% in this portfolio. It is going to 51.2% of what renewals were in the budget. As well as just going back our own percentage, we have already leased up 36% of our renewals as per our budget this year. Ed?

Edward Sonshine

Okay, thank you, Fred and thank you Rags. I think as you can clearly see from our Q1 results and from Fred and Rags' comments, we've put 2009 firmly behind us. While some made much of our relatively poor results in that year, I believe that we not only came through a difficult world of financial crisis extremely well but I believe we were able to put into place strategic acquisitions and strategies of which result this quarter are simply the first and early fruits.

For example, the significant amount of cash both debt and equity capital that we arranged in the spring and summer of 2009 went un-deployed until the fourth quarter and even in to the first quarter of this year. While this have a severe negative impact on our results right here, it did put us in a position to acquire two significant portfolios, one at year end ‘09 and the other in the first quarter of this year, while at the same time embarking on our US expansion strategy, which we think already looking backwards with a very opportunistic time.

The excess liquidity continued in the first quarter and quite frankly caused our results in this previous quarter to be lower by both two-thirds of a penny per unit, when you parse it down.

While we await the completion of new acquisitions, we are using these funds to the repayment of certain mortgages, which have an average interest rate of about 7%. So, as an interim years affecting not bad, but as a result of this program by the end of the current quarter i.e. at the end of June 2010 we will have about 70 unencumbered 100% own properties, where we quickly raise of the $700 million of secured debt should be required.

In order to not going in to the situation again in the future as Rags as mentioned, we have redone our operating lines. So, we will now aggregate $300 million of B46 term of three years with no callable features.

As a result we feel extremely comfortable and are in a position of write our any storms should they happen, while at the same time moving forward quickly on acquisitions opportunities all without having to carry diluted cash balance.

We are approaching this year, and next eagerly, looking to material growth in our FFO from our existing operations, new acquisitions and our ongoing development program. We have actually highlighted that program in our quarterly press release, perhaps in a more forceful manner than usual just to remind our stakeholders, that a significant amount of new income will be coming on stream in the next eighteen months.

The retail component of the Queen & Portland development which is anybody driving along Queen Street, can certainly see, that development alone will add almost $2.5 million of NOI all from national accounts, when it opens fully next year, and at a very attractive yield on cost.

With respect to acquisitions, we are certainly finding the market to be very competitive. Here in Canada, there is simply too much money chasing too little property, particularly in Western Canada, although it certainly doesn’t make our portfolio of acquisitions last year in the West looking them better than we thought they were.

Things are not as tight in the US, as there is more available product due to many owners both public and private simply still carrying too much of leverage. Notwithstanding the foregoing and notwithstanding our focus, on maintaining our high portfolio quality metrics on all our acquisitions, we have under contract in Canada, all letter of intent, three properties, aggregating, 360,000 square feet at a total purchase price of about $62 million and an average cap rate of just over 7.25%.

In the US, we have thirteen properties, either, under contract or in final negotiations, and our interest in these properties, the total purchase price would be about $230 million, at an average cap rate of 7.75%. The properties themselves in the US aggregate almost $2 million square feet, not counting shadow anchors and all are anchored by high quality supermarkets. Of course there is no assurance that all of these transactions will be completed but assuming they are, they would satisfy well over half of our acquisition goal for this year and they can be completed without any further equity issuance. A [lot of] growth drivers, is of course organic rent increases in our portfolio and I believe we can see our confidence in this from Fred's reports. The strength of our high quality, big city portfolio is clearly evident in itself.

Finally, it has become clear to us that size matters when you are Canadian REIT. Between IFRS and (Bill 652), both coming into force at the same time, namely January 2011. the additional comps and overhead involved in insuring timely compliance with both is much more absorbed by REIT camp than it will be by our smaller competitors. In addition, the non-qualifying income basket of 5% amounts to about $40 million annually for us thereby permitting us to comfortably proceed all of our intensification program of creating residential density for sale and we expect that it will generate in the neighborhood of $10 million to $20 million in gains on a consistent go forward basis.

We have all kept our mark somewhat abbreviated so as to allow us, except for the warning at the beginning, so as to allow more time for questions. That time is now about to start. So I will turn the call back to the operator for the question and answer process.

Question-and-Answer Session

Operator

Your first question will be from Sam Damiani from TD Newcrest.

Sam Damiani - TD Newcrest

Just on IFRS do you see yourself taking advantage of that book value bump to enhance leverage use at RioCan?

Edward Sonshine

We are not exactly very at as to what the numbers are going to be or well in to the process because of course the number will be that in effect as of January 1, 2010, but where we expect the number to that we hope and expect that will come in. It would take our coverage today to 150%.

So, we then going to assuming the number comes in the way we expect we then go when back up to 58, no. I think what we will do ultimately is allow us to work a much lower coverage ratio, but still having debt a little bit higher perhaps than we are today on an absolute basis because I think what we will finally do is a reflect that our portfolio is out of black as against cause more than anybody else’s. Now having said all that, I think the important metrics will be coverage ratios, not so much the absolute debt ratios that we had before and that is really what we are focusing on knowing in full well, that IFRS will permit us to lower our overall ratio. That answered your question, I hope.

Sam Damiani - TD Newcrest

Yes, maybe I’ll just try and get a little more specific if you are willing, Let us say that book value and market value balance sheet is (inaudible) 12% or something on the leverage metric. How much of that gap would you be willing to use half of it?

Edward Sonshine

At the most half of it.

Sam Damiani - TD Newcrest

At most half.

Rags Davloor

Sam, the focus really is going to be on interest coverage and those other ratios. So, we're going to try and pin it down on debt to GBV basically that metric falls away.

Edward Sonshine

It will give us some more room but Rags is right and limitation will be the coverage ratios.

Rags Davloor

Then that’s really all we’re going to focused on. It’s a tough question to answer, as to how much more we could put on as far as debt because interest rates or averaging down and so our ratios are just improving naturally we are resetting the amort on refis…

Sam Damiani - TD Newcrest

All right.

Edward Sonshine

And we have a lot of unencumbered properties.

Rags Davloor

So we were going to have a lot of room to work with. That’s how we manage the balance sheet after Jan 1, 2010.

Sam Damiani - TD Newcrest

Whatever will you choose here, you don’t have to go back to your debenture holders or unit holders getting any sort of approvals for modifications, is that right?

Rags Davloor

No.

Edward Sonshine

No, basically, IFRS replaces GAAP and all the calculations in the debentures are based on whatever current GAAP is, so effectively for all changes you don’t have to ask permission to follow the new law.

Sam Damiani - TD Newcrest

Just finally, all those acquisitions that you describe at a high level, would you really do describe them in a little bit more detail and may be give us the ratio of how much are under contract and how much are at the LOI stage?

Edward Sonshine

You know what, that really changes on a daily basis, I would say closed to half are under contract but you we fully expect the LOIs and even the ones that are in final negotiations to come through and we’ll be very busy with due diligence over the next six weeks, but, no deal is final until you actually close. So to start giving you the exact status of each transaction I think would not be useful.

Sam Damiani - TD Newcrest

These are all with Cedar?

Edward Sonshine

The ones in the United States of course you mean and the answer is no, there are actually by number of properties about half are with Cedar, third party acquisition not from Cedar but they would 80-20 with Cedar and the other group which is one portfolio, we are working with another partner.

Sam Damiani - TD Newcrest

How would they differ from your existing U.S. assets by market size or?

Fred Waks

They would be different only by, they follow the same format as for being supermarket anchor. This bunch actually, if we complete them, we will be in a different geography outside the Cedar footprint and actually just by happenstance be more in urban markets actually.

Sam Damiani - TD Newcrest

So outside north, the north east or just other north eastern states?

Fred Waks

Outside the north east.

Operator

The next question will be from Dennis Mitchell from Sentry Select. Please go ahead.

Dennis Mitchell - Sentry Select

Thank you, Rags, for your brevity. Much appreciated. Listen, I just wanted to ask a single question on the prefs. You have asked unit holders for permission to issue prefs and I am just wondering what your rationale there is? What your thought process is? What activities you think you might finance with pref securities? How much your capital stack you might devote to pref securities and what impact that might be having in terms of tax, raw distributions on the existing commons?

Rags Davloor

Okay, let me go in direct there. I guess from a distributions and the tax impact, it would be on the same proportion as the commons. So basically it fall into one pool of equity and whatever distributions are and the taxable income, it will be just shared proportionally across the board. As far as, we don’t tend to match dollar for dollar when we raise the money and how we deploy. It is a precedence of pool where we have a variety of sources of access to capital. We managed the balance sheet as efficiently as we can with the objective of driving down the capital cost.

So, this is just another source of capital we want to put in to our toolbox so to speak. It really it’s not a substitute for debt unsecured debentures would be more cost efficient. We'd really be viewed as more substitute in place of an equity if the circumstances are correct and we believe that the cost of capital will make sense.

So, we are not looking at the prefs, if the debt substitute we are looking at more as an equity substitute and would be treated this equity for GAAP purposes. Really that’s how we are looking at it. Right now we just want to set the stage to allow us to do it and we want to make sure that the cost to capital works if you want to proceed. We are looking to issue huge comps of the stuff. So, we wouldn’t be looking a replace our common equities with prefs, but to have some availability of prefs I think is nice in the capital structure and diversify that source of the capital.

Dennis Mitchell - Sentry Select

So you mean if you guys given any thought to say a maximum amount you have in your capital structure?

Edward Sonshine

I think there is a maximum in the proposal we report to the shareholders, but we don’t want to leave unlimited. At this early stage and as we were really having, we kept 16 almost 17 years we keep an extremely simple balance sheet. We never gone in for convertible debentures or any kind of hybrid securities, but the cost of preferred shares and their treatment as equity that we have all seeing over the last year and half. The banks really having been the leaders in this over a year ago as made it compelling now for us to go to our unit holders and say okay give us the authority to issue this class of unit, should we wish to do so. Whether we wish to do so or what amount, quiet frankly we have not yet thought through.

Dennis Mitchell - Sentry Select

Okay.

Edward Sonshine

It is going to depend on the market at any given time.

Dennis Mitchell - Sentry Select

Yeah, and we do agree, we do appreciate the simplicity in the capital structure but do you recognize that as your business complexity increases the caps structures complexities is probably going to increase as well?

Edward Sonshine

Exactly.

Operator

The next question will be from Michael Smith from Macquarie.

Michael Smith -Macquarie

Thank you. I just wanted to follow up on Sam's questions on the acquisition front, especially in the US. It sounds to be like, from your comments on the call and in your press release that, that you are pretty optimistic about achieving your goal for the balance of year on the acquisition front, is that correct?

Edward Sonshine

Yeah, its proving, and I have to say, a little more difficult than I would have thought, three months ago even, because there is a lot of money out there, and even in the United States, cap rates have moved South, they are still considerably higher than they are here, because of sort of problems that its just a different system and different economy right now, but you know we have made ourselves known very quickly, down in the United States.

Cedar is proving to be exactly the kind of partner that we wanted there, there contracts in the Northeast are already generating a lot of products for us to look at and ultimately our over half a dozen that we are landing on. and we are starting to get, there we have been getting for the last three months or soon, they are starting a lot of phone calls, spending a lot of time making ourselves known down there, so we are proving to be, I think an attractive partner not only for availability to capital, which certainly does tend to differentiate us but also the fact is that we are prepared to let the vendor manage.

We prepare and in fact want them to stay in for a piece of the deal and that kind of continuity and not just walking away from a property is proving to be very attractive for many vendors in the United States. So I am pretty optimistic although its certainly not easy that we will make our acquisition goals.

Michael smith -Macquarie

Okay. Thank you for that. Is it fair to assume that all of the stuff that you are looking at now are grocery anchored and some of them are and the new ones outside, the deals outside of the Cedar, are even in more mature areas?

Fred Waks

More urban areas.

Michael smith -Macquarie

Urban areas, okay. So is it beyond than what you have on your contract or LOI? Is your strategy to continue with the grocery anchored retail in mature areas and urban areas?

Fred Waks

Yes, at this time, that is correct. We are not deviating from that core strategy. We are staying with the strategy, minimizing the amount of risk we take. There is a lot more available in the United States and the large power centers where you had Circuit City and then you have some things go down just over a year ago. There is lots of question marks about other tenants in those power centers that continue to this day. So we are avoiding that type of products, certainly for the foreseeable future.

Michael smith -Macquarie

Okay, and just finally, so you are going outside the north east, is that closer to Florida? Or is it south east or want to give us some color on that?

Fred Waks

Yes. I will tell you. Its not Florida and its not California, Nevada or Arizona.

Michael smith -Macquarie

Okay. All right.

Fred Waks

Staying away from the really areas that have really got hit the worst.

Michael smith -Macquarie

Okay.

Fred Waks

We just don’t believe they would come back yet.

Operator

The next question will be from Mandy Samols from Raymond James.

Mandy Samols - Raymond James

Ed I know you said that you are optimistic, which you would reach the acquisition goals that you had beginning of the year, but you aren’t committing to it. How do you feel about FFO still covering the distribution by the end of the year?

Edward Sonshine

I feel pretty good. I feel it’s an issue that some of the people on the phone made much of it and really shouldn’t an issue. Our balance sheet and our cash flows are almost embarrassingly good. We can’t invest the cash that comes in for this place fast enough. So, the ongoing concern about our AFFO covering our distribution is a Red Herring that's about as where as I have ever seen. Having said that, I think what I said in last fall was that by the fourth quarter annualized, we would be doing that. We know how to do it. We will be pretty close.

Mandy Samols - Raymond James

I asked the questions because it good guidance in terms of what you expect from your earnings, when you said the fourth quarter annualized is that excluding gains or including gains?

Edward Sonshine

I don’t know what gains mean that. It’s a normal part of our business and assuming the same that our day-to-day rent it would be excluding them.

Mandy Samols - Raymond James

Okay. That’s great. In sense of acquisitions, what you are seeing in terms of cap rate compression, are you seeing cap rates come down across the full part of the spectrum of properties or is that only very the high end spectrum?

Edward Sonshine

I think you had to read the economy in the market. I think we would all agree with the lower quality properties is almost all market for and the cap rates of anything probably gone up because people don’t expect things to turn around that quickly. I think certainly here in Canada the cap rate compression over the last six months has been dramatic and again probably even more dramatic in Western Canada. In British Columbia it has gone to what it was, I mean there's people out there who are talking sub six cap rates on good retail product and nor only talking it but getting it.

Alberta has been the same, I don’t know if has to do with oil prices but there is a serious optimism, and a serious lack of product in Alberta and Vancouver with the result of cap rates have probably moved in the last six months as much as a 150 basis points sub, little less so in Ontario pull back but still there has been material movement.

Even in the United States the product that we bought or ready to buy were still closing them as Rag said from Cedar at an 8.5 cap today would be 7.75 quarter. So there’s been a good 75 basis point movement in cap rates in the United States as well.

Mandy Samols - Raymond James

Okay. Then in terms of high quality properties, are you referring to just high quality markets and primary market. In the primary markets so you are referring to high quality properties in secondary markets, so how would you define that?

Edward Sonshine

No, I would – I am talking primary markets I think there has been a differentiation between primary and secondary. Although right now for high quality properties the differentiation is very small.

Mandy Samols - Raymond James

What do you mean by that last point?

Edward Sonshine

What the words very small?

Mandy Samols - Raymond James

No, for high quality the differentiations very small across markets across secondary or primary markets?

Edward Sonshine

Yes, the differentiation is very small between primary and secondary markets for high quality retail. A Walmart anchored center here in Canada or a great supermarket center anchored here in Canada in lets say Victoria or outside of Victoria that I'll consider a secondary market is probably 10 or 15 basis points differential between one that is in the Vancouver suburb.

Operator

Thank you. The next question will be from Karine MacIndoe from BMO Capital Markets. Please go ahead.

Karine MacIndoe - BMO Capital Markets

The 75 basis point reduction in cap rates that you have been seeing in the states, how would the mortgage quotes, maybe, has changed over the same time frame?

Fred Waks

They have come down materially, probably even more. Was it right, Rags?

Rags Davloor

Yes, we were getting close, let's say, two months ago, three months ago, and on the quote spreads, we will just give an absolute rate, and the rates we were getting were 6-3/4 with a point in. We are just doing the deal now with the Cedar folks source with the (inaudible) which two months weren’t even at the table and it's at 5% rate with no point to grow again. So it has moved a lot. In the US, it's still had to constrain down, let's say, but we are seeing people starting to come in the market and its opening up and the rates have really moved substantially.

Karine MacIndoe - BMO Capital Markets

All right, wow. Okay, so perhaps even tighter than what you are getting in Canada or similar?

Fred Waks

We are getting for a similar term in Canada would be today, sub 5.

Rags Davloor

Would be at by 4.64, 4.65.

Karine MacIndoe - BMO Capital Markets

Then this is all 5 area?

Fred Waks

Yes.

Karine MacIndoe - BMO Capital Markets

Okay.

Fred Waks

Keep in mind; they are non-recourse down in the United States. So they tend to be a little bit higher.

Karine MacIndoe - BMO Capital Markets

So when you compare the two sides of the border, in terms of what you are looking at, would you characterize the quality as being similar to growth prospects being similar?

Fred Waks

Actually, I think the growth prospects over the, let's call it the short term, three years, in the United States is probably better, because key differentiator is you’re really not paying for vacant space down there. The market here has never gone that way and certainly have to tighten up here, certainly not going to go that way. There is always I don’t know how. Other than your vacant factor no vendor want to sell or not get credit for vacant space, in the United States that’s not the case. So, you have got two things that at least make you believe that we are seeing nice growth on the properties were busy acquiring that.

One is simply (inaudible) vacant space as. Fred mentioned in his report, our occupancy rate in the properties that already owned in the United States is gone from 95 to 96. In most cases unless there are subject to individual earn-outs the full benefits of that increase and I think we will see that continue. You also had in the United States a longer period of depressed rents and larger vacancies with the result that there is some real pent-up growth prospectus on the type of centers were buying over the next three years. Last, but not least, it’s a very important [addition] to keep in mind.

What’s kept the rents down and occupancy rates down in United States is tremendous development pipelines, where zoning is not tough to get, tenants are not tough to get because there is much more competition in the individual sectors. I think we are going to see very little green field development in the United States in the markets that we are in and almost any markets quite frankly over the next three to five years.

I think as the recovery in the United States progresses you are going to see a material rent growth of a depressed base that’s been created over the last three years. I think we will see when we are sitting here, Karine, let’s say two years now, we will see significantly faster pace of organic growth in the United States than we will seen in Canada.

Karine MacIndoe - BMO Capital Markets

Then in terms of reporting the same-store stock will you be looking at Canada, US segmentation or…?

Fred Waks

Yes.

Karine MacIndoe - BMO Capital Markets

Okay. The 3% same-store guidance, now I assume with the way the last year quarters came through there may be, you are looking for a lower percentage Q2, Q3 and then it picks up in Q4 because Q4 last year was so weak, could that be?

Raghunath Davloor

Yeah, Q2, would be lower obviously, that because also of the dynamic with the least buyouts and the down time in the interim and in Q3, Q4 we can see a big catch-up in the nice pick up.

Karine MacIndoe - BMO Capital Markets

Okay. What are your economic occupancy assumptions that are going in to that?

Fred Waks

The spread between portfolio occupancy and economic occupancy that you heard today and seen in our results we think we’ll narrow fairly materially as the year goes through because its very tenant and sort of tenant expiry specific and it will vary from quarter to quarter. Typically retailers, large scale retailers like their leases to expire in the first quarter because that’s traditionally the slowest retail period. Nobody wants their lease to expire in November. So, we tend to see this all the time and that gap will narrow down as the year progresses.

Karine MacIndoe - BMO Capital Markets

So may be we go from – just under a 96 to may be we land at 97 by year-end. Is that your…?

Fred Waks

Yes, that would be my guess but it is a bit of a guess. We have not done an analysis.

Edward Sonshine

That number which I pretty much, we are looking for an increase of almost deploying in terms of overall occupancies, still not getting a 97, for economic would make sense.

Operator

The next question will be from Pammi Bir from Scotia Capital. Please go ahead.

Pammi Bir - Scotia Capital

Thanks, good morning. Just on the new potential acquisition that you are working on in the U.S., last quarter you talked about two potential new JVs that you had been working on. So, would one of these, half of these assets in the U.S., that you are looking at, would that be part of those two potential JVs?

Edward Sonshine

Yes. One of them that we are pretty close on is one of the two that we spoke about. We have been talking to these people for quite a few months. The second one that I spoke about last quarter is still alive. It's just taking a long time to bring home. We are now at the point of being able to include in these fields that on balance we think are going to happen. Certainly heavy discussion. Fred and I had a meeting about it, quite frankly, on Wednesday morning. So we are still working on it and if that one deal comes through, quite frankly, that will take us most of the way to our goal of large portfolio.

Pammi Bir - Scotia Capital

Okay, so that would be somewhere in that $200 million range.

Edward Sonshine

Our share would be about that, yes.

Pammi Bir - Scotia Capital

Okay, just on I guess with the S&P provision to the negative outlook, going forward, based on your results to date and the expected tick up in NOI, are you fairly comfortable that you shouldn’t have any issues meeting the requirements? You have said that in the past but I guess these results that have reconfirmed.

Edward Sonshine

We are worried. I said that, certainly, with the confidence and the results that I see and based on the visibility we have on what the rest of the year looks like, I think we are extremely comfortable that we are not going to have an issue with S&P and I would hope that long before the end of this year we will have them return the outlook from negative to stable.

Pammi Bir - Scotia Capital

Just on the Canadian acquisitions that you had mentioned that you have outlined depending on, can you give us a little bit of color there in terms of location and asset types?

Edward Sonshine

Yes, two of them are in the GTA area as defined by me and they tend to stretch the boundary a little down here and one is in Montreal. So, two in the Toronto area and one in Montreal area, they’re all supermarket anchor. One is actually I think two is supermarket anchor; one is a large general department store it’s not ours.

Pammi Bir - Scotia Capital

In your TIs I believe there was pretty big drop in terms of your expectations for the year, actually went from last quarter you did indicated about $27 million to $29 million for 2010 and you are $16 to $20 million. Can you give us some background is to the rationale for the big production fees?

Rags Davloor

Yes, it’s really driven by the unbudgeted vacancies coming down significantly and just what we see in the pipeline and these numbers can around allotment depends on the nature of the tenants, so whether they want TI or not. So, these numbers are constantly being fine tuned by our lease guys and our asset management guys based on the deal flow and the activity that you see. So, I mean they do tend bounce around a lot will be quite volatile and we why chose to in our calculation of AFFO move to our view normalize that TI and CapEx because these numbers are the set can be volatile and they can take another context.

Pammi Bir - Scotia Capital

Okay. and your – I just want to better understand the rationale behind the increase in the size of lines because I believe last quarter you just sort of reduce the size of facilities by 70 million now you taken it back-up by 80 million but you’re extending them for three year. So may be there is some color there?

Fred Waks

Sure, I like that. I don’t want you to think we know there is some people believe it or not one of the reasons that they sided in and going to their outlook was that our credit facilities were callable effectively on demand and this is the main part of it. So that was an easy fix and quite frankly the cost involve was immaterial and negligible. So that was one reason we did it.

Then I think the main reason and I tried to allude that in my remarks is that we have really seen how churn in excess liquidity is extremely dilutive. I think the impact of that delusiveness in 2009 quite frankly was ignored by most. We were carrying $400 million probably or even higher for at least six months and you figure an average cost of debt never mind equity which is even higher up between 6% and 7% it amounted a little less, I mean you are looking that last quarter we got to get by good I’d say $0.06 or $0.07 just by reason of carrying in that cash.

That carrying of cash has continued in to this year to hurt us, I think I mentioned in my remarks that as good as our results were had we not been carrying well over $100 million in cash throughout the quarter, the results would have been two thirds of a penny, our FFO would have been two thirds of a penny higher as would our AFFO. So, we are trying to maximize every dollar we make and we finally have come to a conclusion that, not withstanding my 15 year reluctance to rely on banks with a three year term, with the two wonderful banks that we have lines with that we are going to be quite comfortable in using that facility. Then that is a relatively new thing for us, probably. That $300 million there is, they are to be used and we are going to use it.

Pammi Bir - Scotia Capital

Then just on the, I just want to get a better sense of, I guess when all of this cash that you are sitting on, it should be deployed, you had, I believe, you commented in some of your MG&A disclosure that you are looking, you could generate net proceeds on financing in Q2 or stuff that you are working on of somewhere between $115 million to $120 million, plus the $106 million that you are currently sitting on. So where do you expect your cash balances to end up, let's say, by Q2 or Q3? Would all of it, the bulk of it, really be deployed or?

Edward Sonshine

By Q2, I think, it will be deployed, as quite frankly in the repayment of debt because the bulk of the acquisitions that I am talking about realistically will take place, hopefully, at the beginning of Q3. So I would guess that our cash balance, as we get to the end of Q2 and I am actually looking at a cheat sheet right now, would be, actually, they will still be there but they will be minimal.

It would be $40 million to $50 million. We can't invest it quickly enough or we can pay off debt back soon enough and that will put us in a wonderful but it really starts to get eaten up as we close these acquisitions, but in the meantime, like I said, we are saving a lot of money. Most of the debt that is current due is around 7% average rate. Some of it quite a bit higher and we will just continue to reduce our leverage and effectively 7% on that money is simply was repayments of debt and at the same time had this really ever increasing portfolio pretty good properties, very good properties in most cases available for secured debt should we require.

Pammi Bir - Scotia Capital

Lastly, with the avenue road in Queen & Portland site, just to want to get a better sense of what your thoughts are in terms of the gains that could be realized there and timing and you still have a lot of room under the revenue requirements for the requalification rule. So, how will all these play in to that [broad color meetings], you are not going offside and will be gains I guess really less than your threshold?

Edward Sonshine

I would say those two together because we really just looking at our participation. We already enjoyed the gains in previous so selling the density. So, you have to separate the two both our continuing interest in the actual residential condominium is way of participation. I would guess it will be in the neighborhood of $7.5 million either side of that maybe a little bit higher. If we choose to do it this year and discount it, if we choose to wait in to future years it probably would be in the low double digits, but our goal right now and you can really take that through our qualification program is that we are attempting to deal with all the assets that don’t qualify.

Right now because we want to not use that basket as a matter of practice, but rather have it available for future gains and future densities that we are creating whether the ones we have already done whether its (inaudible) or telecom on Victoria, where are just going to wait out the markets or the once where working on it all times.

Pammi Bir - Scotia Capital

That was $7.5 million combined for this issue.

Edward Sonshine

Yes, if we choose to fund it early.

Operator

Thank you. Next question will be from Neil Downey from RBC. Please go ahead.

Neil Downey - RBC

One of the things that did intrigue me Ed with respect to you US assets?

Edward Sonshine

Yes.

Neil Downey - RBC

Also what you are seeing down there in terms of not paying for vacancy in terms of rents perhaps being stagnant for a couple of yeas. Can you help us understand at least a little bit better the dynamics that we see in terms of the in- place rent in the Canadian portfolio being by if I remember about $15?

Edward Sonshine

Yeah.

Neil Downey - RBC

Then your US assets being about $20 in-place, is that a [position] of a lot of CRU space in comparison to the Canadian assets or what’s the dynamic there in terms of rent difference?

Edward Sonshine

I think the dynamic is the sample in the US are far too small right now. I mean quite frankly you take one big giant super market in Harrisburg that’s paying 24 bucks a foot but and there is a 100,000 feet and when you are looking at shopping centers and that skews the numbers already.

Neil Downey - RBC

Okay.

Edward Sonshine

I think its really a case of the sample being too small, I mean you really look I think at that quarter end our assets in the United States might come to around 2.5% of the total. So its just too small a sample and it gets unfairly skewed I think Fred wanted to add something to that.

Fred Waks

Its all for the type, all acquire in supermarket and shopping centers so you’re not buying a lot of [new] department stores that are paying $2 and $3.

Edward Sonshine

Very good points. So if you are basically, the department stores typically they are paying a little more them pay on average, one. And two that you are buying small CRU, so far what we are buying is being in that plan. The fact is it will be skewed. So until we get up, as Fred says a larger portfolio, you are going to see that discrepancy.

Neil Downey - RBC

Okay, that makes a lot of sense. How much free vacancy do you think you can reasonably acquire? Is it a couple of hundred basis points or?

Edward Sonshine

Its probably on, what I call, free vacancy that we have some confidence it can be leased up because you look at some shopping centers and they have got vacancy that you just know in your heart they never should have built it.

Neil Downey - RBC

Right.

Edward Sonshine

That I would say there is couple of hundred basis points in there over the course of the next couple of years.

Neil Downey - RBC

Okay, great. Earlier on the call, Sam Damiani started to open up the can of worms on IFRS, and not that I am trying to get my fish out for Rags, but the conversation went along in the line of where the gross value will look like in the future and your response was, really you are going to focus on coverage ratios. So can you talk about which coverage ratios you think are most important and what your key levels would be? Whether it's EBITDA to interest coverage? Whether its debt to EBITDA? Whether to debt to debt service coverage ratio?

Edward Sonshine

If that sure is coverage, while Rags is gathering himself on that, I find actually very unfair. I know it’s a commonly used metric because we spent the last 15 years creating a wonderful debt ladder that has shown its strength over the last couple of years where we have certain amount of maturity coming up every year and of course a fair amount of secured debt.

So we get penalized for the amortization that is actually going to let us create new sources of secured debt whereas if we did all unsecured in bank debt the way perhaps some of our competitors do certainly our peers in the United States, there is no amortization and I see three is a strength, but we get penalized by that metric.

Rags Davloor

Yes, there is no question the interest coverage is the one that we focus in on the most. We also do look at the debt service coverage, but don’t with the emphasis I would say S&P what and we do get the total coverage ratios which is include distribution might have drop in a variety of metrics. Again three is no one point of it and a lot depends on the metric floating fixed a maturity schedules. It’s not that simple. You guys stand back and look at the health of the balance sheet now you manage risk, doesn’t just about micro numbers. It’s a hard question to answer simply.

Edward Sonshine

Any how we tried.

Neil Downey - RBC

One quick final question, the limitation on the prefs, which Dennis had cleared you on earlier was 50 million units. What I was left wanting in terms of my understanding is presumably these prefs units if issued we will have some stated par value and would the intention be to follow along the way most preferred shares. I have a stated par value of $25 today or would these $10 perhaps or… ?

Edward Sonshine

By all means we intend to [remain] conventional so they probably be $25 perhaps.

Neil Downey - RBC

So, that will give you people a better understanding to the maximum potential dollar value.

That’s right.

Neil Downey - RBC

That can ever be contemplated?

Edward Sonshine

I’d be shocked. no matter how big the market was quite frankly and I’ll say this boldly that if we are sitting here, a year or two from now, and assuming the unit holders approve it, which we expect they will, that we have more than a few hundred million dollars outstanding perhaps.

Operator

(Operator Instructions) the next question will be from Heather Kirk from National Bank Financial.

Heather Kirk - National Bank Financial

Most of questions have been answered, but I wondered if, given that you said that it’s a little bit challenging and competitive on the acquisitions front in the US. Would his of course allow you an would you consider looking at going through that as a way to access property?

Edward Sonshine

Going to what?

Rags Davloor

By stress.

Edward Sonshine

No, its just, first of all the 6 rolls wouldn’t be a problem.

Heather Kirk - National Bank Financial

Okay.

Edward Sonshine

We’ll see 52 rolls that would be a problem because interest is not a good thing, but quite frankly those type of situations are available more in the stress situations and that’s not what we are looking for. We are looking for high quality pristine properties I mean the new good news is that our best opportunities we see are coming from properties that have been just newly built in the last three years because people haven’t been able to get long-term financing at a level any more than they would have expected when they started the development. So these are great properties we are buying, not the stress ones and the debt just being available over to stress itself.

Heather Kirk - National Bank Financial

In terms of your interest rate, which has been trending down nicely, do you have an estimate of where you see that going over the next sort of 12 month?

Edward Sonshine

I wish I know where interest rates were going. So I think we know the things that people are much smarter of this than I say is that interest rates will probably trend up over the next 12 months. Its hard to go much lower. We are getting five year debt here in Canada at 4.75, or once, sometimes even less and ten year debt at like 5.5, 5.75.

That’s historically low. Now, I don’t think personally that rates are going to move up. Near, as quickly as perhaps some others do, only because I see in the United States, they still got lots of issues and I am telling you, even here in Canada, you still got an unemployment rate that is high by historical standards and I think we have also seen in the last couple of weeks the problems in Europe and problems in Europe, even though Canadian and American banks may not be that exposed. It, as we learned to our sorrow, the world is very interconnected and big problems of one place will impact another.

So for me, maybe that I think the governments are going to have a lot of good reasons to keep rates relatively low for a period far beyond what I think somebody would have said, six months ago or three months ago.

Rags Davloor

So notwithstanding where the headline bond rates are moving and it's more really at the very short end of the curve. We are not really seeing the five to ten year part of the curve moving significantly. Spreads are coming in.

Fred Waks

Very, very quickly.

Edward Sonshine

That’s a very good point Rags. Bond rates are, even on the five year curve, will have probably moved up 50 basis points over the last several weeks here in Canada. These spreads have come down by at least 50 basis points. So the absolute rate is staying roughly the same.

Heather Kirk - National Bank Financial

Well, that’s my next question. So, in terms of the prefs, do you have sense of pricing on that?

Edward Sonshine

No we actually don’t. We are just waiting for it to be finished. Again, if some market driven that why we had very, very preliminary talks with investment bankers. I think something that of the week and we really don’t know where that pricing will be right now. We wouldn’t want to guess.

Heather Kirk - National Bank Financial

With the assumption being that it will be tighter than your straight equity.

Edward Sonshine

You are correct. We wouldn’t access it.

Heather Kirk - National Bank Financial

I would imagine not.

Edward Sonshine

Right.

Operator

The next question is a follow-up question from Sam Damiani from TD Newcrest.

Sam Damiani - TD Newcrest

Two real quick ones, here just on the US your new partner is it a similar set like we see here where that your partner is a little bit shorter on equity?

Edward Sonshine

No, I would rather not comment on that, Sam and everybody short on equity in United States except for the giants. Actually I just rather not to comment, until we quite frankly closed the deal and I will tell you know all about it, but it is not another entity where we are taking a equity position in the entity like we did with Cedar that was unique transaction and I wouldn’t expect that to be happen again.

Sam Damiani - TD Newcrest

Is somebody deals under contract or actually on your own or?

Edward Sonshine

No, all with partners.

Sam Damiani - TD Newcrest

All with partners and just finally on the completion of the developments in Canada, you expect this year and next year you are still quoting a 8.5% to 9.5% yield, you stand by that or?

Edward Sonshine

Yes.

Sam Damiani - TD Newcrest

You expect that as out of the gate or that more of a stabilize yield maybe two or three years later?

Edward Sonshine

No, I think we expect out of the gate. You got to appreciate on the Queen & Portland which I think that would raise anybody eyebrows that we are getting those kind of yields on a downtown strong property that we did reduce the cost base by about $11.5 million year and a half ago.

We didn’t take that into income that's just gone down in a cost base. So otherwise that deal would have been 6 or 6.5 much more normal yield, but what we are finding in our more suburban properties, the couple in Ottawa and the one outside of Calgary that we are doing. The yields are going to be in that area.

Rags Davloor

One thing we've been Sam is, construction cost are coming down there was a lag because you have the contract signed well in advance. So there is a lag when you, given the economic environment last year and we are starting to see that come through in that construction.

Edward Sonshine

Yeah, there is another thing we have been seeing in about 10 years, cost coming in under budget.

Operator

Thank you. We have one last question from [Kathryn Smith] at Green Street Advisors. Please go ahead.

Jim Sullivan - Green Street Advisors

Hi its actually Jim Sullivan. Ed you talked a lot about conditions in the US versus Canada?

Edward Sonshine

Yeah.

Jim Sullivan - Green Street Advisors

Then with respect to acquisitions one thing or two things that you said were you think that cap rates in the US are considerably higher than they are in Canada?

Edward Sonshine

Yes.

Jim Sullivan - Green Street Advisors

Attach to that, you said that you think that the growth prospects are better in the US versus Canada?

Edward Sonshine

On the properties that we’re buying I am not talking sort of macroeconomics there.

Jim Sullivan - Green Street Advisors

Okay. but to the its fairly cap rates are considerably higher in the growth prospects at least on what you are buying are better?

Edward Sonshine

Right.

Jim Sullivan - Green Street Advisors

Does that suggest that US strip centers or systematically mispriced versus what you can do in Canada?

Edward Sonshine

I wouldn’t call – I don’t know enough about that market to call anything miss priced. I can tell you that good strip centers in the Unites States that we are seeing are in the 7.5 to 7.75 range which is probably 50 to 75 basis points higher than they are in Canada.

Historically, going back over the last ten to fifteen years, it' almost been the reverse. Canadian cap rates we 50 to 75 points higher than equivalent to American properties. So if you want to call that a mis-pricing, that’s based on the relative strength of our economies, the relative liquidity that’s available to the players in those markets. I could agree with that. That answer your question?

Jim Sullivan - Green Street Advisors

Yes. I just think it's really intriguing because you guys have faced the challenge of allocating your capital either in Canada, in the U.S. and clearly you are voting with that capital to emphasize the U.S. So you are?

Edward Sonshine

It's not as simple as that, Jim. I would agree that that’s the way it appears but, quire frankly, if we have the availability here in Canada that we are seeing in the United States, our first preference is still to buy asset share in Canada, if only because we know the market much better. We manage them ourselves and we are very comfortable with our management expertise here. Dominance does have its advantage. Down there we are just another guy. So we are seeing great opportunities down there. So we will keep at them while we see them.

Jim Sullivan - Green Street Advisors

What level of you affinity you have? In Canada, you are the dominant player and in the U.S., you are just another guy and not understanding the market as well you do Canada but you end up maybe being seduced into doing deals that look appealing but actually aren’t that great.

Edward Sonshine

It is a fear that we always have. We approach every transaction, number one, with very serious healthy skepticism. At least, I hope it's healthy. We, at the risk of sounding like a bad guy, we don't believe anything anybody tells us. We are doing extraordinary amounts of due diligence, not only on the properties themselves that we are looking but on the competitive landscape in the individual markets and on the individual fence. Before we invested in the Cedar anchor centers or the Giant anchor centers, we did more work on Giant, including meeting with a lot of their senior executives than we would ever dream of doing on, on its equivalent here in Canada. So that's because, we know we don't know down there.

Then last but not least, we are very comfortable of keeping a partner in place and certainly whether it's Cedar in the Northeast or somebody else in another segment, they have got a 20% stake too. At least, that's our model so far. So that's how we are trying to mitigate that unfamiliarity with the individual marketplaces and at the same time we are trying hard to learn. We are spending a lot of time on airplanes and in cars once we get where we are going.

Jim Sullivan - Green Street Advisors

That's very helpful. Thanks, Ed.

Edward Sonshine

I think that should be about it. We have gone a little while longer than usual but we did want to answer as many questions as we could. I am going to thank you very much for your attention. Thank you for your questions, all of which were informed and interesting and we look forward to speaking to you again, either in between, but for sure, next quarter. So, operator, that's about the end of it.

Operator

Thank you. The conference call has concluded. Participants may disconnect their telephone lines at this time and we thank you for your participation.

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