RioCan Real Estate Investment Trust's (RIOCF) CEO Edward Sonshine on Q1 2014 Results - Earnings Call Transcript

May.13.14 | About: Riocan Real (RIOCF)

RioCan Real Estate Investment Trust (OTCPK:RIOCF) Q1 2014 Earnings Conference Call May 13, 2014 11:00 AM ET

Executives

Edward Sonshine – Chief Executive Officer

Frederic A. Waks – President and Chief Operating Officer

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

Analysts

Pammi S. Bir – Scotia Capital Markets

Heather C. Kirk – BMO Capital Markets

Michael Smith – RBC Capital Markets Asset Management

Sam Damiani – TD Securities

Operator

All participants please continue to standby. The conference is ready to begin. Good morning and welcome to the RioCan First Quarter 2014 Conference Call for Tuesday, May 13, 2014.

Your host for today will be Mr. Edward Sonshine. Mr. Sonshine, please go ahead.

Edward Sonshine

Thank you very much, Sarah, and good morning to everybody dialing in on our 1Q conference call. With me as usual of course, is Fred Waks our President and Chief Operating Officer; and Rags Davloor, our Executive Vice President and Chief Financial Officer.

Before we launch into their presentations, I got to give you our statutory thing here, warning. So in talking – excuse me, in talking about our financial and operating performance and responding to your questions, we may make forward-looking statements, including statements concerning RioCan’s objectives and strategies to achieve those objectives, as well as statements with respect to management’s beliefs, plans, estimates, and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts.

These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. And discussing our financial and operating performance, and in 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 standardized definitions prescribed by IFRS and are, therefore, unlikely to 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 according with – 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.

And you know what, additional information we have, I thought it was finished, I’m not. Additional information on the material risks that could impact our actual results and the estimates and assumptions, we applied in making these forward-looking statements together with details on our use of non-GAAP financial measures, can be found in the financial statements for the period ending March 31, 2014, and Management’s Discussion and Analysis related thereto as applicable together with RioCan’s current Annual Information Form, all of which are available on our website and at www.sedar.com. And soon the lawyers will be moving once talking on this conference call, judging by the length of that. And pardon me, for my cold.

So I will hand this off to the mellifluous tones of Rags Davloor at this point.

Raghunath Davloor

Thanks, Ed. I think I have disclaimers under the – my speech. So we are pleased to release our results for Q1 this year. For the first quarter, RioCan reported operating FFO of $127 million, an increase of $3 million or 2%, compared to operating FFO of $124 million in Q1 2013.

On a per unit basis, operating FFO per unit increased $0.01 or 2% to $0.42 per unit in Q1 2014, compared to $0.41 per unit in Q1 2013. The increase is primarily due to the increased NOI from rental properties of $6 million, which includes higher rental income as a result of acquisitions, net of dispos, same-store growth of 3.1% for Canada and 3% for the U.S. portfolio and the benefit of a favorable $3.2 foreign a currency gain from U.S. operations offset by lower lease cancellation fees and straight line rent of $2.4 million.

We had lower interest income of $3 million, including a $0.9 million unfavorable impact of foreign exchange on U.S. dollar denominated debt. These were offset – partially offset by a decrease in other revenue related to reduced development fees of $5 million and higher G&A cost of $2 million, primarily due the increased infill technology costs associated with the Trust implementation of the new ERP and financial reporting system during the quarter, as well as certain one-time costs related to the startup with the new system.

Looking forward, the quarterly NOI run rate as of March 31, 2014, adjusted to include acquisitions and dispositions and of course, during the quarter is approximately $192 million, which excludes any potential lease buyouts and includes approximately $2.3 million in straight line rent.

For the second quarter of 2014, we expect same-store growth to be approximately 2%. For the year, same-store growth is expected to be between 2% and 2.25%. Property and asset management fees are expected to be approximately $4 million to $4.5 million for Q2. Interest income for the second quarter is expected to be approximately $1.5million. G&A is expected to be approximately $51 million for the year. The increase is primarily due to the full-year impact of the U.S. platform and higher IT cost. For Q2, we expect G&A to be unchanged at approximately $12 million.

During the most recent quarter, RioCan completed a total of two property, income property acquisitions in Canada and the U.S. for $22 million and a weighted average cap rate is 6.7%. RioCan is one income property in Canada under contract where conditions have been weighed at a cap rate of 6.8% and a purchase price of $21 million.

Regarding dispositions, RioCan had three dispositions totaling $51 million during the quarter in Canada. Over the past – over the past 12 months, we have disposed $763 million of property from Canada and the U.S. During the same period, we had acquisitions of approximately $850 million. We continue to evaluate additional dispositions and we continue to prove that portfolio and focus on RioCan’s concentration in Canada’s six major markets.

Under IFRS, as of March 31, RioCan’s investment properties would value to $13.4 billion on a proportionate basis, based on the weighted average cap rate of 5.88%, which is three basis points lower than a year-end.

With respect to financing RioCan completed the offering of $150 million Series U debentures that carry a coupon of 3.62% that mature in June 2020. For the balance of the year, RioCan’s maturing debt of $270 million at an average rate of 4.16%. The underlying value – the value of the underlying assets is close to $800 million. Our intention is to refinance approximately half of these assets with the balance becoming unencumbered.

During the first quarter, RioCan renegotiated an existing operating facility and that is the fourth operating line. The pre-existing line was increased $100 million to $130 million and the new facility has capacity of $75 million, both of which mature in June 2017.

Subsequent to the quarter-end, RioCan converted the term facility that would have matured in December 2014 to revolving facility. This facility has a capacity of $67.5 million with pricing similar to RioCan’s other operating lines BA’s plus 125 and the maturity date extended to December 2015. This facility brings the aggregate of the facilities are now sitting at $707.5 million, presently $173 million has drawn on these facilities with another $41 million drawn to support outstanding leverage of credit on our development activities. Our current undrawn balance is approximately $490 million.

In the first quarter, RioCan’s coverage metrics continue to improve over the prior quarter. The ratios on a proportionate consolidation basis and excluding cap licenses for the quarter were as follows: interest coverage of 3.2x, debt service coverage of 2.34x, fixed charge coverage, which includes preferred and common distributions of 1.12x. RioCan’s debt to total assets ratio on a proportionate consolidation basis was 44.2%, as compared to 44% as at December 31, 2013.

Net operating debt to operating EBITDA was 7.5x for the quarter and on the rolling 12-month basis. We expect these ratios will continue to improve over time through organic growth, the completion of development projects and the issuance of equity through our DRUIP program. Currently, the DRIP participation rate is approximately 28%, generating approximately $120 million of capital on an annual basis. Our payout ratio on an FFO basis was 93% for the quarter. It is our objective to bring this ratio below 90%.

On March 31, RioCan had 108 properties that are unencumbered with a fair value of approximately $2.3 billion, up from $2 billion at December 31, which represents 141% of RioCan’s unsecured debentures. As previously stated, it is our objective to continue to grow the size of this unencumbered growth.

With that, I’ll turn it over to Fred, who will provide further insights on our operations.

Frederic A. Waks

Thank you so much, Rags. Over the three months ending March 2014, RioCan completed 74 new lease transactions, solving 305,943 square feet. Average net rent for the completed deals was $18.30. On the property specific basis, our enclosed malls placed. we have begun our remerchandising in this center and we continue to progress. the deal was done in first quarter 2014 with Pusateri for 14,000 square feet; this third anchor will commence operations in 2015.

We’ll provide a high-end food operating that is currently lacking in the Town of Oakville. In addition to Pusateri recently completed deal with SportCheck for 20,000 square feet and have relocated or in the process of relocating Shoppers Drug Mart for an expanded store and improve locations within the mall.

Moving to mall, to facilitate a reconfiguration of interior to center, RioCan completed new deals with existing tenants SportCheck and Shoppers Drug Mart. The tenants will be relocated into larger better located fronts, the interior of the mall will be updated and reconfigured and improved the consumer circulation authorized store size.

On the outlet center side, tenant demand remains high with the two outlet centers development in Cookstown and Kanata, deals have been done with Polo, Coach, Brooks Brothers, GAP, Banana Republic, Calvin Klein, American Eagle, Tommy Hilfiger, Nike, Reebok, Adidas, Under Armour, Guess and the names go on. Both centers are currently in present pre-leased, will be open in the fourth quarter of 2014.

Growth in the specialty food market and quick service food category continues to put pressure on the low inventory and smaller units CRU. For example our food courts across the country remain a 100% leased. Those continued interest from big box player, but in particularly, the urban markets, for example, the Michaels that we’re putting to backfill in RioCan Hall. Our larger tenants are also looking for and competing for smaller locations or more infill locations for our markets, example with Drummondville, recently with PetSmart in Ajax and Orangeville and a Good Life as well in secondary market.

In terms of renewals, we are running with a renewal retention of 91.2%, as compared to last year this time at 68.3%, that’s because of the Zellers situation. Average rental increases for non-anchors were $2.91, as compared to $3.13. there is some color to that story.

Over the first three months in March 31, 2014, RioCan completed 157 renewals, comprising almost 1.3 million square feet. In 2014, we experienced a global amount of six rent options for expiring tenants, 56% of tenants in the quarter renewed at fixed rates, which limited the growth attributable to renewals to the 7% that we have saved in their numbers. RioCan will have a much greater ability to increase renewal rents over the remainder of 2014, as only 36% of the remaining expiries are fixed at non-fixed basically.

RioCan negotiate also two – in secondary markets, basically, two food store renewals. one was with Metro, which was a downsize, which had a decrease based on giving back the space, and more importantly, in Niagara Falls with one of our food stores, 71,000 square feet, the tenant has a right basically, a termination right and we basically started the arbitration process that came to what was a market rent, so the rent actually went down by $2 a foot from $16 to $14 a foot, for that we have term.

Overall, our new format retail increases were at 9%, and closed at 11.2% and urban retail renewals were 22%. In terms of vacancies, we have launched 394,000 square feet in the first quarter, as compared to last year 474,000, 0.60%, as compared to 0.63%. 198,000 of that was attributable to the big loss pulled out, I wouldn’t say bankruptcy, but they basically pulled out of Canada.

In those stores that we haven’t been, we are presently negotiating with Mandarin, XS Cargo, Your Dollar Store and more, Urban Planet and Good Life Fitness. The second question that was asked of us last week is in terms of our Jacob locations where we have paid and we are presently negotiating with Fortinos, Shoppers Drug Mart, White House Black Market, Justice, Good Life, Burger King, Body Shop, et cetera.

Now we are so sure if the receiver has been in at, give us the leases back, they have controlled that situation. But if we have the opportunity there, our average rent was $22 a foot and we believe there’s substantial upside in those locations.

In terms of our occupancy and we are running at 96.8% with a economic occupancy at 95.7%. Over the next 12 months, we are – we have signed agreements for 519,000 square feet or $13 million annual growth income. Our top 10 tenancies have changed due to consolidation, Loblaw and Shoppers Drug Mart now is our largest tenant with 4.1% of our revenue with Walmart, Canadian Tire, Metro, Cineplex now at number five, Winners, HomeSense, Target, Staples, Cara and Sobeys being the rest of our top 10.

Our U.S. portfolio continues to operate smoothly with an occupancy of 97.4% in the Northeast, 95.6% in Texas, because of space that we took back, which we do not pay for, which is in the process of leasing with an overall average of 96.6%, of that national anchors are 89.5% with royal halls being our top tenancy representing approximately 10% overall income.

In terms of geographically, Texas now is providing us with 55% of our annual income. In terms of new leasing, we have done 11 new deals with approximately 20,000 square feet at an average rent of $23.44 a foot, and we have renewed 22 new deals with the renewal retention rate in the states of just over 86% at an average increase of $1.73. Edward?

Edward Sonshine

Fred, thank you very much. You’ve heard from Fred’s presentation and from Rags as that both our portfolio and our balance sheet are in very good shape indeed. I’m actually quite satisfied with our first quarter results. Having in mind, a few of the – I’ll call it Rags, that that but for which we would have had even better numbers.

Obviously, there was a dreadful winter. To the extent, we have properties in the Maritimes was even worse there, as bad as we think here in Ontario that we had and it was worse in America, so it was worse in Western Canada and obviously, that’s a cost that we bear to a small extent and that leases are still met, but there are certain costs that we bear.

Number two, in the first quarter, we were net sellers of assets, which for any extended period of time, it’s probably first. And we actually, our square footage was actually diminished I think from the previous quarter by about 175,000 square feet.

So getting that, this all goes to making our FFO per unit growth, I think even better and looking forward to much better things down the road. Probably most important that’s always been there, but I think is worth mentioning, our investments in shopping center technology, information systems and development transactions have been and continue to be considerable. And in the short-term, provide a further drag on what growth would otherwise be.

Just to elaborate on that latter point a bit. As of March 31, 2014, our properties under development totaled $674 million. This is up almost a $100 million from a year prior. Now there is constant movement in and out of this account, as developments are completed and new ones commence. I would in fact expect this number to rise somewhat and stabilize probably by 2016.

This is true investment in the future, as there is no current cash flow on this investment. Yet, due to location and strength of our large existing portfolio, we are still able to show satisfactory growth in OFFO on a per unit basis, and that’s something we continuously worry about and balance, so that we can show that growth and there isn’t too much of a drag. As part of the current development projects, as more – sorry as more of the current development projects become income producing and I would note that all of them are major markets primarily Toronto, Calgary and to a lesser extent Ottawa.

I am confident that what we see as our base growth rate of 4% to 5% per unit of OFFO annually will accelerate. This acceleration will likely happen, as early as 2016. I wish that development and redevelopment can move more quickly, but we don’t always get what we wish for. So as we can’t really speed up the process much every time we try to speed it up one area, it slows down in another.

So instead, we’re building what is effectively a development completion letter. Similar to what we have done with debt and lease maturities. In this way, we try to ensure that our development exposure never coins out of our comfort zone, while at the same time, planning completions that will provide a steady claim in OFFO. While we are at the early stages of this process, and then will never be as exact, as a debt maturity schedule, it will be a great predictable assistance to the management team.

Frankly, we are quite happy with the way RioCan is evolving and that we are able to look forward to steady cash flow growth from both our American and Canadian platforms. And quite frankly, we’re starting to get payback for all of the various moves, including the ongoing dispositions that we made over the last several years.

So thank you for listening. And I’d like to open it up to any questions that anyone may have.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) Thanks for your patience. The first question is from Pammi Bir from Scotia Capital. Please go ahead.

Pammi S. Bir – Scotia Capital Markets

Thanks, good morning. A lot of the appetite from pension funds and other parts of the capital, do you have an update, or any updated views on perhaps, selling some of the core assets and or non-managing interest in recycling some of that capital back into developments or some other sort of higher growth opportunities?

Edward Sonshine

Yes, look, we constantly revisit various topics for raising capital. Right now, we’re actually quite self-sufficient, between a minor disposition program and our DRIP program; we’re like I say quite self-sufficient, if we had for capital, both for acquisitions and for our development program.

Certainly, we have looked at the possibility of selling a non-managing interest in some of our core, but not high-growth assets and we’ve run all kinds of numbers on that. One of the many abilities, our investments and technology gives us to run those kind of the scenarios. But at this moment, we actually have nothing to do with the money, Pammi, as blunt as that sounds, I wish you were otherwise.

Pammi S. Bir – Scotia Capital Markets

Okay. And then just maybe in terms of the broader disposition program for this year and next, any update in terms of how we should think about what that pipeline could like?

Edward Sonshine

I would say it’s in the $100 million to $200 million per year range and we’re able to find notwithstanding this very difficult acquisition market, where to buy things that makes sense. Somehow, we’re able to source here and there sometimes from our partners, sometimes from – because it happens to be a next door property and we’re the only buyers, because we have the access, little things that happen like that, when you have those bigger portfolios we do. I would tend to think that our acquisitions and dispositions will be close to being in balance over the next couple of years with the real growth that come from the development side.

Pammi S. Bir – Scotia Capital Markets

So just in terms of the U.S. strategy, is there any change there? in the past, you talked about a number of options that you would consider; just wondering if that’s changed in any of your outlook for the growth in that business.

Edward Sonshine

You know what, we have a significant growth in our – in organic growth quite frankly, in our Texas portfolio. as Fred mentioned, we’re sitting there at about – I think about a 4.4% vacancy, much of that space we got for no consideration, because the earnout period is expired and our partners at the time didn’t fill them up. We’re not filling them up. We see good organic growth in a portion of that portfolio, I know that’s not your question, but I thought I throw that in, and it’s worth repeating.

from the point of view of acquisitions, the acquisition market in the United States, while it’s more widespread, in other words, there’s more things available. the bidding is frenzy to buy anything new. and notwithstanding we get the odd off-market transaction, because we’re well established with our own platform. as far as larger strategies for the U.S., again, I’ll just go back to the same type of thing; we play with scenarios all the time, nothing as landed.

Pammi S. Bir – Scotia Capital Markets

Okay. So is that something we may hear more about later this year or?

Edward Sonshine

One day, if the things come up right now, I would say our strategy in the United States is more of the same. we’d like to keep buying. we are – we have offers out periodically. Our platform down there that we’ve established in the Northeast and in Texas is working terrifically. So we’re under no pressure to do anything. Having said that, if the right opportunity or opportunities come along to do something interesting with American portfolio, we’re always open to it.

Pammi S. Bir – Scotia Capital Markets

Great, just lastly, just on the Staples side of things, any update there in terms of your exposure?

Edward Sonshine

You’re not talking about Staples, like in my refrigerator or pantry. Sorry that was a joke a poor attempt Staples, be offer statin, I think we’re just working our way through, there is no – nothing exciting particularly happening.

Pammi S. Bir – Scotia Capital Markets

There is a couple that are…

Edward Sonshine

Empress Walk.

Pammi S. Bir – Scotia Capital Markets

Empress Walk and one in Montreal basically that basically…

Edward Sonshine

Yes, that we are – that they have two years of term left and we have – we’re already negotiating with alternate tenants. And I don’t want to give us a too much of the negotiation way.

Pammi S. Bir – Scotia Capital Markets

Yes. So what Staples is actually a – for a tenant, that obviously is very much impacted by the internet in a good way, I mean they are the ones picking up their own internet sales there. I think the last thing I read there about 50% of their revenue is actually coming from Internet sales.

So they are on a process of downsizing stores, and obviously, of giving up certain locations, and – but there are very responsible retailer. and we’re working with them, rather against them. and clearly, they will be a smaller revenue producer for us, as the years go by. But I don’t expect to see any unusual impact from them at all. It’s a good well measured process that we’re going through with them.

Pammi S. Bir – Scotia Capital Markets

Thank you.

Edward Sonshine

Thank you.

Operator

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

Heather C. Kirk – BMO Capital Markets

Hi, you talked about the sort of frenzy bidding activity, and you saw from good cap rate compression on your IFRS value, I’m just wondering if we should expect that compressions that sort of ramp up as we trend through 2014 and what your outlook is…

Edward Sonshine

You know what, my own outlook is, there is a very little reward in us being pushing the envelope. We really don’t and having said that is the market value of a lot of our properties different than IFRS, I hope not, because it’s not supposed to be. but the market is – can be a little bit silly sometimes. I would expect just from an outlook perspective that you’ll see IFRS unless something changes dramatically, stay roughly where it is. If you had asked me six months ago, I would have thought that the values would have been trending down, i.e., cap rates trending up a little by now, but that clearly isn’t the case. And if anything, you might see a very modest trend down and that’s just a guess on my part, because believe it or not Heather, they don’t even let me in the room when they settle the IFRS values.

Heather C. Kirk – BMO Capital Markets

And so is that reflective of your view on Canada and the U.S. or that’s…

Edward Sonshine

Yes. I think they’ve basically gone back pretty much into – they’re about the same, if anything, I think we’re starting to revert to what I’ll call the historical sort of values where American values are actually a little bit higher than ours for like product. The difference is that there’s so little product that comes to market here in Canada that I think is keeping the cap rates roughly the same.

Heather C. Kirk – BMO Capital Markets

Okay. And in terms of just the – I’m looking at the change in average rent, versus the same property NOI. So you’ve seen occupancy be relatively flat.

Edward Sonshine

Yes.

Heather C. Kirk – BMO Capital Markets

the same property NOI was very strong, stronger then it’s been in quite sometime.

Edward Sonshine

Yes, we did.

Heather C. Kirk – BMO Capital Markets

And I’m going to reconcile that with the fact that the rents have kind of come off a little bit this quarter and…

Edward Sonshine

Yes I think those rents Fred I think, it’s very property specific and there were specifically, there were a couple of supermarkets that we dealt with each was unique, one where a supermarket wanted a downsize, one where they had a right of termination that we managed to negotiate. And so you had two fair size stores totaling probably about 130,000 square feet, where the rent actually went down. So I think the numbers this quarter were not representative of a trend.

Raghunath Davloor

And just a couple of upon points, Heather, the contractual rent step-ups for the current year is quite strong, and you will see that our economic occupancy gap, the headline occupancy shrunk from $18 million to $13 million. so we had more of those delayed starts kick in, which moved the dial on the same store growth.

Heather C. Kirk – BMO Capital Markets

Yes.

Edward Sonshine

I wouldn’t take really anything from that specific quarterly number on the rents.

Heather C. Kirk – BMO Capital Markets

Okay. Thanks, that’s very helpful.

Edward Sonshine

Thank you, Heather.

Heather C. Kirk – BMO Capital Markets

And just on a technical, the straight line numbers, do you have a forecast for that?

Raghunath Davloor

Yes, for next quarter, I think, I indicated it would be $2.3 million.

Heather C. Kirk – BMO Capital Markets

Perfect.

Raghunath Davloor

And really, it’s a bit volatile depending on when development projects come on stream. so for Q2, we’re expecting $2.3 million.

Heather C. Kirk – BMO Capital Markets

Okay, great. thanks.

Operator

Thank you. The next question is from Michael Smith from RBC Capital Markets. Please go ahead.

Michael Smith – RBC Capital Markets Asset Management

Thank you and good morning.

Edward Sonshine

Hi, Mike.

Michael Smith – RBC Capital Markets Asset Management

Hi, there I just wanted to talk about rental residential. I know you discussed it on the last call.

Edward Sonshine

Yes.

Michael Smith – RBC Capital Markets Asset Management

But it seemed your letter to unitholders this quarter and it’s key component of your growth as you note, and that there’s more to come. And I’m just wondering if you – there’s any color you could give on that – give us on that one now?

Edward Sonshine

Just the following, I think it’s in a very exciting area of growth for us. Probably, the first one that makes us appearance will be the – anybody that drives by Yonge & Eglinton, we’ll see that we’ve started demolition. that demolition will proceed and we’ll actually be starting construction by late this fall, I believe. and the North Tower is a two tower project. I think about 630 condo units in the self tower at the corner and about 450 units on the north building, which actually faces Roehampton, which is the first North of Edmonton. It has been agreed with our partners in that – in this project at the North Tower will be retained as rental residential.

So I think that will be the first completion we see probably in about 2017. We have underway, applications being prepared for zoning that might number in excess of 3,000 units. Most of them here in Toronto, one or two projects are depending on where we are in it in Calgary and one project in Ottawa. And I think it’s going to be very exciting.

The returns are a little bit skinny on day one, but when I expect the returns to be better on a lot of the other projects, where we already own the land. And then once we finish, your effect of the replacing the repay also, it’s arguable what kind of land cost you should put it. But I think long-term is just going to be a great value adder for these types of – for somehow lot of our existing developments. So I think it’s going to be significant over the next five years. It’s really not going to gather piece, as far as actual construction except for this one Yonge & Eglinton until the earliest would be probably year and a half now.

Michael Smith – RBC Capital Markets Asset Management

Thank you. That was very helpful.

Edward Sonshine

Thank you.

Operator

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

Sam Damiani – TD Securities

Thank you. Good morning.

Edward Sonshine

Good morning.

Sam Damiani – TD Securities

It happened to be in the RioCan, going to center a few weeks back and I just wanted to say the interior renovations are looking fantastic so far?

Edward Sonshine

You know what, there within I’d say 60 days, 75 days are being 100% complete, although that something our development partner doesn’t use, as a phrase, 100% complete and the exterior is coming along and I would say, I mean personally and I can say this, because I take no credit for. I will give it to Fred and all these guys from Jordan to Jeff, I am just thrilled with the way this place is going to look and it’s going to really revitalize the whole corner. And the numbers are going to be terrific and get even more terrific.

So we’re getting a lot of pleasant surprises and anything we’ve leased out already. We almost wish we hadn’t, because everybody wants to be here. So it’s just a question of finding enough space to put some very high rent paying tenants into this new environment that were just about completed creating at there. So, thank you for giving me opportunity to make that commercial.

Sam Damiani – TD Securities

It’s my pleasure. And I was also winning the stock here, as recently also looking fantastic. The target there particularly is refreshing experience versus some of the other Zellers conversions.

Edward Sonshine

Yes.

Sam Damiani – TD Securities

What are you seeing in terms of the Zellers converted stores, in terms of the targets demonstrate ability to improve their operations that get onside and gets to where they intended to be in Canada?

Edward Sonshine

They’re going to get there. They’re getting better. I think they’re increasing their food offerings in a lot of these transactions, and in a lot of these locations. I think there is the whole thing; I mean keep in mind with just about – just over a year ago that they started opening stores. And I think within it’s going to take longer, than I think they expected than anybody expected and the numbers are getting better, as far as I can tell. Fred, and we have complete confidence I should add that they are going to be as greater retailer in Canada as they are in the United States. Fred, do you want to add anything to that?

Frederic A. Waks

Well, interestingly, not that their competitors whom we speak to all the timers feel that they are an entity that needs to be dealt with, they – everybody including targeted we speak to our almost on a daily basis, we’re going to see them next week at several different meetings at the convention in Vegas. They believe they’ve got a lot of work to do, they are totally committed and as I said, speaking to people in the food and unit apartment business, they all believe the eventualities, they’re going to be there and they’re very concerned about than taking market share.

So nobody is counting them about. and quite frankly, we’re already seeing some changes that they actually adopted by the – opening up their first new store at stockyards and look in terms of the inventory, and actually, merchandising in the some of the Zellers stores that they’re certainly seeing positive changes.

Sam Damiani – TD Securities

Okay. My last question is on your cost of capital, which given the not bad unit price performance this year. Clearly, you’ve got a cost of capital to grow and grow by acquisition accretively in today’s market. I mean how do you view the opportunity to grow by acquisition, given…

Edward Sonshine

Well. We’re back to, in some ways, we’re before. We have the opportunity by acquisition, we’ll take it. You know what; I’m a believer in instant gratification, and buying properties is instant gratification, because the income hits the same day at close, where is development is two or three years away. And as I mentioned in brief comments, it creates a drag on the way through. So the extent we can get acquisitions, we will pump on them. Mr. Gitlin has not stopped working. He is out there all the time looking. I think nobody is more involved in the market than we are. right now, there is – quite frankly there is not much available that meets our quality standards.

So we’re not prepared to resile from where we move this company. I mean that 72 point something percent in major markets. You’ll see that number grow over the next three years and I think we’re not going to allow it to go backwards. So, from the point of view of dispositions, the United States probably, just because there’s more property available, but at a very high price. to the extent, we can afford it by accretively and it makes sense we were very open to do it.

Sam Damiani – TD Securities

Quality dependent.

Edward Sonshine

Absolutely, quality dependent.

Sam Damiani – TD Securities

Thank you.

Edward Sonshine

Thank you.

Operator

Thank you. (Operator Instructions) Next question is from Sam Damiani. Please go ahead.

Frederic A. Waks

Sam, you again.

Sam Damiani – TD Securities

Listen, I thought enough to wait, but anyway just on the Jacob situation, obviously, not a big kind of you guys, I didn’t get the total square footage. But is this an indication of any weakness in their retail segments specifically, or would you say it was a retailer specific issue?

Edward Sonshine

I’ll just comment on the Jacob and the retailers specific. I mean they have been in a trouble for 70 years already. It’s actually nice to see the end of the story and let me turn it over to Fred.

Frederic A. Waks

Yes. I think it’s – I mean it’s interesting, because I’ve got several calls from analysts last week from there. We just opened in Yonge Eglinton center completely renovated Right Men’s and smart that where they went to the expenditure themselves to completely revamp new stores and they are – you can get into them during once every year. They are doing extremely well.

I think it goes to the real estate in terms of how these tenants are going to do. Last night, I was in a charitable event and Michael won’t pull me aside, and he wants to go through the entire portfolio again, to see where there’s opportunities. So I think that Michael told is to the shares hirings, siblings et cetera. Basically, the size of dialects was before when they amalgamated all those companies. So we’re in discussions with everyone and I’m looking at that tenants that are talking to us and doing deals with us in terms of our mall space and also place in Georgian Mall and of course, in our Tanger Outlet Centers as well.

So there is in the – the closing size of things there, tenants that are expanding and of course, you have to look at companies like that Glenn Murphy, we turned around the gaps in the last couple of years. So every point in time, there is going to be ebbs and flows in that business and the question is, get the best covenant, get the dialog why they’re coming up and hopefully, you’re going to certainly have with that merchandise mix.

Sam Damiani – TD Securities

Okay. Thank you.

Operator

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

Edward Sonshine

Okay. Well, thank you very much for once again; dialing in. I’m sure I know there’s a very busy time for all you ladies and gentlemen. And hopefully, we’ll talk to you again in a few months. Bye-bye.

Operator

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

Edward Sonshine

Thank you, Sarah. Bye-bye.

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