Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Edward Sonshine - President & CEO

Rags Davloor - SVP, CFO & Corporate Secretary

Fred Waks - EVP & COO

Analysts

Karine MacIndoe - BMO Capital Markets

Alex Avery - CIBC World Markets

Mandy Samols - Raymond James

Pammi Bir - Scotia Capital

Laura Clark - Green Street Advisors

Sam Damiani - TD Newcrest

Heather Kirk - National Bank Financial

RioCan REIT (RIOC.PK) Q3 2010 Earnings Call October 28, 2010 10:00 AM ET

Operator

Good morning and welcome to RioCan Real Estate Investment Trust third quarter 2010 earnings conference call for Thursday October 28, 2010. Your host for today will be Mr. Edward Sonshine. Mr. Sonshine, please go ahead.

Edward Sonshine

Thank you and good morning and welcome to our conference call. I have here with me of course our Chief Financial Officer, Rags Davloor and our Chief Operating Officer, Fred Waks. Before turning it over to them I’m required by our many lawyers to read the to you.

And 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 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. Additional information on the material risks that could impact our actual results, and the estimates and assumptions we applied in making these statements, can be found in the unaudited interim financial statements for the period ending September 30, 2010, and Management’s Discussion and Analysis related thereto, together with RioCan’s current annual information form that are all available on our website and at SEDAR.

Okay with that having been said, I'm assured it is longer than it was last quarter it seems that way. I will turn it over to Rags Davloor.

Rags Davloor

Thanks, Ed, and good morning, everyone. Our financial results show continuing strengthening that reflects the impact of acquisitions that were completed later in 2009, and in the first nine months of this year. In addition our portfolios operating metrics are healthy both in Canada and in U.S. and they continue to improve.

In the third quarter, RioCan completed six acquisitions in Canada and 10 in the U.S. at an aggregate purchase price at RioCan's interest up 372 million with a weighted average cap rate of 7.4%. Subsequent to the quarter end RioCan has completed the acquisition of an additional nine properties in the U.S. at an aggregate purchase price of 141 million with a weighted average cap rate of 7.8%. In Canada RioCan acquired two properties at a purchase price of 25.6 million, the first being March Road and the development component to it and is being classified as properties under development. The second property Brant Power Center, was acquired from purchase price of 30.1 million at a cap rate of 7%.

In the U.S. we expanded our JV relationships with our first acquisition with Camco. RioCan currently have 197 million in various acquisitions in Canada and the U.S. where we have completed due-diligence and have waived conditions that will be acquired at a weighted average cap rate at 7.4%.

RioCan reported FFO for the third quarter of $89.3 million, an increase of $17.7 million or 25%, compared to FFO of $71.6 million for the same period in '09. On a per unit basis, FFO increased by 20% to $0.30 per unit in Q3 '09 to $0.36 per unit in Q3, 2010.

The $17.7 million increase in FFO was primarily due to the following. Increased NOI from rental properties of 21.8 million, which is due to acquisitions, same-store growth of 1.2%, completion of Greenfield developments, intensifications of existing properties and increased lease cancellation fees of 4.5 million. Increased transaction gains of 2.7 million. These are offset by increased interest expense of 3.6 million and higher G&A expense including IFRS and SIFT transition costs of 1.1 million.

Same-store NOI increased by 1.3 million or 1.2% for the third quarter as compared to the same periods in '09 primarily due to new and renewal leasing and fixed rent steps which positively impacted NOI by 2.2 million and reduced bad debt expense of $0.9 million offset by reduced NOI due to vacancies of 2.5 million. On a sequential basis, same-store NOI remained constant during the third quarter of 2010 as compared to the second quarter of 2010.

Same-store NOI increased 7.1 million or 2.2% for the nine months ended September 30, 2010, as compared to the same period in '09 primarily due to new and renewal leasing and fixed rent steps which impacted NOI by $5.4 million, reduced bad debt expense of $2.4 million, offset by reduced NOI as a result of vacancies were 5.1 million.

Looking ahead to the fourth quarter and into 2011, there are a number of factors that will positively impact RioCan's results. Based on the acquisitions closed in '03, the NOI run rate of Q3 2010, excluding any lease buyouts is approximately 140 million. Growth will come from acquisitions, completion of developments and same-store rental growth. Same-store rent growth for the fourth quarter is expected to come in at just over 3.5%, with same-store growth for the year expected to be approximately 2.5%. For 2011 we expect to see same-store growth of approximately 2%. A number of RioCan’s Greenfield developments have scheduled to come online including Queen and Portland and 1717 Avenue Road during 2011 which will begin to contribute to RioCan's FFO.

And occupancy is expected to increase by 25 basis points by the end of the year. By 2011 we expect a further 50 to 75 basis points increase in occupancy thereby expecting to reach approximately 98% by the end of 2011. Property and asset management fees are expected to run at approximately 3 million per quarter and expect us to continue into 2011. Interest income for Q4 this is expected to be approximately 3.8 million and may increase in 2011 depending on the level of development. Dividends from SEDAR expected to be 850,000 per quarter.

We expect G&A to be between 10.5 to 11 million in Q4 which includes executive bonuses. This excludes costs related to IFRS or SIFT restructuring with a budget to be approximately 1.5 million for the fourth quarter. For 2011 G&A is expected to be in the range of 31 to 32 million.

Now turning to our capital management and liquidity position as of September 30. In Canada, RioCan received advances during the quarter of approximately 108 million of mortgage financing at an average interest rate of 4.4%, with a weighted average term to maturity of approximately 5.2 years. Year-to-date RioCan has obtained approximately 473.8 million of mortgage financing due to an average interest rate of approximately 4.9% at an average term of 5.5 years. In the U.S. during the third quarter and year-to-date RioCan received advances of approximately 140 million of mortgage financings at an average rate of approximately 4.9% with a rough weighted average term to maturity of approximately 6.1 years. For the balance of the year, we have approximately 13 million of principal maturities at a weighted average rate of 5.8% and in 2011 we have approximately 160 million of mortgage principal maturities at a weighted average rate of 5.8%, which also have a $200 million of secured debenture maturity in March 2011.

We are currently securing debt financing at or below 4.75% depending on the term which will lead to continued interest savings into next year. Also during the quarter we added a substantial amount to RioCan's unencumbered pool of assets both through the acquisition of unencumbered assets and repaying maturity mortgages. We currently have 73 properties that are unencumbered at a book value of 792 million. On a fair value basis we believe that these assets are worth in excess of 1 billion.

Our interest coverage ratio in the third quarter was 2.48 times and debt service coverage of the 1.92 times. RioCan's debt to aggregate asset ratio was 57.1%, as compared to 55.6% as of December 31, '09. Net of cash debt to aggregate asset ratio is 56.9%. Furthermore our leverage ratio of 57.1% at September 30, based on historic book values would decrease to 51% when you factor in the restatement as of January 1, 2010 due to the IFRS fair value increase.

We are also reviewing that this ratio would decrease to below 50% using today’s fair values. With that I will turn it over to Fred who will now speak to the operating portfolios.

Fred Waks

Thank you very much Rags. I'll be talking actual operations ending of September 2010. This year we have leased approximately 1.170 million square feet as an average rent of just under 6 million a foot. Our lease renewal this year were quite abundant 2.8 million or just over that as compared to 1.983 million the previous year with a renewal retention rate of 90.2% and more importantly with an increase of 10.8% or $2.40 on average for our non-anchor tenancies as compared with $1.73 or 9.6 the previous year.

Our unabated budgeted vacancies were just over 1% or just over 80 million as compared to 14.5 million the previous year which was just under 2%. In terms of our occupancy we are sitting at 97.1% and our top ten tenancies continue to be the wholesaler in Canadian retail ranging from Galaxy, Famous Cineplex, Metro, Wal-Mart, Canadian Tire, with no exposure greater than 4.7% of any one tenancy and basically Wal-Mart, Metro and Cineplex sitting within a couple of that points of each other. Our top 10 equating 32.1% of our overall income.

In terms of our budgeted vacancies tackling those larger tenancies, I'll just give you a quick snapshot through where we stand today. Yonge Eglinton Centre, our office space, Stone & Webster, where we lost 67,000 square feet we’ve already leased up 25% of that space at an average rent of 14% higher than the initial rent, average rate up $1.53 per square foot. RioCan Hall the old circus space has now been leased up with a deal which has board approved, only condition of a lease finalization with a national, actually an international tenancy of great covenant and not in the business of booze and eating.

Bell Front, Metro, the old store has been leased to Bed, Bath and Beyond. Winners has been leased to Valley Village, solutions to Sports Chek in Brampton. Heart Lake Center, Regional Appeals taken the space from Erin Oak. And La-Z-Boy has been re-leased to Dollarama [Structube] in our Brampton property, Trinity Common. Looking at just generally and looking at leased financing and looking at larger space just to give you a quick snapshot we have approximately 473,000 square feet of large space that we have taken back or that has come due in the last year, we are paying initially an average rent of just at $11 a foot. Basically we have re-let that space already at just over $13 a foot, that’s looking at two slightly negative positions of our Office Depot space in Bell Front which is in Bell.

[The tune] that mostly we're going to be looking to see how we are doing is obviously the roll now which we looked at last quarter which was a 125,000 square feet. We have already procured a tenancy for over 50% of the space and a 50% higher rent from a U.S. covenant and we are presently negotiating, we have paper on the balance of this space from a GGA Supermarket chain as well as a European furniture store to take the balance. Again looking at average rent for the [Lowe's Center] which was $12.25, the average rent will be closer to $16 when we complete those deals.

RioCan Westbridge, the Wal-Mart lease buyouts, we have already procured a offer for 25% of the space at 50% higher rates. Wal-Mart is paying $8.25 for us whereas the 25,000 square foot unit has now been re-let at 12. We are also dealing with a 50,000 square foot U.S. tenancy for that which I can’t disclose at this point in time. But we are going to paper with them shortly as well as we are looking at a furniture operator and a very large Canadian one as well.

Our occupancy as I said was sitting 97.1 with our economic occupancy sitting at 95.7 which equates to 492,000 square feet representing 11.6 million of annual income that will be coming over the next year. In terms of new retailers, new U.S. retailers and what’s going on in the market in general here is what I can talk about. Maurices and Justice which is owned by Dressbarn are looking for cross-country locations 3 to 7,000 square feet. The largest U.S. sporting goods company Dick's Golf Galaxy was at the show and are looking again to our new locations across Canada.

Dollar Tree's acquisition of Dollar Giant is big news as well. They will finally be a sound competitor to Dollarama. Nothing against Dollarama we love them, the competition is good for our landlords. They're planning extensive growth across the country as well and GAP is also pushing hard with success at their GAP outlets. Basically we just open outlet in Sudbury was the best opening in the country thus far. Marshall's has done several new deals which we really can’t talk about their locations but we have done another couple as well in the GTA and out West.

They are looking to have their first openings in the first quarter of 2011 as their rollout starts. Bouclair is pushing West. We have already done three of their first new stores including Mayfield Common, Signal Hill and Beacon Hill.

Just to put things in perspective over the Dollar Tree again, we presently owned nine Dollar Giant stores and we are going to have a much better covenant and we will be rolling that out, shortly as well. Our U.S. portfolio continues to operate in a incredible rate, we did a good job in our initial acquisitions. We are seeing a strong 98.1% occupancy, with increases.

So far we’ve done 10 new lease deals at an average rate of 27.55 for our non-nationals and 19.31 for our national tenancies, $1.25 towards increase in terms of our renewals and the top 10 U.S. retailers are as follows. Number one, Giant/Stop & Shop, which is [Apple], Bed and Bath, number two; three Wal-Mart and Safeway is four.

HEB, number five; PetSmart, number six. Best Buy, number seven. Sports Authority number eight. Kohl's, number nine. And Gap, at the tenth. So basically I can say that we are duly taking advantage of our very vibrant leasing strategy right now. The market is same to us, but people are looking to expand and we’ve taken back space based on those demand from our tenancies. Ed, over to you.

Edward Sonshine

Fred, thank you very much and thank you Rags. As you’ve heard from both of their presentations, both on financial basis and operationally I really think that RioCan is moving forward strongly on every front. Just about one year ago, as we finalized in our 2010 budgets at the tail end of what was a very difficult year.

We're excited to set aggressive and ambitious goals for RioCan for the current year. I am pleased to be able to advise you that we are not only achieving all those goals but in some metrics exceeding them. We certainly have been assisted by the record loan interest rate environment that we find ourselves in. Although our budgeting certainly contemplated attractive rates, we did not expect them to get down to current levels. But we happen to be in a position to take advantage of this phenomena and you do that by having maturing debt and acquiring new properties that are unencumbered.

With respect to the former we have long followed the factors of (inaudible) so the 10 to 12% of the total matures yearly. The interest rate savings we have locked in on a refinancing of the debts that matured in 2010 amounts to millions of dollars per year and will contribute significantly to growth in 2011. As far as acquisitions by year end we will have invested about $1 billion in new properties. The majority of which were purchased unnumbered. This permitted us to take maximum advantage of the current interest rate climate at a number even lower than that contemplated in our purchase analysis in virtually every case.

We expect interest rates to remain at relatively low levels well into 2011. So the fact that almost $400 million of debt matures in 2011 should enable us to walk in more savings and growth next year. I should comment further on that $1 billion of acquisition but I expect we will complete it by year end large number and actually does exceed the entire asset base of some REITs. It should be seen within the context of RioCan's total enterprise value of over $10 billion.

On balance sheet we own today over 42.25 million square feet of high quality retail space. And when one includes partner's interest and shadow makers the total is over 68 million square feet. And we have compromised our quality standards in making these acquisitions. While I believe that you all are aware how we have called and improved our Canadian properties over the years with a result that I think we have the best retail portfolio in the country today. Most of you are not familiar with our U.S. portfolio. (inaudible) case, I suggest and visit to our newer and improved website.

We expect our U.S. interest aggregate over 4 million square feet by year end. The properties are almost all supermarket anchored with the dominant or second strongest food retailer in the particular market a very important point in the United States. Supermarkets as a result comprise over 35% of our revenue in the United States. Our top 10 revenue sources as Fred has enumerated in the United States, aggregate almost 60% of our revenue as compared to only 32% in Canada.

The quality of the covenants are arguably even better than the equivalent list for Canada. Finally, an occupancy rate of almost 98% in the U.S. two years into the worst recession in recent memory speaks to the quality of the assets and the prowess of our U.S. partners. While our acquisition and finance groups were demonstrably busy this year, the entire company was busy transforming themselves for the onset of IFRS and Bill C-52 both of which come in to effect in just over two months.

We are ready for both after substantial effort and expenditures and Rags will at the appropriate time refer to you more fully on RioCan's full compliance as a REIT. It will result in some changes in what we do and the manner in which we do it. But over a longer period it should not negatively impact our performance. For example; we sold the last real estate asset in the RioCan retail value limited partnership this past quarter. The LP, which was invested and by OMERS, TIAA-CREF and ourselves, had as its purpose the acquiring and improving of retail assets and then the sale of that. Over seven years of existent the partnership generated a 19% IRR of those partners after payment of over $28 million in fees to RioCan.

In the future we will continue this full map, but we will keep the assets rather than sell them. So value will be created but receive to enhance cash flows rather than sales gains, something will probably make some analysts happy. To sum up 2010 is shaping up as one of the busiest and most productive years for RioCan in quite some time. We are extremely optimistic as we will fall into 2011 which will fully reflect the acquisitions we’ve made this year, the bulk of which would have been completed in the second-half of the year.

At the same time we expect to continue a heavy load of new purchases while the window of large spreads between debt and cap rates still exists. When added to development completions lease up of vacant space and continued interest rate savings as well as other new initiatives that we are considering. I am as excited as I have ever been of our prospects for the next few years. Thank you for taking the time to listen to our presentations and I'd like to open it up for questions at this time.

Question-and-Answer Session

Operator

Thank you, Mr. Sonshine. We will now take questions from the telephone line. (Operator Instructions) Our first question is from Karine MacIndoe of BMO Capital Markets, please go ahead.

Karine MacIndoe - BMO Capital Markets

Just getting back to the U.S. strategy, I was hoping to flesh out some of your latest thoughts, you're probably up about 10% of your asset base in the States?

Edward Sonshine

That would be in square footage but I don’t think either cost or NOI, we're probably little lower than that still.

Karine MacIndoe - BMO Capital Markets

So do you still think that getting up to 20 is a possibility over the next maybe one or two years? Or what are you thinking in that regard?

Edward Sonshine

It could be. It's really going to be a question, that word called opportunistic. And as long as we see the availability of good quality real estate with good partners, the kind of spreads that we can see between cost of debt and cap rate, then we will continue to buy in our chosen geographies and perhaps even expand that by the other third geography next year. Certainly, I can’t see us going over 20% but going up to 20% probably still would let to take our total in the U.S. like 11 and 12 million square feet which is sufficient and still lease an awful lot of room for growth down there.

Karine MacIndoe - BMO Capital Markets

And then as the U.S. portfolio gets larger in size, have there been any internal discussions about, would you consider a dual listing? Or would you want to create a REIT…

Edward Sonshine

There have been many internal discussions. There have been many and there are no conclusions that we wish to share with anyone yet.

Karine MacIndoe - BMO Capital Markets

But either of those may be a possibility?

Edward Sonshine

What we have, more alternatives that we're and in great position. We have those two alternatives plus several others available to us and we have lots of people come and talk to us every two weeks but I think people in the United States have started to sit up and take notice of what we have been creating over a last year in a period. When really it's starting to change an hour little bit but really they go back a year ago when we started to acquiring, we had very little competition. And even to this date most of what I call the usual competitors. Some of the REITs that of our scale in United States are dealing with such a large legacy issues. Whether it's de-leveraging or vacancies or it's non-retail assets they have to dispose off. They are just not in the market. So it's great to have a lot of options and we have them. And we have not decided at all which way to go yet.

Operator

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

Alex Avery - CIBC World Markets

I just wanted to look forward to 2011 and look at some of your lease maturities. Fairly representative of what we would have seen in 2010. Would it be fair to say that you're looking forward to high single-digit to low double-digit leasing spreads in 2011? Or is that maybe going to change because of some of these U.S. retailers coming in?

Edward Sonshine

Don’t put words in to Fred's mouth. I can tell you that we intend to be a little more aggressive in 2011. First of all we think the economic environment will be a little more stable, even then it is today. And there is no question as Fred mentioned in his presentation. The greatest thing for landlords is competition. I think we’ve talked about many times, the good and the bad is that in many sectors we only have one player. It's good because they are extremely strong, we never have to worry about credit. It's bad because they can play in that too when it comes to ramp by and large. For example; Golf Town who is a wonderful tenant of ours, but they play the only game in town. By and large if you want a big box at golf store. Well, Dick's Sporting Goods is coming up with Golf Galaxy. Forzani has been the only game in town for sports stores. Dick's is coming up on that and I can go on and on but it wasn’t retailers that Fred mentioned that are coming up and they have to provide a strong second player in many sectors where we’ve only had one player and if that doesn’t lead to higher rent growth in what I consider I think I call the best retail portfolio in Canada I will be shocked.

Alex Avery - CIBC World Markets

Turning to the tenant inducement or tenant installation costs, a little bit higher than the target this year. There were some notes about that relating to unplanned vacancies relative to more orderly ones. What kind of a range should we be expecting for 2011? Should that return to a more normal level?

Edward Sonshine

I will believe it will. A lot of which you are seeing in 2010 is front-gear loaded that really is a carryover of the carnage that we witnessed in 2009 and unfortunately, when you look some of these larger spaces, there is a 12 to 15 to 16 month time span between the tenant going out and you finishing spending the money to put the new then and then. That’s something we've just learned to live with. But we're just in a process of really finalizing our budget for 2011 right as we speak and we will revisit at that time what we think the appropriate adjustment to FFO should be. I would hope its not going to be much different than what it is now, but of course as your portfolio grows, which we have had significant growth this year, it might be a little bit higher, but I hope not materially so.

Alex Avery - CIBC World Markets

Would it be safe to say that the lingering carnage, as you just said, should have played out by the end of this year? Or will this tail into 2011?

Edward Sonshine

Absolutely.

Alex Avery - CIBC World Markets

And then just to touch on your comments on the US expansion, the portfolio is performing quite well. You mentioned the 20% target. Is there any reason that you see to pause in this effort? Or do you expect to continue to acquire, subject to pricing and availability?

Edward Sonshine

Right now we have not seen any reason to pause and again those are two big subjects, pricing and availability of quality properties are subject to those. We see no reason to slowdown.

Operator

Our next question is from Mandy Samols of Raymond James. Please go ahead.

Mandy Samols - Raymond James

So have you guys have accumulated an impressive stable of unencumbered assets. You are saying $1 billion market value?

Edward Sonshine

Yes.

Mandy Samols - Raymond James

Can we expect you going forward to continue building up on this? Or do you guys expect to take advantage of the lower interest rate environment and get on some of those actions, or some of those buildings to fund future acquisitions?

Rags Davloor

I think we're always trying to find the right mix between secured debt, non-secured debt and what should be our overall leverage target. I think there is a bias right now to secure debt on a longer terms because of the way the curve is and when you look at the secured debt market, it is a good time to go along but just kind of find the right mix is something we always planned with. We're always mindful of the overall leverage target. To say so, we're just going to crack up the leverage on these unencumbered assets without sort of stepping back and looking at the overall metrics. You cant do it in isolation, but I think what we're looking to do is move to more longer-term 10 year debt and I know we'll have to decide as to how we want to play with the mix on unsecured.

Fred Waks

Yes, if I can just add to that, Rags is bang on. All of the recent secured commitments we're doing right now are 10 years and when you can do 10 years at well below 5% I think its perhaps not the smartest thing not to quote as longer term is reasonable in that regards. But from the point of view of overall leverage, again as Rags mentioned, we will probably be on a fair value basis in the 50% or sub 50% range which means is that we have de-leveraged ourselves in many ways to (inaudible) de-levered where our leverage is at the type of range that most American REITs are striving to get to. We're already there. So I don’t think we're going to move too far away from that position because we are extremely mindful of our investment ratings, we're extremely mindful of our coverage ratio that I think were starting to highlight in our disclosure quite a bit more and we don’t want to go backwards.

Mandy Samols - Raymond James

And then the secured debt, you're saying you're going to move more towards 10-year. The unencumbered debt, should we expect to see longer terms on future issues?

Fred Waks

The unsecured market really hasn’t been conducive necessarily to 10-year debt. At least we find that to be the case. I think where we will be going is going longer term even on our secured debt and the unsecured we really are functioning in the market and where we think we can get the best deal for the company.

Rags Davloor

Just to elaborate, secured debts, the fed premium between 5 to 10 years has effectively merged so you can do a 5 year or a 10 year between 170 to 180 back of Canada’s while when you look to the unsecured market the spread premium really does widen once you move past five years or six years term. So if we are going to go longer I think our preference is to go with secured debt rather than unsecured debt because if there is a real differential than the average spread.

Mandy Samols - Raymond James

Okay, great. And Rags in your opening remarks you had commented that capitalized interest would stay where it is unless development picks up. So are you guys anticipating the development pipeline to pick up with all the interest that you're hearing from retailers? Also would that just be in the existing developments? Are you looking at acquiring on some more Greenfield space?

Rags Davloor

Okay I will talk about interest income not capitalized interest because the rules are little bit different under IFRS. But as far as the interest income its really from the existing development part is where we see some growth.

Edward Sonshine

And we had built perhaps those three large joint ventures with CPP where they bought half interest I guess two years ago already, and we would hope certainly to get to those started a little bit off course in 2011, the three major developments and from a size point of view, but then we think as we go forward from that there will be new Greenfield opportunities because of the requirements for space for some of the new retailers coming to Canada.

Mandy Samols - Raymond James

Then one last question, and I will turn it back. Just looking at the same property growth quarter-over-quarter and year-over-year, if you remove the reduction of bad debt expense that’s flat and so what is holding back the growth in the current quarter, because you are getting positive spreads on renewals?

Rags Davloor

Well we do have the lag effect it was heavily really inspired of. So there is going to be a digital lag effect around the three it’s the right thing to do creating having strong growth but as you can appreciate, when we do take back some of this space on a short term basis to conclude a bit of noise also given our strategy in the US, that US mix starts to increase we are expecting the same type of same store growth as the US portfolio the were expecting not with a more than intelligent, you look at the Canadian portfolio, we still are expecting strong growth that doing the over maybe US have produced started creeping to that numbers.

Operator

Our next question is from Pammi Bir of Scotia Capital, please go ahead.

Pammi Bir - Scotia Capital

Going back to the acquisition outlook, you obviously have some pretty aggressive targets for 2010, and you've done quite well in terms of getting there. Do you have a target in mind for next year, whether it's split between Canada and the US or in aggregate?

Edward Sonshine

Sure, as part of our budget plan and making process, we do that in our target for next year is $600 million of acquisitions.

Pammi Bir - Scotia Capital

Is there a split between Canada and the US?

Edward Sonshine

Yes, we are looking at 150 million in Canada with a remainder of 450 in the United States. Now obviously that’s a guess it comes back for just opportunities. But that is our best guess for budget making purposes.

Pammi Bir - Scotia Capital

Can you give us some comments on whether you're expecting to see much more in terms of cap rate compression, at least in Canada? Or the US as well?

Edward Sonshine

I think for a large extent it’s a function of interest rates. We have seen capital compression from the time we started buying a year ago at least 100 basis points. In many cases, property that we acquired lets say 8.5 caps, today if they were to be come back on the market, they would probably be more like 7.25, plus or minus. In Canada obviously we bought a Wal-Mart portfolio almost exactly a year ago today, the first portfolio we bought the four centers at slightly over 7% all in the cap rates and including the fabulous property in Vancouver, I don’t know whether it’d be worth today. But today then we bought the second portfolio about 40 basis points less and I think a very good, quite frankly that was a few months ago. So, I think you are continuing to see cap rate compression in Canada that on quality properties will move cap rate closer to six then it is not maybe six and four with some outliers going below six, with this institutional interest and I think again as long as interest rates stay roughly where they are now, we are starting to see deals that we pass on the deals in the United States going at sub 7 cap rates for supermarket anchored properties with a dominant-market supermarket.

Pammi Bir - Scotia Capital

I want to step back to the comments about the US retailers. What about a strategy from their perspective of just buying assets in Canada, as opposed to arranging leases? So if you have some thoughts on that?

Edward Sonshine

I can't make strategies for retailers because that’s their business, my business is just to serve them and try to get them the right in the best space to carry on the business and. So, I'm sure they consider every strategy and time will tell. You're probably thinking of Best Buy, but keep in mind, Best Buy, which eventually bought Future Shop, but keep in mind that the expense over two year to increase field development to try and get upside before they actually took the plunge and bought Future Shop. So you may see that kind of scenario play itself out, but then on the other side, you have somebody like Lowe's, who came in here two years ago to do brief field developments. Everybody assume they were going to make an asset, purchase, buy somebody else. They have not, and they are quite satisfied with the progress, so who knows which way that will go.

Rags Davloor

And that’s a long kind of it is, you're going to see a mix of both.

Edward Sonshine

Exactly.

Rags Davloor

There is no question some of these retailers in the US tend to own higher percent its types and in Canada they don’t, and it's just a function of the market dynamics, site availabilities and all the rest of it. I think you are just going to see a mix.

Pammi Bir - Scotia Capital

And just two last quick ones hopefully. Your thoughts on leverage going forward, you talked little bit about it, but have you said any sort of, not hard and fast guidelines, but maybe some guidelines on where you want to operate post IFRS audit, whether it's interest coverage or debt to EBITDA?

Edward Sonshine

I think it roughly will be the metrics rather than a percentage of assets that has driven in the past. And I don't think we can give you any hard and fast numbers other than we are determined to keep our investment grade rate.

Pammi Bir - Scotia Capital

Last one. The preferred the ability to issue preferred shares, it sounds like you got your tax ruling on that. What are your thoughts on using that market going forward?

Edward Sonshine

Well, I think we're only ever going to use preferred shares at the market. We're not going to mature the change at balance sheet and its something we are going to look at as we role into the new year, rates on preferred are pretty attractive. We don't know whether rate will be in ours because we will be the first really to do one, but we were the first REIT to do a US dollar denominated them secured as well, and the rate came in pretty. I can't give you a hard answer on that, that’s the best I can do, there will be something where it just comes to me or during the market as we acquire the funds.

Operator

Thank you. (Operator Instructions). Our next question is from Laura Clark of Green Street Advisors. Please go ahead.

Laura Clark - Green Street Advisors

As we think about your US expansion and considering the interest rates in Canada and the US have tightened, do you have a cost of capital advantage now coming to the US?

Edward Sonshine

I think we have an availability of capital advantage for sure, I think our cost of capital advantage is still there, its probably a little narrower than it used to be, because you're quite right we've seen interest rates debt coming down fairly dramatically in the United States just in the last two months, our spread have tightened and they take out some of their minimums and so on, but I think our advantage is still there, yes.

Rags Davloor

There is one other thing, when we're putting our secured debt on our US assets, we tend to go at lower leverage then the lot of our pier then when we see our people doing especially when we are bidding again sort of a private market buyer. There is no question when you draw your LTV below 60%, that spread really comes down fast and because the US lender -- is it underwriting at the high leverage ratio and that we used in the past and when you come in at the lower leverage we are really starting to see a big move on what's happening with spreads in the US and also eliminating the floors, we are really fighting this whole floor issue three, four months ago where lenders are were putting in floors and so the spread is almost irrelevant but now we will be quite successful given our leverage profile and get the lenders to start to remove the floors. So, I think we are positive is just how we're structured in our capital structure. I think it still gives us an advantage.

Laura Clark - Green Street Advisors

But as you think about how that cost of capital advantage has shrunk to some extent and then you have falling cap rates in the US, how does that change your growth or how you think about your strategy going forward and your growth plan?

Edward Sonshine

Well, it’s a good question, but as we said earlier we are not married to a specific growth plan in the United States on a long term basis. We are opportunistic, I'm fairly confident that over the course of the next six to nine months we will be able to acquire well because where we are working on a volume quite frankly, I think we are from $500 million to $600 million worth of assets in the United States which will satisfy our targets for 2011 and when we find that our advantages that we identify a year ago disappear and some of our piers on the United States become more active in the market, where it's just too competitive, we are not hell-bent on being continuing acquirers down there. Then we will really start exploring some of the different options that are available to us.

Laura Clark - Green Street Advisors

Okay, thanks. And lastly, going back to your comments on the US retailers expansion into Canada, can you comment at all on Target's recent announcement regarding their expansion in Canada and the impact or any impact that you see on this happening or this could have on your portfolio?

Edward Sonshine

Yes, we are quite constrained in what we can say and what we found in most of the American retailers that come up here want to keep very confidential, their specific plans. I can't tell you that we have had couple of meetings with them. We expect to have more, I would be disappointed if year or two from now, because I'm not sure how quick their timelines will be that we wouldn’t be in position to tell you that we are doing a whole bunch of deals with them. I think certainly if they roll out the kind plans that have been rumored, it will have a material impact on the retail real estate business in Canada simply put Wal-Mart has not had an expanding competitor out here in last 10 years. Zellers which is a very fine retailer has opened very few with any new stores over the last 10 years as they went through several different ownership iterations. So I think for us its quite exiting. I think it is going to be more exciting for Canadian consumers.

Operator

Thank you. Our next question is from Sam Damiani of TD Newcrest. Please go ahead.

Sam Damiani - TD Newcrest

Just wanted to touch base on the US strategy longer-term, similar to last quarter, the same kind of question. As you continue to grow, is there a plan to develop an internal, fully integrated operating platform down there? And are you comfortable reaching that 20% exposure level without having done that?

Edward Sonshine

I haven't crossed that bridge yet, Sam, what we did when we really looked hard at it at an off-site meeting the other month, last month actually. One of the things we really realized is that one of our advantages and being an acquirer down there, is simply put not having our platform. Because we are not a threatening and acquirer from the point of view it's quite simply nobody loses their job when we buy in. In fact that it becomes for our partner, it’s a little more accretive because we are paying them fees.

So far we are extremely happy with the operating performance of the partners that we have chosen so from an operational point of view, there is no reason again for us to hurry into a platform and once we make that decision to create our own platform, it actually takes away a little bit of the optionality of the various things we want to do down there.

Why we don’t have a platform there for, we think we are a more attractive acquirer and because we acquire on better terms and we just retain a lot more optionality and what eventually might be our strategy down there so there is no reason that we can see today or rush it, it will be something that we review every 6 months depending on progress down there but I can give you an answer beyond that.

Sam Damiani - TD Newcrest

And what sort of barriers are there to you buying out your respective partners' interests in the properties if you wanted to take 100% control of that entire portfolio?

Edward Sonshine

It’s a time barrier depending on the relationship anywhere between 2 to 3 years from inception. So we're a year into it already.

Operator

Our next question is from Heather Kirk of National Bank

Heather Kirk - National Bank

Just a follow-up on some of your comments with respect to the internal growth in the US, occupancy improved nicely, and it looked like the same-store growth was solid, but you seem to indicate you expect it to be lower in the US versus Canada. And I wanted to make sure that I understood that correctly.

Edward Sonshine

Yeah you did, the reason for that quite frankly is the type of assets that we focused on buying in the Unites States. We have chosen at least in this world, right now in the current economic concept to really go for low risk assets. The other side of low-risk assets is typically relatively low growth. When you are signing deals with the supermarkets leases that have 15 years left to go, clearly and your supermarket are 35% of your income clearly is not getting quite the same row pattern. Having said that I am not sure that you wont see some surprising growth over the next couple of years because keep in mind when we buy our assets down there, you are not paying for vacant space. Vacant space may not be very much on an overall portfolio because we have a lot of 100% leased assets but it still amounts to probably a 100,000 feet today and that will probably go up as we continue to buy down there and as the occupancy get to seems better, you will get growth.

I think when Rags was referring to a little more muted growth down there. It’s the question of the rev growth in the short term. Long term I would say that long term being 5 years we will see better growth down there than we were in Canada.

Rags Davloor

Just keep in mind our average lease term in US is considerably longer than in Canada so its just a nature of that at least roll over profile obviously has an impact in there and then economic recovery is lagging on but if they are, we didn’t focus on extensive portfolio.

Heather Kirk - National Bank

So as you move out, do you see yourself going into maybe riskier assets? You focus on the grocery anchor. Would you move towards more the power centers, which have been more troubled as that market stabilizes?

Rags Davloor

I depends which are called riskier but we would probably look at doing the odd one of those our partners, we did it with made an extremely convincing case as to the upside. I mean there is power centers with 50,000 to 100,000 feet vacant, our partner would have to show that’s exactly who he had in mind to lease it and shows us the piece of paper that he's already got them committed, to a certain point of lead before we will consider doing that but I suspect those types of situations may arise as we move through the next 12 months.

Operator

Our next question is from Mandy Samols of Raymond James.

Mandy Samols – Raymond James

A follow-up question here. As you talk a lot about being opportunistic, if the acquisition opportunities had it become more difficult in the US, would you consider moving elsewhere globally?

Edward Sonshine

Not at this time, we haven’t even considered it, although your accent does make me think about it. But the last time that the I hate to keep using that word, opportunistic. I hate to get overused any word but the last time that acquisition opportunities became less than attractive would have been up here in Canada, in ’05 and ’06 and what we did then is we moved more forward development opportunities and that’s certainly here in Canada. I am quite excited about the development opportunities over the next 3 – 4 years. So the question is (inaudible) having your growth will be available to us, the ones they haven’t had I should say redevelopment opportunities as well as the whole organization of retail continues to take effect. So I am not, I don’t think we have to expand or go geography wise beyond the Unites States and Canada.

Certainly we have no plans or thoughts to do that.

Operator

And we have a follow up question as well from Sam Damiani of TD Newcrest

Sam Damiani - TD Newcrest

Thanks. Just wondering if you could offer any specifics on your thoughts on when Greenfield development is going to really kick back up here in Canada in the context of US retailers coming in and maybe other factors? I just noticed in the disclosures that the St. Clair project looked like it was pushed back a few months. Just wondering if you could address that specifically as well.

Edward Sonshine

Sure that’s just a question pretty long the tenancies into place and finalizing our site planning, getting site plan approvals. So in the Unites States we are quite comfortable that will start at the beginning of ’11. As far as for general Greenfield, I don’t think it seemed much and beyond like St. Clair and maybe some of the smaller ones we had going in 2011 and (inaudible) 2012 an beyond story and I shouldn’t under-emphasize. I sort of passed by the issue of urban redevelopment and then we have seen a huge hunger and demand for urban sites from larger scale retailers. They just, they don’t have the presence and they want to be where the people are and the people are moving more into dense urban situations.

The last to say in Greenfield that we are taking about that I sort of eluded to very obliquely is that the areas that’s of real interest towards the main result in some Greenfield development quite frankly is outlet malls. There is no redoing a real outlet malls in the Unites States and in Canada as they are being done in the Unites States today. It’s a growth area, value retailers are experiencing the best sales increases, both in Canada and the Unites States and we are looking carefully at some of these existing states, we already own as well as ones we don’t know to make up for a into that area.

Sam Damiani - TD Newcrest

Would that specifically be targeted to US retailers? Or is there a growing contingent of Canadian outlet?

Edward Sonshine

I would say primarily US retailers. I am sure there will be some Canadians that enter into that sector because it is a growing sector but it’s primarily American (inaudible).

Fred Waks

This is actually being an issue by American resellers approaching us and we have had several meetings with there reps and with there tenancies starting to back in May at the IPSE show in Vegas

Sam Damiani - TD Newcrest

And this is to bring their existing US outlet labels into Canada I guess?

Edward Sonshine

That’s right.

Its 11’o clock but its (inaudible) few more minutes.

Operator

There are no further questions registered at this time

Edward Sonshine

Perfect timing. Thank you very much for joining into our conference call and we will look forward to talking to you again on our year-end call. Bye, thanks again.

Operator

Thank you. The conference has now ended. Please disconnect your lines. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: RioCan REIT Q3 2010 CEO Discusses Results - Earnings Call Transcript
This Transcript
All Transcripts