RioCan Real Estate Investment's (RIOCF) CEO Edward Sonshine on Q4 2015 Results - Earnings Call Transcript

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RioCan Real Estate Investment. (OTCPK:RIOCF) Q4 2015 Earnings Conference Call February 18, 2016 11:00 AM ET

Executives

Christian Green - Director, Investor Relations

Edward Sonshine - Chief Executive Officer

Rags Davloor - President and Chief Operating Officer

Cynthia Devine - Executive Vice President and Chief Financial Officer

Analysts

Sam Damiani - TD Securities

Alex Avery - CIBC

Pammi Bir - Scotia Capital

Michael Smith - RBC Capital Markets

Operator

All participants please standby, your conference is ready to begin. Good morning and welcome to RioCan Real Estate Investment Trust’s Fourth Quarter 2015 Conference Call for Thursday, February 18, 2015. Please go ahead.

Christian Green

Good morning, everyone and thank you for taking the time to join us today. I’m Christian Green, Director, Investor Relations for RioCan. Today’s presenters are Edward Sonshine, RioCan’s Chief Executive Officer; Rags Davloor, RioCan’s President and Chief Operating Officer; Cynthia Devine, Executive Vice President and Chief Financial Officer for RioCan.

Before turning the call over to Ed for his opening remarks, I’m required to read the following cautionary statement. 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, performances 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.

Also in discussing our financial and operating performance and in responding to your questions, we may be referencing certain financial measures that are not Generally Accepted Accounting Principle measures, or 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 operating or other reporting issuers.

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

Additional information on the material risks that could impact our actual results and estimates and assumptions that 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 December 31, 2015, and RioCan’s management discussion and analysis related thereto as applicable, together with RioCan’s current Annual Information Form, that are all available on our website and at www.sedar.com.

And with that, I’ll turn the call over to Ed.

Edward Sonshine

What if legislation and lawyers keep working on that, we won’t have time for the rest of the conference call. They will be quite free. Thank you, Christian. And good morning and thank you all for joining us on our conference call.

2015 was certainly an interesting year, which I’m sure you will all recall commenced with Target announcing it was withdrawing from Canada. That seemed to open the flood gates of bad retail news which Rags and his team had to deal with throughout the rest of the year.

2015 also marked the revival of the Rocky movie series with the release of Creed. It was actually very apt for RioCan, because by the end of the year we felt a lot like Rocky Balboa at the end of 12 punishing rounds. We took a lot of punches, but at the end, there we were, not only standing but turning in a very satisfactory year not withstanding what were for RioCan record low occupancy numbers at difficult economic climate and a shaky retail sector.

I will leave the details of how we did it to Cynthia, but suffices to say it was a combination of our being able to pull many of the levers that become available when you have as much going on as we do. Besides the results that we are quite proud of, there was another release this morning announcing that RioCan’s board requested that I commit to staying in this job for three further years and that I agreed to do so.

Several of you may be wondering why the board asked, and some of you may be wondering why I agreed. I can’t speak for the board, but for me it was simple. I can’t think of anything I would rather do than lead the superb team of people we are so fortunate to have at RioCan to the transformative and exciting years that we have coming.

About a dozen years ago, we shifted RioCan’s focus to the six primary markets in Canada and a few years after that further sharpened our focus to the more urban areas of those six markets. As a result, RioCan is uniquely suited not only to intensify existing retail facilities by demolishing what currently exists, but also to repurpose portions of existing shopping centers to use as more suited to the changing retail environment and the ultra demographics of the surrounding areas.

For example, Five Points malls in Oshawa, it was built in the 1970s and then expanded by us in the early part of this century, but not only was it a victim of Target’s departure but it also has suffered from much new retail development in the local market over the last 20 years.

In addition, the demographics are changing as Oshawa moves from a blue collared manufacturing city to much of it becoming home to commuters attracted by its good transit and highway links to Toronto and relatively low cost housing.

As a result, we intend to repurpose a good part of this large property to housing. This will not only reduce the available retail space at Five Points to a much more manageable amount, but also add a significant number of residents adjacent to the remaining retailers. A win for RioCan and a win for our tenants.

This is a theme you will see played out on many retail sites in our portfolio over the next few years to address some of the structural changes we are witnessing in the retail world.

At the same time, we are undertaking new developments such as the well at Front and Spadina here in Toronto, a longer way to construction of a new building on Bathurst street as a college and many redevelopments and expansions such as Yonge Sheppard Center in partnership with KingSett and our King and Portland site as part of our expanding joint venture with Allied Properties, REIT.

These developments and redevelopments are not only in Toronto, but also in Calgary, Ottawa and hopefully Vancouver. But one thing they all have in common, they will be mixed use, retail, residential and sometimes the office they will be urban with state of the art design and construction and most importantly, they will contribute significantly to RioCan’s cash flow over the next few years. The assets themselves will also create tremendous value for RioCan’s unit office.

To give you a sense of what we expect to complete over the next few years and timing is of course something that is always a bit uncertain. Our best guess is that we will deliver about 600,000 square feet in 2016 and close to a million square feet in 2017 with those delivery numbers to get even better in the future years.

The numbers I just sighted before only to retail space coming on stream and do not include sales of residential density that we are creating or anything from the rental residential portfolio we are in the midst of creating.

But what I believe is the best leasing and operating team in the business. I am confident that our core business of collecting rents from retailers will recover strongly particularly as we roll into 2017. And with new sources of revenue created by our remarkable development and construction groups, I am extremely optimistic about RioCan’s future in both the short and long term.

And with significant improvements to our already strong balance sheet following the completion of our U.S. asset sale we will have the financial resources to not only fund the programs I have described but to have a superb investment group to take advantage of any opportunities that may arise as a result of these somewhat turbulent times.

With that, let me turn the call over to Cynthia Devine to take you through our financial results which are somewhat complicated, a bit noisy, but nonetheless very good.

Cynthia Devine

Thanks, Ed, and good morning everyone. We’re pleased to review RioCan’s 2015 results that were released earlier this morning. In your review of the most recent financials in MD&A you will surely have noted the changes to the presentation of our results.

The presentation is now separated into continuing and discontinued operations to reflect the announced agreement to sell our U.S. business. RioCan’s results from continuing operations represents essentially the Trust Canadian portfolio. And the results from our U.S. portfolio are reflected as discontinued operations. The results are further complicated by some unique events that took place during the fourth quarter that had a significant impact on RioCan’s results for both the quarter and the year.

These events included the Target settlement, fair value adjustments to the U.S. portfolio and the recognition of a deferred tax provision for accounting purposes related to the U.S. business. These items are made to some degree overshadow or at the very least make it a little more difficult to see through to the underlying fundamentals of the Trust business. When considering our results from the perspective of operating funds from operations or OFFO which I will provide more details on later. The business had solid growth of 7.6% in 2015.

Net earnings from continuing operations or Canada attributable to our unit holders for 2015 was $417 million compared to $447 million in 2014, representing a decrease of $30 million.

Now excluding a decline in gross fair value adjustments and taxes, net earnings in Canada for 2015 was $510 million compared to $413 million in 2014, representing an increase of $97 million or 23%.

One of the largest positive factors that influence net earnings this quarter which we have excluded from operating FFO and AFFO was the net proceeds recognized from our settlement with Target of $88 million which is net of approximately $3.5 million that was applied to receivables and legal fees.

In the $126 million decline in gross fair value year-over-year, represents the difference between a gain of $34 million recognized in 2014 and a loss of $92 million this year as recorded under IFRS. The reduction in fair value is primarily due to valuation changes as a result of Target's exit from Canada in the first half of 2015; increased projected costs to complete certain development properties due to changes in the development plans; and interior renovation costs at some of our enclosed malls.

The declines were partially offset by fair value gains on certain properties that were acquired during the year and a slight reduction in capitalization rates or cap rates on assets located in primary markets. So overall, cap rates in Canada declined by five basis points to 5.72% from 5.77% at year end 2014.

The net loss from discontinued operations attributable to unit holders or essentially our U.S. operations for 2015 is $275 million compared to earnings of $216 million for 2014, representing a decrease of $491 million.

Now excluding the combined impact of the fair value adjustments and the deferred taxes, net earnings from discontinued operations for 2015 is approximately $111 or 7.8% above the $103 million reported in 2014.

The gross decline of $260 million in year-over-year fair value of our U.S. portfolio is mostly attributable to an increase in cap rates of our Northeast U.S. portfolio as well as other property specific adjustments.

In addition, pursuant to IFRS, we recorded a deferred income tax accounting provision of $230 million related to taxable temporary differences calculated on the change between the accounting fair value as at December 31, 2015 and the tax bases of the Trust's U.S. investment properties at that same time.

RioCan does not intend to fully distribute to unit holders, U.S. taxes if any arising on the U.S. net disposition proceeds, thus the deferred income tax liability recorded is measured based on the theoretical U.S. tax obligation on the unrealized gain on our U.S. investment property as of December 31, 2015.

Now this deferred tax liability does not incorporate future transaction costs, other potential tax basis adjustments, and the difference between the U.S. property accounting value under IFRS and the transaction amount, and as such the amount recorded in the consolidated financial statements may be materially different than the actual taxes.

Non-GAAP measures such as Operating FFO and some of the Trust’s credit metrics reflect the combined results of both continuing and discontinued operations. So overall, despite some headwinds in Canada during the first half of 2015 our full year performance for OFFO was $557 million representing a growth rate of 7.6% over 2014. On a per unit basis OFFO increased by $0.06 or 3.7% to $1.74 per unit.

While same store performance from our rental operations in Canada was negative, our operating results from our continuing and discontinued operations benefitted from other growth drivers. Our results were aided in 2015 by a strengthening of the U.S. dollar relative to the Canadian dollar, acquisitions net of dispositions and completed developments, other income and continued interest savings in the current low interest rate environment.

Same-store NOI in Canada was down 1.4% for the year, the decline in same store NOI was largely due to increased vacancies as a result of the challenging operating environment encountered in 2015. Now partially offsetting these declines were increases in NOI from new leasing, increased rental revenues on renewals and increased NOI from vacated space that has since been back filled to new tenants.

Same property NOI in Canada, which includes the impact of the Target’s departure, declined by a greater expense down 1.8% in 2015.

In the U.S., same-store growth was up 0.9% for the year but was negative for the fourth quarter primarily related to a bad debt provision. Our decision to sell our U.S. operations to Blackstone represented a unique opportunity for the Trust to capitalize on the increasing that the trust has benefitted from since assembling this portfolio. This historical cost of our investment was approximately $1.7 billion which was made during a time when the U.S. and Canada dollar were essentially trading at par.

The sale capitalizes on both the growth in the portfolio from underlying value gains and the appreciation of the U.S. dollar over the past five years. After taking into consideration the taxes and transaction costs as well as the $510 million of cash that was used to acquire Kimco’s interest in 23 Canadian properties the remaining proceeds of approximately $725 will enable RioCan to reduce its debt to book value ratio.

In addition, the added financial flexibility will give the trust the capacity to invest in the development pipeline which we believe will be a core driver of future growth. Now looking ahead to 2016, we expect that the U.S. operations will contribute approximately US$22 million of OFFO in the first quarter of the year. We anticipate that the sale will be completed by the end of April of this year.

In the second half of the year we are expecting to see some of our Greenfield development projects come on stream. We should start to see some of the backfilled Target space begin to take occupancy towards the end of the year although most will take place in 2017 and 2018. Rags will provide an update on the leasing side on the Target backfills from an operational perspective.

The current interest rate environment remains favorable. In 2015, RioCan reduced its overall contractual interest rates and outstanding debt to 3.65% at year end from 4.04% at December 31, 2014, through the refinancing of maturing debt at lower interest rates.

This environment provides ongoing support for RioCan’s key coverage ratios, which continue to improve. For the full year 2015 as compared to 2014, RioCan’s interest coverage was 3.1 times compared to 2.89 times; debt service coverage improved to 2.39 times, compared to 2.2 times; and fixed charge coverage, which includes preferred and common distributions improved to 1.12 times from 1.08 times.

RioCan has increased its operating facilities to complete the acquisition from Kimco. As a result, there has been some short term deterioration in the Trust operating debt-to-EBITDA ratio, which was 7.93 times at year end.

RioCan opted to use a short-term financing vehicle for this acquisition so as to provide flexibility to the Trust and we will repay these lines with the anticipated proceeds of the U.S. sale upon closing of the transaction.

Similarly, RioCan’s debt-to-total asset ratio on a proportionate consolidation basis increased to 46.3% from 43.8% at year-end 2014. As previously stated, we intend to reduce this ratio by paying off debt with the proceeds of the U.S. sale. We expect to reduce the leverage ratio below 40% immediately following the sale of the U.S. portfolio.

The DRIP participation rate remained high throughout the year at 31.5% for 2015 generating approximately 143 million of capital in the year. Our payout ratio on an AFFO basis for the quarter was 90.1% an improvement from 95.3% for the same period in 2014. For the year, the AFFO payout ratio also improved to 90.4% as compared to 93.4% in 2014.

Now we are pleased with the progress that the Trust has made on reducing the AFFO payout ratio, however we recognize there will be some short term pressure on this ratio as a result of the U.S. sale and therefore this ratio will continue to be an area of focus going forward.

As at December 31, 2015, RioCan had 119 properties excluding discontinued operations that are unencumbered with a fair value of approximately $3.3 billion. On a percentage basis, this ratio of RioCan’s unencumbered assets to unsecured debentures was 166%, an improvement from year end 2014 which was 137%.

Subsequent to year end the Trust announced the redemption of the Series A Preferred Units, this step is in line with the Trust strategy to reduce debt and considering that the rating agencies apply varying degrees of debt treatment to this asset class, it was seen as advantageous to redeem on the first available redemption date.

We believe that past year is a great example of how the Trust business model of the diverse property and tenant portfolio together with prudent balance sheet management is able to provide the resilience necessary for RioCan to be successful in a variety of economic conditions.

2015 was a challenging year sort of a trial by fire from me during my first year here at RioCan, but I am pleased that the team has been able to accomplish. So with that, I’d like to turn the call over to Rags for an update on our operations.

Rags Davloor

Thank you, Cynthia, and good morning, everyone. I’m pleased to provide operational highlights for 2015. With the announced pending sale of the U.S. operations this past December the discussion of RioCan’s operational statistics will reflect only the Trust continuing operations in Canada unless otherwise stated.

2015 was a challenging year for a number of reasons. Targets decision to discontinue its Canadian operations, which resulted in the tenant disclaiming 19 locations in our portfolio, was a dominant event in 2015. However, there were other significant global economic issues that impacted our business last year as well. Increased market volatility and lower oil prices have and continue to negatively impact the Canadian economy and soften the retail environment.

In addition, numerous other national retail chains filed for bankruptcy protection in 2015 and early 2016 including Mexx, Laura, Wal-mart, Daniel Leather and La Salle Delimo [ph]. Despite all these issues, we are well positioned to withstand the sun settled retail market due to the size of diversity of our portfolio, the dominant position in Canada’s six major markets and the quality of four management team.

In Q4, 2015 our commitment occupancy in Canada increased from 93.2% as at September 30, 2015 to 94% as of December 31, 2015. We continue to see steady demand for space in our properties. For the full year of 2015, our leasing team completed 460 new deals comprising 2.3 million square feet and average rental rate of 18.99 per square foot

The annual square foot is leased with 75% more than the amount of new lease and completed in 2014 when RioCan completed 356 new deals representing $1.3 million square feet at $22.19 per square foot.

The higher GLA lease and the subsequent lower average rental rate achieved in 2015 is the result of a higher number of leases completed on anchor, a large box space many of which backfilled portion to the former Target premises.

In connection with Q4, our same store growth did drop by 2.5%, largely is driven by the drop in economic occupancy from 95.8% to 92.2% at the end of the year. The GAAP between economic and headline occupancy has also widened from 1.2% at the end of last year to 1.8% in the current fiscal period.

There’s a variety of factors that affected the Q4 results that created some noise which we do not believe is representative of our go-forward performance. Included in these numbers are co-tenancy provisions of 600,000 related to Target co-tenancies, bad debt provisions of 1.3 million and is also as the result of a variety of repositioning with respect to our enclosed malls, some short term deals done with tenants as we work through the repositioning of these properties, the properties related to Oakville, Burlington, Sheppard Centre and Georgian Mall.

Also the increase of 4% on renewals is also not represented of again of what we feel the future performance will be approximately 30% of these renewals related to anchor tenants who had fixed rate options with no embedded increases.

With respect to the former Target space, RioCan’s leasing team has made considerable progress backfilling the approximately 2.1 million square feet of space, previously occupied by Target and they continue to work diligently negotiating to bring this space back to a productive state in t he most efficient and effective manner possible.

To date, we have completed 17 deals totaling 573,000 square feet, 418,000 square feet at our interest. In addition we have conditional agreements or are in advanced stages of negotiations for another15 deals totaling gross square footage of 486,000 square feet or 426,000 square feet as our interest and we expect to finalize which we expect to finalize in the first half of 2016.

Collectively, the net rent generated from these 32 leases is expected to be approximately 12.5 million and RioCan’s proportionate share or 115% of the total net rental revenue loss through Target departure.

The average net rent payable by these 32 tenants is $11.82 per square foot in comparison to five in a quarter per square foot firmly paid by Target for the same space is $6.57 per square foot increase.

The expected cost to complete the redevelopment work related to the 32 leases is currently estimated at approximately $116 million or $93 million at our interest. The overall redevelopment costs will evolve as additional tenants are secured, redevelopment plans are completed and construction costs are finalized.

I’d like to take a minute to provide a few property specific highlights of the progress we have made since the press release we issued in November that announced the settlement with Target.

At Trinity Common Brampton, in addition to the previously announced deals completed with Michaels and DSW, negotiations are in the final stages for the remaining unit of 25,000 square feet with Winners.

Construction is expected to begin in Q3, 2016 and tenants are expected to open in Q3, 2017. At RioCan Durham Centre, in addition to the previously announced deals completed with Michaels and DSW, negotiations on the final stages for the remaining two units for 23,000 square foot PetSmart and the 6,000 square foot structure [ph]

Construction is expected to commence in Q2, 2016 and tenants are expected to commence operations in mid 2017. At RioCan Scarborough Centre, we have complete a deal of national tenant, that can’t be named at this point who will occupy the entire 116,000 square premises firm release to Target, the tenant is expected to commence operations in early 2017.

At Shoppers World Brampton, in addition to the previously announced deal completed with GoodLife, a deal has been completed with the 25,000 square foot Giant Tiger and negotiations are in the final stages with 31,000 square foot. Construction is expected to start in mid 2016 and tenants are expected to commence operations in Q4, 2017.

At South Hamilton Square, in addition to the previously announced deals completed with Fabricland and the Trampoline Club, negotiations are in the final stages for the remaining 32,000 square feet with U.S. Construction started in Q1, 2016 with tenants commencing operations in late 2016 and early 2017.

At Millcroft Shopping Centre we have completed action in the Former Target space with the national fitness user, construction is expected to begin in Q4, 2016 and the tenant is expected to commence operations in Q1, 2018.

At Sheppard Centre, we have lease 25,000 square feet to Value Village, construction here is expected to start in the summer and tenant is expected to commence operations in Q1, 2017.

I’d also like to highlight the fact that commence in Q2 of this year we will start to generate revenue from the former Target premises from certain of the former Target premises, Dollarama and Giant Tiger at Gates of Fergus, and Marshalls and HomeSense at Lawrence Square are all expected to open in Q2, 2016.

The revenue stream that will be generated from the completion of a Target unit redevelopment will make significant contributions to NOI growth in the second half of 2016 moving into 2017 and 2018.

With regards to renewal leasing in our Canadian portfolio for the full year of 2015, we retained 86% of the 5.4 million square feet of tenants that expired at an average rent increase of $1.37 per square foot or 8.1%, approximately two-thirds of the 4.6 million square feet was renewed in 2015 -- that was renewed in 2015 for that non-fixed options where RioCan achieved average rental growth of $1.72 per square foot or 9%.

Rental rate growth on renewals completed on what we consider non-anchored space, mainly premises under 20,000 square feet with $2.15 per square foot or 9.6%. On a geographic basis, the primary markets continue to be the main contributor of growth on a year to-date basis where renewals of non-fixed rate renewal rate increased by $2.11 per square foot or 10.3%.

Despite the impact of low oil prices, the strongest performing regions in 2015 was Alberta, where we experienced average rental rate growth on non-fixed leases were renewed at $4.19 per square foot or 18.8% increases.

Represented over the challenges presented in 2015 for the full year 2015, we experienced vacancies totaling 3.6 million square feet or 2.9 million square feet at RioCan’s interest. This is more than three times the vacancy at 1.1 million square feet or just under 1 million square feet at RioCan’s interest that came back to us in the full year of 2014

Net of the 2.1 million square feet that comprised our Target space of 2015 vacancies exceeded those experienced at 2014 by 20%. RioCan’s economic occupancy at December 31, 2015 was 92.2%, an increase of 60 basis points from September 30, 2015, but well below the 95.8% rate recorded at the end of 2014.

Excluding the Target Premises, the economic occupancy at December 31 was 95.3%. The decrease in economic occupancy is our significant factor in this year same-store growth result.

Same-store growth was also negatively impacted by 15 tenants from various Target at the sites that involved there are [Indiscernible] for their contractual co-tenancy provisions last year.

Given our success and backfill in the Target Premises, their higher rates with dynamic tenants that will positively impact the performance of the surrounding tenants, we are confident in the economic occupancy and same-store growth will return to historic level within the next 12 to 24 months.

Looking now at our development pipeline, we continue to make good progress on a considerable number of properties that are underway. Our development pipeline will be significant contributor to future NOI growth and I would like to provide a brief update on some key projects.

Construction is well underway on the third phase of our East Hills development in Calgary, Alberta. 7 tenants totaling 134,000 square feet including Marshalls, Michaels, Sport Chek, Bed Bath & Beyond are expected to open in Q3, 2016.

Costco will also build 160,000 square foot store on 15 acres of land that they will purchase from us in first quarter of 2016. Costco is anticipated to open late this summer and they will serve as an additional anchor to the property.

And our Sage Hill project also located in Calgary, Alberta, a 45,000 square foot Loblaws opened last month and an additional 195,000 square feet of tenants including a 36,000 square foot London Drugs are expected to open by the end of next year. This property is currently 85% leased.

Construction is underway at RioCan Colossus Centre where portion of the property is being redeveloped. The lease buyout was completed with Lowe’s [ph] two years and leases have been completed for all of the space with 28,000 square foot Bed Bath & Beyond, 22,000 square foot Buy Buy Baby, 22,000 square foot tower, 22,000 square foot stables, 10,000 Party City and 500 square Chop Steakhouse, construction began during the third quarter of 2015 and the initial tenants are expected to open in Q4, 2016.

Conditional deals has been completed with Costco to purchase approximately 14.7 acres at Shoppers City East located in Ottawa. Provided the conditions are waived, its anticipated Costco will build the 161,000 square store who will commence operations in 2017.

Construction is commenced on the 15,000 square foot Shoppers Drug Mart and will commence operations in Q3, 2016. The remaining tenants on the site including a 6,500 square foot bear [ph] store will commence operations in Q1, 2017.

The expansion of Yonge Eglinton Centre is now complete. Cineplex commenced operations in the VIP theatre expansion in December and Sephora is expected to commence operations this summer.

Construction is underway at our project at the Northeast corner of Yonge Eglinton Avenue. This project will contain a 58 floor Condominium tower and the 36 floor residential rental tower as well as 46,000 square feet of retail and commercial space featuring a TD Bank.

The rental tower will have 461 units and the Condominium will have 621 units all of which have been pre-sold. The project is expected to be completed by 2018. Official plan approval is in place approving the development of over 3 million square feet that are more significant project in our development pipeline being the well at front end Spadina Toronto.

We expect our zoning approvals in place by the end of 2016. This 7.74 acres site located Spadina having in Front street in Downtown Toronto will be redevelop to the mix use development who will include approximately 1.6 million square feet of retail and office space and 1.5 million square feet from residential. Construction is expected to begin in 2017.

2015 was a difficult year, however provided there’s no deterioration in the retail and economic conditions we are optimistic that the worst is passed. We remained extremely well-positioned over the next several years to organic growth of our existing high quality portfolio, completion of our target property redevelopment plans and two new revenue streams from the completion of our development projects.

These are the operational highlight. I will now turn the call back to Ed.

Edward Sonshine

Okay. I think we have a few minutes left for questions. So, why don’t we go ahead with those?

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Sam Damiani from TD Securities. Please go ahead.

Sam Damiani

Thank you and good morning.

Edward Sonshine

Good morning, Sam.

Sam Damiani

Just looking at the retail environment this January season that was presently quiet, not a lot of failures or closures or what not, so I’m wondering what you’re seeing and is there another shoot or drop later on this month or is just because we have so much bad news last year?

Edward Sonshine

I think, I’ll let Rags to add on, but my own view is that they didn’t wait for Christmas this year. They even broke in November and December and October and we have also noted a relatively quiet January and February is half way done and it still remains quiet. There will be a sprinkling without a doubt particularly in the sort of mid range fashion segment which has well documented headwinds. But as Rags said, I think the worst is behind us in that era. Most retailers that I speak which is not all that many, they all say, well, the last few months were okay. Not great but not terrible.

Sam Damiani

Okay. Maybe just switching over to your enclosed mall segments, what are you hearing about tenant sales in those properties in the last few months?

Edward Sonshine

Rag?

Rags Davloor

They are holding relatively firm. There’s no question with the mid-range fashion are the ones that are feeling the pressure at mid point, but there are new entrants coming in and we are seeing some pick up in some of the sales activity. I think the target closures help some of these department stores. Certainly the Winners and the likes to them are performing well. But the mid-level fashion is where there is some pressure.

I think adding the food offering that we’re looking to do in some of our – in the shopping centre is does not going to help the productivity of those malls. In the Tanger [ph] for example in Ottawa, the sales were relatively good. There were 450 bucks a foot which is just a first year of operations, so we thought that was reasonably strong and we do expect that number to climb especially after [Indiscernible] will open, which is scheduled to open in Q1 of this year. So we’re not seeing a big drop off but they’re not increasing that much either.

Sam Damiani

Okay. Maybe just finally on the co-tenancy sort of hit to NOI in the fourth quarter, it did pick up a bit over the third quarter. Do you see that increasing further into 2016?

Edward Sonshine

No. What we will do is -- what you will see is the full year effect of the co-tenancy provisions, so you’re going to see a little bit of noise again in Q1 because it wasn’t booked in Q1, 2014, it weren’t treated, so that will spill over. But as these Target boxes get filled and the new tenants come in we should actually start to alleviate co-tenancy provisions.

Sam Damiani

Okay. Good. I’ll turn it back. Thank you.

Edward Sonshine

Thanks.

Operator

Thank you. The following question is from Alex Avery from CIBC. Please go ahead.

Alex Avery

Thank you. I just wanted to dig a little bit more into the co-tenancy provisions specifically what the triggers might be and also how it may works in terms of how they would remitting or as the reduce rent would persist through the end of a lease term?

Edward Sonshine

Obviously they were triggered by Target going dark, largely I guess in June, so we did have – it really hit us in the third and fourth quarters and it will continue until one of two things happen. In most cases it will be the redevelopment and re-tenanting of the former target box.

In other cases it will be termination, either by that tenant or by us, if it doesn’t go back to full rent. I think what you’ll see is we will suffer through a lot of this through the course of most in 2016, but as we go into 2017 and the boxes are re-tenanted or other action is taken over the course of 2017 it will largely disappear as a factor and that’s Rags you agree that. Is that many tenants?

Rags Davloor

It’s not that many. Is it more focus on the enclosed mall rather than the enclosed. In the typical release -- they go on the point deals of the pay percentage rent or they go to 50% of what they were previously paying. And then within a period of time they have to decide whether they can either terminate or go back to full rent and it does not go on and definitely and we also have the option, but we can also cure it by getting the new tenant in place and that effectively cures the co-tenancy provision. So this will play out over the next six to 12 months. Okay, Alex.

Alex Avery

Yes.

Rags Davloor

Thank you.

Alex Avery

So, just to follow on there, Ed you notice there are lot it I guess would have been triggered when Target close their stores, but it seem to me, correct me, if I’m wrong, but it sounded like perhaps the impact in Q4 was greater than it was in Q3, I guess maybe that’s reflection of the percentage rent?

Edward Sonshine

Mostly it’s a reflection of tenants noticing that they had these rights quite frankly. Not all of them are – the minute Target closed, sent us a notice, especially with some of the larger tenants it takes. It just took a few months for them all to say, hey, I’ve got some eye to, let me take advantage of them.

Cynthia Devine

I think they are precluded during the CCAA process from starting any of those initiative, so I think that lead to some of the delays and then as I’ve said, some of them are just kind of point through their lease agreements and say, hey, I have this opportunity, so I think it was a combination of things but it to be back half project.

Alex Avery

Okay. And then just finally, you talked about leasing spreads and tenant retention, to what degree would you ascribe the reduction that you saw in both metrics to Target and related issues?

Edward Sonshine

I think what, there’s a – the Target impact went way beyond just to 2.1 million square feet. Number one is an emboldened tenant from the perspective of they say, well, there’s all this empty space certainly here in Canada and we should be able to take advantage of that. So, that was a factor and we had to be mindful at the same time that there was this 2.1 million square feet, so when it came to negotiating specific deals, we were probably a little more flexible last year particularly in the latter half of last year than we would have been in previous years, that something that will go away as the Target boxes get filled up.

And of course the second impact of the Target departure was on new tenants coming into Canada, I mean, if you’re an American tenant you just saw Target right off $5 billion last year and closed 133 stores, it’s going to be a pretty brave CEOs who says, I’m coming to Canada, Target sale but I won. So, slowly we’re finding foreign retailers getting overlap, but it’s a slow process, but I think a lot of what happened last year in the renewal rates and even in the new leasing process where sometimes we got a little less than we hope for can be take them back to the Target departure as well as the economic.

Rags Davloor

There are quarter-over-quarter you do encountered some statistical anomalies. In Q4 we did have a higher proportion of anchor who adopted to renew at existing rents and so that does sometime SKU the map.

Alex Avery

Okay. That’s very helpful. Great color. Thanks.

Rags Davloor

Thanks, Alex.

Operator

Thank you. The next question is from Pammi Bir from Scotia Capital. Please go ahead.

Pammi Bir

Thanks. There is some softness I guess appearing from some of your peers among some of the smallest store tenancies. Can you comment whether you’re seeing any of this and what’s your sense of where occupancy could end at the end of this year?

Rags Davloor

Well, the small tenancy there’s no doubt, I mean, some of the noise for example that goes through Q4 as we did provide rental system in connection with some of the smaller tenancies to a struggling. So that dynamic is there. We strategically have always focused on larger national tenant, but obviously we do have some of the smaller tenancies and moms and pops and they are filling the economy.

Our view is do we expect to see certainly going in to Q1. We are experiencing positive absorption in the portfolio. So, absent what happens with the economy, we’re starting off on a positive note from that perspective. It’s very hard to project what Q3 and Q4 is going to be like given the economic overlay, assuming it stays the way it is we do continue to see positive absorption especially as the Target tenancy come in and other tenants who also want to be in the shopping center.

Edward Sonshine

I think you also have to look at some of the programs we’re having in place, I mean, some of the softness is as Rags refer to is also attributed to our ongoing development process. When we renew a tenant for five years and say by the way we want six months termination right, because we’re in the middle of rezoning this shopping center.

Guess what he doesn’t pay us much rent and so that’s an ongoing factor with ours, but at the same time as we roll through the next couple of years what that redevelopment process will have is actually diminish the amount of retail space at a particular site which will then in turn lead to higher rents as we roll through this process. So, there’s a lot of noise going on, but I think it starting to look pretty good that we’re coming out from the other side of tunnel over the next couple of years.

Pammi Bir

So when you put that together then we just focusing on the next 12 months and realize there’s a lot happening over the next two years, but in terms of the – in the past we have or you have provided internal growth guidance, in terms of range overall at least for Canada, based on what you’ve said, do you see and if you exclude the target impact, do you see Canadian same-store NOI being positive this year?

Cynthia Devine

Pammi, its Cynthia, we expected to be kind of flat to slightly positive for the year in terms of the Canadian same-store NOI.

Pammi Bir

Okay. And then I just wanted to touch on the IFRS valuation process, can you provide an update on how that it managed and what your proportion or what proportion of the Canadian portfolio has been externally appraise versus internally in the last few years? And I’ll leave it there.

Edward Sonshine

Well, that’s a big question. When you go back over the last few years because our process is constantly evolving, it’s a complex process and that we have in Canada over 300 properties, so the number of external appraisals is actually fairly minimal. We’ve never found them that valuable, but we do have a very rigorous internal process that John Valentine who is here with us, basically head these head of our asset management group, unfortunately they don’t even let me in the room, so I bear no responsibility for good or for bad, but it includes our investment people, it includes the Cynthia and Rags in that process and it’s a pretty rigorous bottom up process, which then goes through a pretty, I would say equally intrusive process by Ernst & Young, our auditors, who at the end of the day before we walk into the board with the IFRS values everybody has to sign off. Is there anything anybody wants to add to that?

Cynthia Devine

I didn’t know, Pammi we use specifically, did you use specifically after, but the U.S. is well at the beginning or did…

Rags Davloor

I thought it was just Canada.

Cynthia Devine

Canada.

Pammi Bir

Yes. Just Canada at this stage.

Edward Sonshine

Okay. Thanks Pammi. I hope that was helpful.

Pammi Bir

That helps. Thank you.

Operator

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

Michael Smith

Thank you and good morning. You have big plans in the residential space, I’m just wondering if you could give us a little bit color on how you’re setting up the internal infrastructure. Have you begun to make changes? Are you making additions?

Edward Sonshine

No. Because quite frankly our first rental residential building will probably not come on stream till late 2018 that will be one across the street here Yonge Eglinton, so it’s a little early. We’re dealing with at all internally, so constantly we’re finding what we see. We realize we don’t have to do everything ourselves, so in some of the projects that were specifically looking at to be rental, we’re talking to several different partners who can lend expertise and do a lot of the work so to speak, for us when it comes real intricacies like sweet layouts and sweet design which we certainly don’t claim to be the world’s experts stuff, since we don’t own any rental buildings right now.

Similarly, we’re also looking at – we have Investor Day, I think about a year ago when we talked about 18,000 units in the overall intensification program over a period of time, well, I think the conclusion we’ve come to also is that a certain number of those units will be better suited to be condominium. So what you’ll see a real mixed bag that I think early as sometime this year you’ll start seeing announcements on where some of the density we’re creating well actually be sold to third-party condominium developers, some will be designated as residential without having a partners who will actually do a lot of work.

Right now, we’re like the pretty girl at the party. We got a lot of suitors because of I think the foresight shown by RioCan starting 12 years ago in focusing on primary market and urban sites, we have some of the best sites in Canada, quite simply, so everybody wants to dance with us. I never went through that one when I was young myself, Cynthia possible did. She is getting a little embarrass here, but I never experienced and it got to tell you Michael it’s quite fun.

Michael Smith

Sure, sounds like. Thank you.

Edward Sonshine

It is. It’s great.

Michael Smith

Thank you.

Edward Sonshine

Thank you.

Operator

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

Edward Sonshine

Didn’t we hear from Sam already?

Sam Damiani

You did, but I guess no one else turned in. I just wanted to maybe dealt in to the well if I could I mean that project from a planning perspective is proceeding very nicely. Just wondering if you had any preliminary discussions with potential tenants on the retail and their office site that gives some visibility to the build out there?

Edward Sonshine

The answer is yes, but let me put in the couple of -- I mean there’s so much going on the well that in the phase of a couple of minutes, I won’t leave you, we want to try to really elucidate. We will be making some interesting announcements from the well over the next six months, I mean, those will take that kind of period but I will tell you two things.

I’ll agree my [Indiscernible] and his really good team have had a tremendous amount of interest in the office components of that building. What we’ve ultimately come through with the design is an extremely functional building that is in one of the most interesting areas of the city and I myself and surprised by the significant amount of interest that we’re getting, is that relatively advance stages of discussions, but no names that I’m prefer to release now.

On the retail side this is going to be a very unusual project for RioCan and of course we’re in-charge of the retail. There will be some pre-leasing that we hope to announce in the course of the next year or so keeping in mind that the retail component probably won’t open until 2020, so on the one hand not a lot of retailers want to commit out four or even five years, on the other hand in today’s economic climate we don’t want to commit. So the whole transaction is being structured in and I think quite an interesting way that you will find out over the course of this year to manage our risk and let us go forward typically on the retail component with a probably much lower proportion of pre-leasing than RioCan is typically use to. It’s also going to be a very different retail project that RioCan typically does because of the just terrific demographics and neighborhood that were in there, we think it calls for a much more entertainment food oriented in all centers of that word, food both prepared, restaurants, shopping experience and I think when the full plans of this are unveiled, which might be six to twelve months from now, it’s going to blow everybody away. I can’t tell you, I’ve never been more excited about the project I am about this one and the way it’s all going to turn out.

Sam Damiani

Great, look forward to hearing more on that. And then just quickly 85 blower [ph] renewals is not a huge deal but the price per foot was up there and the yield was low, I mean what’s the player on an asset like that? Is it a good sort of stable coupon clipper with long term [Indiscernible] value or is there some built in growth…

Edward Sonshine

There is built in growth where the rent goes up I think 2% a year. It’s an unquestioned covenant, it’s the parent company of H&M that’s on covenant there, that’s their sort of higher end brand cost and quite frankly it just gives us a little finger in a very, very interesting part of the city where we really haven’t got anything going on right now and it’s a critical piece as moved [ph] street one day down the road starts to get more heavily developed which I’m sure over the next 10, 20 years it will.

Sam Damiani

Great. 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

Well thank you all for participating. Well I know it was a noisy quarter and a noisy year and I think a lot of that noise will unfortunately continue over the next at least six months, but and I know most of you have probably already hung up to get to the 11:00 clock somebody oh sorry 12:00 clock call. It’s a very busy day for everybody in the midst of a very busy week. So thank you for taking the time to join us on the call. I’ll see you next quarter. Bye, bye.

Operator

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

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