RioCan Real Estate Investment's (RIOCF) CEO Edward Sonshine on Q2 2016 Results - Earnings Call Transcript

| About: Riocan Real (RIOCF)

RioCan Real Estate Investment Trust (OTCPK:RIOCF) Q2 2016 Earnings Conference Call July 29, 2016 10:00 AM ET

Executives

Christian Green - AVP, Investor Relations

Edward Sonshine - Chief Executive Officer

Raghunath Davloor - President and Chief Operating Officer

Cynthia Devine - Executive Vice President and Chief Financial Officer

Analysts

Sam Damiani - TD Securities

Mark Rothschild - Canaccord Genuity

Alex Avery - CIBC World Markets

Pammi Bir - Scotia Capital

Michael Smith - RBC Capital Markets

Operator

Good morning and welcome to RioCan Real Estate Investment Trust's Second Quarter 2016 Conference Call for Friday, July 29, 2016.

Please go ahead.

Christian Green

Good morning, everyone. I'm Christian Green, AVP, Investor Relations for RioCan. Thank you all for taking the time to join this morning. For today's presentation Cynthia Devine, Executive Vice President and Chief Financial Officer for RioCan will begin with her review of our financial results; followed by Rags Davloor, RioCan's President and Chief Operating Officer, who will report on the Trust's operating performance; and finally before taking your questions, Edward Sonshine, RioCan's Chief Executive Officer will deliver his perspectives.

Before turning the call over to Cynthia, I am 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 will be referencing certain financial measures that are not Generally Accepted Accounting Principle measures or GAAP under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by 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 our use of non-GAAP financial measures can be found in the financial statements for the period ending June 30, 2016, and in management's discussion and analysis related thereto as applicable, together with RioCan's most recent annual report and current Annual Information Form, that are all available on our website and at www.sedar.com.

Cynthia?.

Cynthia Devine

Thanks, Christian, and good morning everyone. We are pleased to review RioCan's Second Quarter Results that were released earlier this morning. Before I get into the numbers for the quarter, I want to highlight a few major events that transpired during the quarter, including the closing of the sale of our U.S. operations and the completion of our new $1billion unsecured operating facility.

We reduced the leverage on our balance sheet with the proceeds of the sale to its lowest level in our history, less than 40% of assets as of June 30. Our recent acquisition of CPPIB's interest in four properties demonstrates that we have excellent financial flexibility and ample liquidity to be nimble when immediate opportunities arrive and to manage our longer term development pipeline to drive future growth.

And finally, earlier this week we announced that we’ve entered into a firm agreement to sell the majority of the residential density The Well. This transaction accomplished a number of things and enables us to bring strong residential developers to this multipurpose site. It reduces our financial exposure to the project. It reinforces the value that has been created at the site and finally, enables the partners to develop the project in a single phase development.

Now, onto the financials for the quarter. Net income from continuing operations, or Canada, attributable to unit holders for Q2 2016 was 143 million compared to 59 million in Q2 last year, representing an increase of 83 million. Excluding 79 million in fair value adjustment and taxes from this increase, net income from Canadian operations attributable to unit holders for the second quarter of 2016 is 113 million compared to 108 million in 2015, representing an increase of 5 million or 4%.

The improvements in net income are largely the result of improved net operating income or NOI primarily due to contributions from property acquisitions partly offset by higher corporate and other expenses, primarily reflecting increased transaction cost from property acquisitions and disposition activity, higher G&A expenses and lower property management fees.

As anticipated, operating FFO or OFFO which reflects the combined results of both continuing and discontinued operations declined slightly this quarter versus last year. OFFO was 135 million in Q2 2016 as compared to 136 million in Q2 2015. On a per unit basis, OFFO was a penny lower at $0.42. The decline was due to the sale of the U.S. portfolio, which resulted in five fewer weeks of OFFO from our U.S. assets compared to the previous year. However, we continue to generate strong operating FFO growth in Canada.

Our Canadian operations benefited from additional NOI from acquisitions, income from marketable securities, lower preferred distributions and interest expense savings as a result of lower interest rates and lower debt balances. These positive contributors were partly offset by lower property and asset management fees and higher general and administrative expenses. Discontinued operation were low in the quarter as mentioned earlier due to shorter operating period as the sale was completed in May 2016.

Same store NOI in Canada was positive in the second quarter, up 0.8%. Canadian same store NOI increased due to higher rents from renewals and rent stuff as well as increased percentage rents. Co-tenancy claims were slightly positive during the quarter, as we reversed some previously accrued amount that more than offset the Q2 expenses. For the balance of the year, we anticipate the same store impact of co-tenancy claims to be moderate at approximately 300,000 a quarter.

Similarly, same property NOI in Canada was also positive, but only slightly up 0.1% in Q2 2016. Same property NOI includes the impact of the disclaimed target properties that have been in development since July 1, 2015. Rag will provide an update on the leasing status for the target back though, along with other operating and development highlights shortly.

General and admin expenses increased 2 million or 16.3%, primarily due to higher unit based compensation as a result of the trust relative unit performance in the period and increased net non-recoverable salaries and benefits mainly related to employ termination cost and merit increases. Primarily a reflection of the sale in the U.S. operations, the number of employees declined to 655 from 727 employees at yearend 2015. On a year-to-date basis, G&A is more modestly at 6.9%.

As already mentioned we were very pleased to announce the $1 billion unsecured operating facility which replaced our previously secured facility. This allowed us to significantly increase our unencumbered asset pool to 5.4 billion at June 30, which is now more than 2.5 times our outstanding unsecured debentures. Also, we had previously disclosed the proceeds from the U.S. released to repay debt which reduced our leverage ratio 38% of our asset on a proportionate consolidation basis as of June 30, 2016, the lowest in our history.

The Trust debt to adjusted EBITDA ratio remains above eight times of June 30, 2016 and we intend to continue to work on this ratio over the longer term as we’ve strived to grow EBITDA faster than our debt. Our payout ratio on an AFFO basis for the rolling 12 months ended June 30, 2016 was 89.9%, an improvement from 94.5% for the 12 months ended June 30, 2015. We are pleased with the progress of the Trust has made on reducing the AFFO payout ratio. However, we recognize there will be short-term pressure on this ration as the annualized effects of the U.S. sale are more fully reflected over the coming quarters. This ration will continue to be an area of focus going forward.

So before turning the call over to Rag, I’d like to further touch on some of the recent acquisition activities that the Trust has completed. We acquired CPPIBs interest in four properties at a total purchase price of 352 million. We already own a 50% interest in the property, so the acquisition required no additional resources and will be immediately accretive. With our U.S. sale completed, we’re more streamlined operationally and we have more financial flexibility than ever to take advantage of acquisition opportunities such as the CPP purchase. And we have additional liquidity to fund our development pipeline.

In addition, with our recently completed $1billion unsecured operating facility, the sale of the U.S. portfolio, we have the largest unencumbered asset pool in the Trust’s history, further adding to our flexibility. We intend to continue to recycle capital in the higher growth opportunities and maintain our strength in financial profile as we execute our strategy to intensify and redevelop the properties in Canada’s major markets to maintain our competitive position as Canada’s leading REIT. Overall, we are pleased with the solid growth in Canadian OFFO that we’ve been able to generate this past quarter.

With that I’d like to turn the call over to Rag, for an update on the operation.

Raghunath Davloor

Thank you, Cynthia, and good morning everyone. I’ll provide a brief overview of operational development highlights in the second quarter of 2016. With the successful completion of the sale of our U.S. this past quarter, the discussion of RioCan’s operational statistics will reflect the Trust operations in Canada. The economic climate in the first half of 2016 remained somewhat volatile as global markets remained unsettled for a variety of political reasons. However, the Canadian economy is holding that relatively well and we’re starting to see improvements in our operating results in a variety of our key operating metrics.

I’d like to focus in on the fact that our development and redevelopment residential programs are currently very active and provide a brief overview on some of the key projects. Construction began in Q2 2016 on Fifth and Third East Village in Calgary. This mixed use project will include approximately 184,000 square feet of retail space that will be anchored by Loblaws City Market and Shoppers Drug Mart. The project is expected to be completed in 2020. Embassy BOSA will be developing two residential towers above the commercial portion of the property.

Construction began in Q2 2016 at Bathurst College Centre in Toronto. This grocery anchored property will be developed into a four storey, 146,000 square foot mixed use to retail office building and is expected to be completed in 2018. At King-Portland Centre in Toronto, the lease is complete with Shopify for 112,000 square feet of office space in the second quarter. Construction on this mixed use development began in Q2 2016 and is expected to be completed in 2018.

Construction will began in Q3 2016, at 491 College Street in Toronto. This 25,000 square foot mixed use retail and office project will be anchored by LCBO and is expected to be completed in Q2 2018. The development is important as they relocate LCBO from 555 College Street site, which evolves to complete a 56,000 square foot rental/residential development that will begin in 2018. Construction is nearing completion on 135,000 square feet on the third phase at East Hills in Calgary. Seven large format tenants will open in the third and fourth quarter of 2016.

In addition, Costco has completed construction of 160,000 store on a 15 acre parcel of land they purchased from the partnership earlier this year, which is projected to open on August 12, 2016. Sage Hill in Calgary is also currently very active. The remaining 134,000 square feet of retail space at the site is under construction and the remainder of the tenants at the site are expected to open in Q1 ‘17. Construction is also nearing completion at RioCan Colossus Centre in Toronto, six tenants totaling 114,000 square feet are expected to commence operations in Q4 2016 and Q1 2017.

We are forecasting that between our target backfill openings as well as completions from our Greenfield and urban intensification development programs, approximately3.2 million square feet at a 100% or 2 million square feet RioCan’s interest will commence operations from now until the end of 2018. These were revenue streams who will make significant contribution to our cash flow growth in the next three years. With regards to the more significant development project in our pipeline The Well, located in downtown Toronto, we’ve recently announced a transaction to sell our interest in the residential portion of five of the six towers.

The transaction is significant and recaptures essentially the land cost for the partners, reducing that financial exposure and more significantly it will allow the partners to complete the development in a single phased approach. We expect to have zonal approvals in place by the first quarter of 2017 and construction to begin shortly thereafter. On our residential intensification site, RioCan has obtained final approvals for seven mixed use projects in our portfolio with an additional 14 applications pending. For the sub sites in our portfolio have been identified that’s having strong potential intensification opportunities.

The residential development program will consist of the combination of residential rental units, housed for long-term rental income, condominiums for sale, including potential air rights and commercial. As we did with The Well, we’re exposed to strategic options including bringing in partners under residential components with some of the projects. Construction is currently underway at two of our residential projects and we expect the construction will be started on additional three more by the end of next year.

We would expect to begin receiving rent from the project King-Portland in 2018. With respect to our income producing properties, sensed our NOI increased by 0.8% or $1.1 million Q2 2016 as compared to the same period in the prior. For the quarter our leasing team completed 127 new deals comprising 581,000 square feet and that rental rate of $21.96 per square foot. Our committed occupancy in Canada improved from 94.8% in March 31, 2016 to 95.1% as of June 30, 2016. RioCan’s economic occupancy at June 30, 2016 was 92.3%, an increase of 40 basis points from the last quarter.

The gap between our headline occupancy of 95.1% and our economic occupancy of 92.3% remains near historic high in terms of another 2.8% square footage at 1.2 million square feet and annualized rental impact at $21.8 million. This is a result of the lag effect associated with new leasing and the new tenants opening in the former target premises as well as from a higher than normal volume of vacant space from retailers that failed to restructure June 2015. As tenants commence operations the gap will reduce to more typical levels.

To date we have completed 30 deals, totaling 1.1 million square feet or 0.9 million square feet of RioCan’s interest in former target premises. In addition we’ve conditional agreements on advanced stages of negotiations for deals on an additional turn of 60,000 square feet, 232,000 square feet of RioCan’s interest that we expect to finalize in the balance of the year. Collectively, the average annual base rent generated from these leases is expected to be approximately 13.1 million at RioCan’s proportionate share as compared to 11.4 million of revenue lost to target departure.

The average net rent payable by these tenants is $11.90 per square foot as compared to $6.66 per square foot from the paid back target for the same space, $5.24 per square foot increase. The majority of this space is expected to open by the end of 2017. With progress to renewal of leasing in our Canadian portfolio, for the second quarter of 2016, we retained 91.6% of the 1.1 million square feet that tenants had expired at an average rental rate increase of $0.64 per square foot or 3.3%. Excluding one renewal completed during the quarter with an anchored tenant of 68,000 square feet at a property located in the secondary, had a negative adjustment, the increase in average net rent per square foot would have been $1.34 per square foot or 6.9%,.

Rental rate growth for renewals completed in what we consider to be non-anchored space namely any premises under 20,000 square feet was $1.41 per square foot or 6.7%. The strongest performing region in the second quarter was Alberta, where we experienced average rental rate growth on all leases renewed, $2.99 per square foot or 14.2%. With respect to the leasing environment, we’re seeing positive activity in a variety of sectors. These include, grocery users, restaurants, value oriented goods and fashion, fitness and entertainment, but it’s not being modified with the buyers to smaller prototypes.

Certain retailers have been opportunistic in expanding with the recent increase in inventory caused by tenant failures. Specialty fashion and moderate priced categories continued to be weak in a rationalizing store counts. Urban markets continued to show strength. Our Q2 results reflected improvements in a variety of our key operating metrics and we’re seeing positive momentum going forward. The turbulence we experienced in the last year and a half is debated. As our economic occupancy lose back towards a historic average, our same store and same property growth will continue to improve. Our successful execution of the target redevelopment plans and the backfill in our other vacant space will be the short-term drivers for growth. Our development pipeline will ensure we’ll continue to be well positioned for future growth.

These are the operation highlights. I’ll now turn the call over to Ed.

Edward Sonshine

Good morning and thank you Rag, Cynthia and Christian. I’m listening to the reports just delivered. It appears to me once again that the reality that we all with is a focus on quarterly and annual results. Perhaps been appropriate in a long-term business like the one we’re in, but nonetheless the state of the public markets and something we have to adhere to.

Having said that, I’m not sure that everyone appreciates the transformation RioCan has gone through in the past six years. It has been significant, positive and quite frankly in many ways accelerating. At the beginning of this decade, we had no assets outside of Canada, Target had not yet opened any stores in this country and I recall may not even yet have decided to do so. RioCan’s leverage ratio was in the mid to high 50s and even after IFRS came in shortly afterwards, at the beginning of 2011, slightly over 50. And internet retail sales were about a small fraction of what they are today.

So when I use the word transformation, it may seem like perhaps a reach, for a REIT dedicated to providing solid and growing distributions to its unit holders, with some longer term capital appreciation as the icing on that cake. But I can think of no better word to describe that this remarkable management team has achieved over those past six years.

First, we very quickly acquired a safe and diverse portfolio in the United States that eventually grew to 10 million square feet. And then we even more quickly –– generating a profit over those six years in the neighborhood of $900 million and that is of course on top of the significant cash flows that we generated on the way through it.

Secondly, with the torrent of cash generated by the sale of those U.S. assets, we were able to bring our leverage ratio down to 40% or actually less than that at quarter end and redo our banking arrangements so as to set up $1 billion unsecured credit facility with a five year term.

Combination of these two realities puts RioCan in the best financial position in its 23 year history. Not only does it allow us to take quick advantage of opportunities such as our recently announced acquisitions from CPPIB, Kimco and Trinity, but to confidently move forward with the exciting development and redevelopment of which Rag’s gave you a very brief overview.

In addition, should there be any negative wins in the turbulent times we seem to be in, a good ship RioCan will not only be able to sail away through them but to benefit from them had others misfortune perhaps. So only three months ago Target announced they were leaving Canada, while it sent shockwaves throughout the retail world, RioCan was actually the most affected in this country.

Once I got over my initial shock, I stated in a conference call at February of last year that the Target scenario would end up being just a bump in the road when seen in a rare view mirror. Well, after normally have worked from every part of this company including leasing, development, construction and asset management, it is proving to be just that a bump in the road.

By the end of next year we would have essentially completed the recycling of our 26 Target stores and the result will be more productive, diversified and stronger centers in existed three years prior and all without RioCan may be missing a beat.

While our American adventure, the restructuring of our balance sheet and the redevelopment of 2 million square feet of former Target space was going on, we continued to successfully press forward with our other many initiatives. Over the last few years our major market concentration has continued to grow.

With our over $1.1 billion in acquisitions in those major markets over the last 12 months together with their program of selective dispositions in less desirable markets, we right now derive over 77% of our revenues from Canada’s six major markets with an overwhelming concentration in Toronto and Ottawa, as well as a qualitative improvement that will become apparent overtime.

We are certainly well within the reach of the 80% goal we set for ourselves several years back and confident of achieving it. Our development program has continued to move forward. Everything, particularly in municipal and government approvals takes longer than it should, but our patience and persistence are rewarded with many exciting projects now finally underway.

Over the next few years the projects currently underway are expected to add over $50 million of annualized NOI to our cash flow. And that total does not include some of our more high profile and already successful projects such as The Well. We expect to be under construction at that project by the first half of 2017 and later this year we will unveil the final plans for the retail component of what I believe will be the new heart of downtown West. It will be unique, exciting and with an initial yield that will certainly be pleasing.

The progress on the office component is also remarkable, but I will leave that for Mr. Ahamed [ph] to discuss during Highlights conference call. To sum up, I’m feeling pretty good that the next several years will not only be exciting, but much more importantly will be satisfying to our unit holders in many ways.

That is the end of my modest presentation and I’d now like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Sam Damiani from TD Securities. Please go ahead.

Sam Damiani

Thank you and good morning. Just looking out into the future, you’ve got through lot of change through the balance sheet to unprecedented levels here, but of course the retail environment is also evolving very quickly. And I’m just wondering with RioCan probably having the most diverse properties in their portfolio in the listed property space here in Canada, do you evolving your portfolio in away from certain areas or more in the other areas. You bought in some JV partners on, some grocery anchored centers and new format centers over the last little while, just wondering how you see that mix evolving in light of everything that’s going on these days.

Edward Sonshine

Well, there’s certainly a lot of change in the retail environment over the last several years. I mean, we all tend to focus on the Target role of grocery that we went through over the last few years, but in addition at Target over the 18 months I would venture to say that looking at Rags and John that it’s probably been one of the most difficult and negative periods that RioCan has ever had as far as the fall out in certain sectors. Primarily that we call it a mid-range fashion sector. We also don’t believe that you’re going to turn back the clock and suddenly that sector and others well when you look at downsizing not just disappearance, it’s not going to suddenly rewind sometime in the next year to where it was five years ago, it’s not going to happen. I think RioCan has actually been at the forefront of doing exactly I think what you’re asking about, which is transforming the very nature of a lot of our shopping centers. Much more focused on necessity, much more focused on, I’ll call it bargains, whether you’re not sure of, but some of our fine tenants like Winners, Dollarama, even Value Village would like to be put that way, but to the extent that it was possible Canadian consumers have become even more value oriented over the last five years and I think that is a trend that will not change. But those tenants are expansionary and we’ve transformed a lot of our centers going that way.

And thirdly, it’s the whole issue of, easy use of world entertainment, but it’s more and I’m going to mangle this word, experiential. What’s happening with people is, they’re prepared to spend a lot of money on experience, whether that experience is foreign travel which has nothing to do with us or it’s going out to restaurants, it’s going to the movies, browsing in a book store, eating much finer foods, more healthy, more interesting than they used to, that opens up opportunities. We just opened up [indiscernible] for example, in Oakville and really the report started blowing the doors out, they’re not value oriented, but they’re almost experiential from the point of view of just walking into one of their stores seeing some of the their food products is remarkable. It’s a remarkable experience and I think you’re going to see RioCan do a lot more of those different kind of things, they all take time. I think we signed that [indiscernible] deal probably 18 months ago, almost two years ago. So to get them you’re going through the municipal approvals, getting the stores designed and then actually getting the permits and building them, it takes time. A year ago in early comment about the quarterly results, we know they’re necessary and we know they’re important, but at the end of the day they’re not what defines our business and what really defines our business is building a real estate portfolio and an income producing portfolio that addresses the changing modes in society. I’m proud to say I think RioCan is at the forefront of that. And having a great balance sheet is what permits us to do it. That’s a real long answer, sorry.

Sam Damiani

So that personally answers it, but I guess I mean, given the mix of the portfolio today, you just did not see that changing or do you see being able to work successfully with the mix -

Edward Sonshine

Okay, you know what, I don’t see the overall mix of the portfolio changing dramatically, it will change with the margins, we’ve not given up on shopping centers. Part of what I’m saying is, our job is to take those wonderfully located pieces of land and slowly change the uses to address what’s required by today’s world. And part of the changing the uses will be adding a residential component on, I think Rag’s mentioned 46, that’s done 25% of our properties. I suspect that number will expand, I mean cities intensify and missed a saga announced I think two or three weeks ago, approval from a province for a I think a $4 billion LRT and it is about 20 kilometers long, well one of the first things we do is we pull out our maps and we track the LRT and guess what we have three shopping centers that are going to be on that LRT line, so we start thinking about that, it’s a long process. It will take them five, six years to build the LRT, it will take us five to six years to redo and expand and intensify some of our shopping centers, but we are not looking to dump power centers. We are looking to subtly alter them. The fact is most of our power centers with a lot of work and elbow greasing in bringing in new users are performing wonderful, does that answer your question?

Sam Damiani

That does, Thank you very much. And your secondly I just with the sale of the U.S., I guess simplifying of the business as a result. Is there any guidance that you would be able to give in terms of FFO or OFFO for the third and fourth quarters?

Edward Sonshine

Well, the work guidance always gives me the shivers, but I will leave that to Cynthia, if she wants to say any specific about.

Cynthia Devine

No I think, rather than giving guidance I think we kind of appeal that the US OFFO earlier and so I think that’s probably the best way to look at it in balance of the years just focus on Canada continuing operations and kind of some of the key matrix that we have outlined for you in our quarterly report.

Edward Sonshine

And just to add to Cynthia, I am sure you will be able to strap a little from that, I think that’s which is that you got to do.

Sam Damiani

Fair enough, thank you very much.

Edward Sonshine

Thank you, Sam.

Operator

Thank you. The next question is from Mark Rothschild of Canaccord. Please go ahead.

Mark Rothschild

Thanks, good morning.

Edward Sonshine

Hi Mark,

Mark Rothschild

Ed, in the light of the unit holders one where you had few times in regards to development its risk and sure with risks in development, is this a reason why RioCan will be operating with lower leverages, is there a connection between the two going forward as far as the $.038 and $0.40 range, is this something that we should expect or on an extended period of time just because of the way the retail has changed as far as where the growth is coming from?

Edward Sonshine

No, actually I am not sure I totally get your question, if you are asking me do we expect to operate or leverage in the 40% range in the foreseeable future, the answer to that is yes. If you are asking me if the reason for that because of our development program I would say partly but not totally, we really are transforming this entity and one of the thing we wanted to do is have the best balance sheet that is possible and maybe the best in Canada in our sector, and maybe even one that SMP might look at favorably one day down the road and even cheap in our cost that way but you know what I used always make a comment that RioCan was built for safety not for speed but we are speeding up a little with our development, so we tend to focus even more on safety and you know the avoidance of undue risk is something that I think we have always been focused on terrifically and you know the development risk we focused on really in a couple of ways, one is by keeping our leverage low, keeping our liquidity I would say, you know more than ample and at the same time, you know bringing in partners, selling of residential density and you know laddering everything else we do from debt maturities to lease maturities, so there isn’t factor that addresses the risk as a whole bunch of factors.

Mark Rothschild

Thanks that definitely answer the question, just leave you one more question regards to Alberta, it sounds like operations have been pretty strong there, and we are definitely seeing some softening and other asset classes, incase if you are seeing any stopping at all in Alberta, do you expect to see softening either opportunities to buy properties they are opportunistically, did they really any change there or just the status quo.

Edward Sonshine

Hey, you listen Alberta is a question mark obviously they have taken some blows both from at the risk of signing politically incorrect from their new government, they came in a year ago but more importantly obviously from the oil price fall that started couple of year ago. Retail in many ways I will almost say it is surprisingly well, as far as opportunities we haven’t seen any yet, nobody is giving away any properties, notwithstanding because others are seeing the same as we are seeing which is you know the retail components are holding up very, very well. The overtime it will probably be better as because I believe I actually have great confidence in Alberta, it is a more diversified economy than it was 20 years ago or 30 years ago, notwithstanding the oil spends and I think we are seeing some of that resilience and the good news is other than us perhaps building in [indiscernible] nobody is building anything out there so when things do get back to even heel, which you know your guess is as good as mine, when that will be, I think that you will see even better going forward than we are seeing today down the road. We are going to see that in a lot of places because quite the situation in some way in Alberta what was going in the United States six - seven years ago where any new development activity ground to an immediate halt. And ultimately that caused rents to rise faster than they would have normally because of lack of supply. So I think we probably see that in Alberta in few years down the road but so far so good and do we monitor very carefully yes.

Mark Rothschild

Got them, thank you very much.

Edward Sonshine

Thank you.

Operator

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

Alex Avery

Thank you, just on the acquisition from CPP this month, you noted in there that you are going to be assuming any mortgage debt in that likely funded half of the line of credit. Just wondering you know what the longer terms plans are or funding that property or those properties that you are likely encumbered with secured mortgages or maybe tap in secured market, what is the plan there?

Cynthia Devine

Alex we are going to continue to look at various sources capital and balance of the year we did no recycling of capital opportunity in our disclosures and so we are going to look at the portfolio and make a determination but incurrence in the current state we have funded that using the secured op line and adding that back up to a more reasonable level because it is basically fairly close to undrawn at the end of the second quarter.

Alex Avery

Okay and taking a back a step and looking at the overall capital structure, you got a I guess weighted average term to maturity of your debt of under four years, you got a huge year of refinancing ahead of which probably couldn’t come at a better time, where interest rates are today. What are you thinking in terms of how you deal with nearly a billion dollars of debt maturities in the next 18 months or more than that I guess.

Cynthia Devine

It kind of goes back where Ed said in terms of laddering, we are very aware of the laddering situation as it relates to debt and you know we will be opportunistically looking to kind of fill-in and continue with the strategy that I think it served the RioCan extremely well over the years of making sure that we don’t have significant risk of debt coming due all in one year so we will be focused on that in the balance of the year, what we think is the strongest balance sheet we have had in the history of the rate to keep that in such a state.

Edward Sonshine

And just to add to that in general I mean what we have is now tremendous flexibility and it really comes down to where we can get the best funding at the best price to keep what the terms of ladder we set up took us many years to set it up and you know with the scope of the unencumbered property pool we have now which I think is both $5.5 billion, you know we are just in a great position when it comes to funding and you’re right with low interest rates and Rag’s in the CFO day back in about 2012 and 2013 as we are looking at that sort of budge in 2017 we said, holy macho [ph] what are we going to do. And but happily and by the way it used to be much higher, we actually work to bring down that bulged but as it turns out the bulged is turning in to an opportunity rather than a difficulty.

Alex Avery

Okay and I guess just time of comments together you got more financial flexibility and a stronger capital position than you ever had, does that does that gets you little bit more comfortable with having a shorter weighted average remaining in terms of maturity or should we expect to see a lot of 10 year and long term debt done in the next year.

Edward Sonshine

I think that you are not going to see any measured change, I think our sort of debt and maturity plan has always been between four and five years. We maybe at the lower end of that and the year from now, we may be at the higher end of that but what they, you know components of demand you know foreign rate money, it is not really demand I guess in our operating facility with some of the odds that piece of construction financing that is also you know very short term. You know it is the mix but I would think that the terms of maturity would stay relatively consistent.

Alex Avery

Okay and then just lastly you know very small numbers but you got $49 million of land for sale, just curious as to what kind of profile those pieces of land would have and you know what I guess what RioCan is seller of in terms of land, I would assume that there are not prime urban development sides but there may be adjacent to existing properties or secondary markets, just give a little bit insight on that.

Edward Sonshine

That is the small number and since years we were trying to figure out what it is right, but generally we are not sellers of land, some of that might be density, our focus right now in addition to our many focuses I mentioned is we do have any pieces of land that is non income producing and or well on its way to that, we consider to be dead money and our focus is either to develop those lands, figure out what to do with them if we can’t develop them according to our original plan or dispose it off. So it is part of that basket and a great example of that is what we did in Stobel [ph] couple of years ago, where we had a piece of land, we brought in Minto as partner and by the end of this year I think 220 town houses well have been constructed, all sold and closed and we will made quite a few million dollars on the entry plus get on the way through get some non-income producing land of our books.

Cynthia Devine

It is incentive thing, [indiscernible] absolutely it is nothing that we have specifically broken out before but it really goes to Ed point in terms of parcels of land that we have, held off for sale.

Alex Avery

Okay, that’s great color, thank you very much.

Edward Sonshine

Okay.

Operator

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

Pammi Bir

Thanks, good morning. Just on a pro forma basis, just giving some of the acquisitions announced, I think leverage will move up, maybe moving closer to your target 40% range, can you comment on how much above that level that you are willing to take it and is their preferences for non-core asset sales versus units to meet those equity need?

Edward Sonshine

Let me answer that in a couple of ways. I don’t want to draw a red line like President Obama did and break them but you know so we try not to have a red line, we are so well now that I don’t think we really need to worry about that. Having said that you know for a specific opportunity might be we willing to go up to 41 or 42, yeah but what is the plan in place to get it back to where we want to be. So keep in mind and this is bit of rough number, that simply or roughly look bad at me for saying but one percentage point is couple of hundred million bucks. So when you are looking at claiming from 38 even to 42 that is not far from a billion dollars, so I can’t see us wondering too far above that 40 except for some audacious transaction as we see as very opportunistic and like say we will then have a plan in place. For staying there, the plan really is capital recycling, it will be then capital recycling is not just selling off income producing assets and less desirable places, it is selling up air weights [ph] its brining in partners you know then for example we recently announced a well deal and there will be other like that well deal all in different permutations and combination depending on these specific property but you know it will be capital recycling that is our focus as supposed to capital issues.

Pammi Bir

And then maybe just as an extension to your comments there Ed, looking at the available for sale securities, they are now almost up to, getting closer to 400 million, can you comment on where do you view those as longer term investments or holdings or do you see better user capital at this stage.

Edward Sonshine

I think the phrase available for sales speaks for itself.

Pammi Bir

What would sort of prompt you to perhaps train those positions?

Edward Sonshine

Achieving price targets, better use for the capital is part of number one change in any strategic thinking, there are various things but I think the biggest one is having a better use from the fund where we have been sitting right now.

Pammi Bir

Okay lastly, Rag he mentioned, give us some color on leasing demands for growth, where are you seeing some growth and some softness but can you comment on any change that you are seeing from the banks in terms of their space need?

Raghunath Davloor

The banks - they are moving in the more flexible footprints, they are smaller, they tend to be smaller but the results are focused on specific areas that are geared to wealth management so that you look a lot what we are doing across the street, the young and neglected, it is a bank branch which is also very focused to the service side and the wealth management. I think the banks are again they are moving to the smaller footprints, for having said that, that separate center where we are developing, most of the banks actually took additional space as part of renegotiating their leases and reworking their leases. But just the internal workings are again geared to our management, what banks are doing as moving more to shorter terms and more flexibility as to have they should they want to restructure the space and give it back, given the circumstances, they are not coming to the same length of detriments they have in the past.

Edward Sonshine

Having said that, the branch that Rag mentioned across the street that we have done a deal with PD moving in a couple of years is 18,000 square feet on multi-level. It is a major business center, I think what Rag said is quite right. The banks are looking for more flexibility but and maybe even reducing store camp or where they are reducing store count is really in the secondary markets. You maybe have a markets that’s not a bad market, not a little down or place by Thunder bay or bank will have five branches where three years from now will probably only have three and then maybe smaller. So it is changing but as much as banks are going digital and mobile the actual, physical presence, albeit on a smaller basis and for different purposes perhaps are still considered essential by most of them.

Pammi Bir

Got it, thank you.

Operator

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

Michael Smith

Thank you one and all, good morning.

Edward Sonshine

Good morning.

Michael Smith

Rags I just want to make sure I understand some of the comments you made in your prepared remarks, are you suggesting that same property NOI and occupancy are going to continue their positive trends over the next few quarters?

Raghunath Davloor

Yeah, we do see that dynamically. We have noticed a - and maybe just these sense of moving around quarter to quarter but as far as request for tenant to release, tenant give back, it has been an noticeable drop from what we have experienced in prior years, it could just below, it is very hard to read into this but certainly in the last quarter, than the other areas that we are actually seeing demand is actually in the independence, there is slowly coming back into the market. So between the two we are seeing that positive absorption and obvious amount to give that space specifically the last quarter as what we are seeing currently in the third quarter has been relatively quiet from that perspective. So we do see the positive move. And the grocery stores you know that’s interesting, they are looking for more spots especially the higher end and you heard Ed talked about the experiential nature of what is happening to retail, the grocery stores are going down also, so it has been quite positive to the shopping centers.

Michael Smith

Okay and just on renewal spreads, I mean if we exclude that one large tenant in the secondary market that renewed at a low secondary market that renewed at a lower rate. Here renewal spread was 6.9%. Is that something we could expect going forward that kind of level?

Raghunath Davloor

Certainly in the near term, I would tell you that - we have seen a little bit of softening in the piece of growth in the headline rents and what we have experienced in the past plus a lot about properties were coming off first generation leases where they were at lower base rents, so we did expect, but for the current year that it would soften a little bit with the inventory. In Alberta for example we are getting 14%; historically we are expecting 20%. So we have seen that come off a little bit.

Michael Smith

Ok I am just switching gears. I guess you made great progress on the developmental, the RioCan Colossus Centre. What kind of development will you achieve on that?

Raghunath Davloor

I don’t have that number right up; I think it’s a seven handle.

Michael Smith

At the seven handle and is that something that you would expect to achieve on the well?

Edward Sonshine

I [indiscernible] where we are really just refining as I mentioned in my talk Michael, we are really just refining the plans for the retail. We started talking to tenants, but we haven’t even set wins [ph] or any phones, so I think it’s just were the speculator on that, but I think it was no well in particular, I think it’s going to be almost exciting project and I think that the initial development here would be a good number, but I think when you fast forward that goes to my first comments about the long term natures in this business and take a property like what we are going to create at the well and you look forward 5 or 10 years, that’s when you really see the huge profits. Initially it will be satisfied and down the road I think it would be super exciting in it. That’s how you have to look at a lot of these deals. You know, it is not pleasant for an analyst to say wow 10 years this is going to double, but when you look back at a lot of the things we have done over the last 15 years, I mean somebody’s power and energy we are talking about, but over a period of 10 to 12 years, the NOI from these properties has doubled and I see no reason as we are creating these urban facilities, and the urban has a very wide meaning, big city because it is getting huge dense growth even up around clauses, means quite astonishing. There is two condo towers been built right across the street and there is going to be a lot more as that transit finally ends up there and they finish it, so it’s going to be a fun decade I think.

Michael Smith

So I guess you are talking to some retail tenants from your side on the well could you give us any color or what type of retailer you expect there?

Edward Sonshine

Yeah, I am going to give you a one piece of color. It’s going to be much more entertainment oriented experiential. I don’t know if I made up that word, but I like it and - so we are hoping to movie theatre, we’re hoping to include a food experience which I don’t want to - I feel label that will be unique, that would be hate to even mentions in Lawrence Market, because St. Lawrence Market, what we are going to do here are going to be two different universes, but the concept the fresh food market, intermingled with a place you can sit down and eat is something that is really caught on in many parts of the world including New York and Europe. And nobody has put together that type of experience here in Torino [ph] yet and I think we are going to have the first one, it’s going to be sizable, it will be unconventional in the sense it is certainly not going to be a super market, but I think it will be a kind of place to which people will flip to and we have spent a lot of time and continued to spend a lot of time making sure the design and the prospective tenants for this are exactly right.

Michael Smith

Thank you, and just last question, I know it’s a small part, but can you give us an update on your HBC joint venture, how it’s going, some color and how it fits into your long term plans?

Edward Sonshine

Yeah, you know what next quarter I could probably tell you little more about it because we have a joint venture meeting I think scheduled for next week with Mr. Baker and some of his executives and eventually how it fits in, quite frankly besides giving as a relationship with one of the more exciting tenants in this country, is the primarily I would say the freehold properties, you got three freehold properties there, all in you know fantastic locations and we have already started very preliminary zoning work form the point of you, really figuring out what we can do on the store in Vancouver, where they have the best part of the city block adjacent to the Pacific Centre, it is going to be a major retail development one day, depending on what eventually happens in BC as a result of the government activity out there last few days. It is like an unbelievable residential sight on top of retail redevelopment. Whereas Calgary right now because of demand, maybe is on the backburner, we are going to be moving forward, we are looking at zoning situations on that and the same with Montreal. So that’s really when you look at those three sites, they are all urban and enhancification sites of you know the [indiscernible] you could have in all three cities. That is a large part of that joint venture and will be, and we are going to look at opportunities to acquire more assets for that joint venture quite frankly.

Michael Smith

Thank you

Operator

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

Edward Sonshine

This will be the second last one; I don’t want to cut it off last. Go ahead Sam.

Sam Damiani

Thanks just follow up on the well, is you intention to only commence construction next year with meaningful pre-leasing either on the office and on the retail side?

Edward Sonshine

No, one of the reasons we did the residential transaction was so that we can build it all at once, the retail and keep in mind, none of these retail space will be delivered until 2020. So we have got four years, we will have a handful of tenants in place and really be a handful, when we started it will be a much smaller percentage than we ever used to but we are going to go ahead and build it off, and we are very confident because you are dealing with a lot of independent tenants I think as well we have there and with a very unique concept in a unique location. So to try to do it in our traditional manner, I think would be foolish. So on the retail you might see 10% pre-leasing, 15% pre-leasing but and that goes back to the risk that Mark mentioned both because of the financial structuring of the transaction and the number of partners and so involved, we are easily able to do it and with utmost confidence of its success. As far as the office component, necessarily as part of the retail building it up to sort of I will call the transfer slab or the residential building start going up, there is some office components in that and we don’t actually hit the transfer flap to ahead with the office tower which is the I think 750,000 feet by far the majority of the office space, until about 2020. So Mr. [indiscernible] really has a few years to pre-lease the bulk of that tower before we have to make that decision whether we can go back to that tower or not. I have the utmost confidence not only in allied leasing capabilities but in the power of that location and the growth of Torino that long before them and maybe as early the end of this year, will be announcing major tenants for that office tower.

Sam Damiani

So you could have pre-leasing on the major office tower by the time of construction stating next year.

Edward Sonshine

That is our hope, yes.

Sam Damiani

Very good, thank you.

Edward Sonshine

Okay one more question, if there is one.

Operator

There are no further questions at this time Mr. Sonshine

Edward Sonshine

Perfect. [indiscernible] somebody else to got a call at 11’00 clock. So that’s perfect. Okay thank you everybody for joining us and look forward talking again in few months. Bye-bye.

Operator

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

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