SmartCentres Real Estate Investment Trust

Huw Thomas – Interim President and CEO Rudy Gobin – EVP, Asset Management Steve Liew – VP-Finance and Acquisitions

Michael Smith – Macquarie Sam Damiani – TD Securities Alex Avery – CIBC

Thank you, operator and good morning everyone and welcome to Calloway’s first quarter 2013 conference call. Thank you for joining us on what I know is a very busy day for all of you.

Its Huw Thomas here and it’s my pleasure to be leading this call as Interim President and CEO of Calloway. Joining me on the call today are Rudy Gobin, our EVP, Asset Management; Mario Calabrese, Interim CFO; Steve Liew, VP, Finance and Acquisitions; Anthony Facchini, VP, Operations; and then John Darlow, our VP, Leasing.

I will make some remarks about the quarter and general business conditions and then we will open it up for your questions. And my comments were principally referred to the first four pages of our supplemental information package, which is posted on our website.

Overall, we were pleased with the first quarter results considering the general economic climate and the space rationalizing that’s been made by a few of our tenants. FFO increased 9.9% to $60 million and 3.9% to $0.45 on a per unit basis compared to the first quarter of last year.

Same-property growth increased, it’s under 1%, and we continue our market leading occupancy level at 99% and are well along the way with renewing 62% of 2013 lease maturities despite the trailing impact of the bankruptcy of everything per dollar last year where we are actively working to re-lease the remaining locations not already leased to other national tenants. For Best Buy, all locations have closed while staying paying rent with one to reopen as a smaller store and we have good interest in all locations to re-lease.

If we were to include tenants who are close to renewal were at 77% of all lease maturities for 2013 at this point, which is well ahead of last year. Overall, we expect to end the year with a mid 7% increase for this year’s renewals and I should perhaps emphasize that our tenant investments on these renewals are typically very low.

Overall, despite the changes in space needs from a small number of national tenants, we are pleased with tenant demand for vacated space. We are able to re-lease in reasonable timeframes at generally higher rents than we are actually previously obtained.

And this I believe is recognition of the fundamental building blocks of our business proposition, where we provide low-cost, well-located in dominant retail centers anchored by major retailers, I mean, cost in particular, Wal-Mart which drives significant traffics to our site and provides good opportunities for tenants to grow their business. With respect to future growth, we are all excited about the upcoming opening of the Toronto Premium Outlets site at Trafalgar Road Number 401, which will open on time and on budget on August 1.

Tenants have begun taking possession of a few store locations and by the time we are open, we are confident we will provide the range of tenants that shoppers come to expect from the premium outlets brand. And I should perhaps say that Simon Properties have been an excellent partner to deal with, which we believe bodes very well for our next venture in Montreal.

This site continues to move forward and we expect construction to commence later this year with a full 2014 opening. For acquisitions, we acquired two income properties in the quarter in Stoney Creek and Whitby totaling over 200,000 square feet of space for just under $60 million.

Purchase price was paid in cash on the assumption of existing mortgages with the customary adjustments. Both of these sites are well located sites and could buy strong food retailers and represent good growth potential of Calloway in the future.

Previously, you issued investment guideline for 2013 acquisitions of $150 million to $200 million is on track. Generally, our investment focus is on the six major markets in Canada, along with selective smaller markets, particularly where Calloway is already located.

Clearly, the market remains very competitive with quality retail assets now being priced at sub 6% cap rates, but we are actively looking at a number of sites and we are optimistic we will have further acquisitions of Calloway quality properties throughout the year. Our internal development in that pipeline continues, and overall this year, our expectations of some 569,000 square feet of space at an expected yield of 7.7%.

Our two Target stores which are in former Zeller’s locations are on track for their grand opening on August 1 as well. And w will no doubt leverage the continued excitement Target has brought to the Canadian marketplace.

One Target store is located in the South Oakville Centre, which was formerly the hotel mall, and we continue to reposition this center with new tenants and additional development space to further leverage our new anchor tenants. Our longer term potential is currently centered on the Vaughan Metropolitan Centre site.

Subway construction continues to be on track for 2016 opening and we are moving forward to begin construction in the first building onsite, the KPMG Tower early next year. There is lots of other planning activity going on in the background and overall we are delighted with the level of cooperation we are getting from all levels of government.

We are all remained very committed and excited about this project. Turning to the balance sheet, we are well positioned to take advantage of growth opportunities as they arise.

Our unencumbered pool of assets is close to $1.2 billion. Debt to gross book value is below 50%, which is well within the trust target range.

And our net interest coverage has increased to 2.7 times excluding capitalized interest. Not surprisingly, we continue to look for opportunities to refinance our various debt obligations to take advantage of the current very low interest rates.

We still have approximately $100 million of mortgages remaining this year to refinance, coming off historic rates they are in excess of 6%. So, the refinancing potential is below the 4% range for secured and unsecured 10-year financing certainly represents a good income improvement opportunity for the balance of the year.

And subsequent to the quarter end we completed an innovative financing for just over $100 million utilizing the strength of our major tenant to obtain approximately 16-year money of well below 4% in the loan-to-value in excess of $80 million, so clearly a very attractive financing. Finally, let me say, you may have some questions on the management team changes.

So, let me say that we have both internal and external searches underway for both the CEO and CFO roles. I am sure all of you would be aware that Calloway has a small focused team supporting our business operations to have a significant amount of very relevant experience.

This is supplementing with the resources of a key business partner in SmartCentres. We provide the number of services to us under contract and the company also benefits from a long tenured and very knowledgeable board.

All of these factors should give you and investors at large a great deal of confidence that the business of Calloway is in good hands. The Board and I in particular are committed to taking whatever time is necessary to find the right individuals to lead Calloway forward for the longer term.

So, with that, I would be pleased to open up the call for your questions. We would like to open the call operator.

Thank you and good morning. I am just wondering for the Best Buy, what type of tenants are you talking to for replacing it given the way any secrets?

Hi, Michael. It’s Rudy.

It’s hard to give you names without giving away secrets, because we do have some competition for the space. I would tell you that if you look at the tenants that are in that Best Buy sites range anything from 20,000 to 30,000 square feet and some of the spaces can even be sub-divided.

There is a wide variety of tenants in that space today. So, if you – again you know all the tenants as well as we do, but I would rather not name names right now because we are looking at for replacement for the space and in some cases sub-dividing the space as well, but very good interest in all of them.

And what are the economics going to look like ballpark?

Well, the good news on this I mean although in three of the locations Best Buy isn’t going to be there, but in one of them they want to be there in a smaller footprint. We are looking for the best mix for the site.

All of these were done, almost at the beginning of the development of the shopping center, so that the leases are either below or at markets, so the space will be ranked at the same rents or better and where we are looking at sub-dividing the space the rents are obviously significantly better because of the smaller sizes. So, we are taking into account things like re-development costs and so on.

So, I would say in all cases our – the net outcome is going to be equal or better.

Okay good. And just switching gears beyond your two JVs with Simon Properties, do you anticipate or envision any other further activity together either in Canada or in the U.S.?

It seems we will be – in particular have had some conversation with Simon and we will have those conversations on an ongoing basis. We will obviously look at other potential sites in Canada as I have said we have been a great partner so far.

We have a strong relationship with them and they clearly are a very strong operator of the premium outlet sites. So, we are continuing those conservations we have nothing to announce at this point but we will certainly continue those conversations and hope to find some other opportunities and realistically they are going to be in Canada or I don’t see us looking to the United States in terms of opportunities with them.

Okay great and just I think you mentioned that you are anticipating roughly 7% rental bumps on renewals as an average for the 2013 what was the range?

Again it depends on the markets some I mean there are very strong markets in I think in mostly Western Canada, the GTAs, the GTA GMAs Vancouver or Calgary where you get 10% to 15% they are somewhere in small markets that tenants wants to stay and they want 1% to 2%. So, the range could be anywhere from zero quite frankly to 15% to 20%, so it is a big range, but if you leave that outliers, we are in the say 7% or 5% to 13%, 14% range.

Thank you.

You’re welcome.

Thanks. Good morning.

Good morning Sam.

Are you in a position to talk about the Toronto premium outlets in terms of what percentage of the space will be built and occupied and paying rent on the opening and also perhaps six months later, what’s the idea on the pace of stabilization there?

Certainly the – currently we have tenants that have already taken possession of their space, so it’s not going to be a big secret as to who the tenants are, they are fixturing. If you go to the site you can probably talk to them.

Right now we are about 85% committed with tenants that we know are there and who are opening, there are still more tenants to take space in June. We expect it would to be somewhere in the 85% to 90% fully committed with the known names that you expect from a premium outlook center.

There are a few tenants that are still waiting and watching the market in terms of coming to Canada. And they are very interested, but they have to get their house in order for making the trip north of the border.

So, they are looking at the markets we have kept that space, we have leases in place that will – that our tenants who want to be there that we said listen why don’t you go and have a look, have a feel, see how you do so this – so it will open 100% leased up with tenants. Some of those – about 10% of those will be shorter term with our ability to move some of those names that we want into the center within let’s say within 12 months of that happening – of the opening.

Interesting, I keep meaning to get a chance to drive out there, but I haven’t, so but since it’s essentially available to see from the street and would you mind sharing some of the names that you have been able to secure that might be of interest?

Certainly, it’d be some of the typical names the Coach, Polo, Michael Kors, (Tommy), American Eagle, Hugo Boss, Brooks Brothers, Burberry, J. Crew the brands you would see when you open up almost any premium brand.

So, we’re pretty excited about this.

And what we contemplated Sam, is an opportunity before the opening we will organize a tour in potentially June when people’s calendars are little quieter, get them a chance to a look at that site, look at the Vaughan Metropolitan site and one or two other of our larger properties in the West end. So, we look at people’s calendars and we’ll be in touch in the coming weeks and give everybody an opportunity to actually go around the site before it opens and get a clear sense of how it feels and so on.

That’s great, thank you. Just a second question is on that mortgage that you’ve talked about briefly, I haven’t gone through your detail MD&A at this point.

But I’m wondering if you could talk about that a little bit more how you were able to get 80% plus loan to value on such a tight spread?

Hi Sam, its Steve. Just to be clear this financing did happen totally subsequent to the quarter and we leverage basically the credit qualities of our major tenant in our portfolio and was able to underwrite the loan to 80 plus percent loan to value and the rate was 3.764% on average 16 years.

Great, now is it secured by specific properties, specific stores?

They are secured by the real estate.

How much real estate is security for?

They were four – it was four properties and 105 value of that real estate would be around 130.

So, four properties i.e. four stores?

Correct.

Okay, great. Thank you.

Thanks. Hum, just in light of I guess some of the changes that you had in management recently.

I was just wondering if you could provide us some insight into where the – I guess the state of strategic planning is within Calloway, I mean are you basically operating off of a play book that has been in place for quite some time or you – I guess sort of just sort of waiting until you resolve permanent replacements until Calloway really decides what the next direction is?

The way we would think about it Alex is companies have a life of their own obviously Bob and Al have done some excellent work working with the board and rest of the their management team to put a plan in place for Calloway. And I would say the company is executing against that plan.

I think Calloway is extraordinary stable relatively speaking. And so the ability to continue to execute against that plan despite the management changes is I think relatively easy.

So, my focus really was and is make sure everybody is comfortable given that there has been some senior management changes focused on delivering our commitments that we have in place for 2013. The plan that we’re working to, the financial plan and then focus on what I think are the key strategic issues that Bob and Al are already talking about and continue to have those discussions with the board and look at both opportunities and any risks we see on the horizon and make sure that we are clearly well positioned to handle those.

So, it sounds like things are running pretty much as normal and people have enough on their plates that’s not an issue at this point and you’ve got some wiggle room to figure out executive positions?

Yeah, absolutely, I mean I have been on the board for two years and clearly that’s an advantage for me coming in. I think my background obviously I have been involved in real estate.

My former employer Canadian Tire for significant number of years, so would have been an interested tenants and customer of Calloway for a number of years. And so I am bringing a slightly different perspective to the process, but the business of large has a great management group, the guys who are sitting around the table with this morning and rest of the organization are extremely capable and knowledgeable about the business and obviously I have the ability to leverage the experience in SmartCentres with Mitch and his team and so on.

So, there is an enormous amount of experience in our building very focused on obviously delivering the best possible product to all of our tenants and I’ll just continue to kind of oversee that.

Okay that’s great. Thank you.

Well, thank you very much to everybody for joining us. I’m aware it’s a very busy day for all of you.

And thank you for your continued interest in Calloway. Those of you that can you’re obviously welcome to join us later this morning at our Annual Meeting at the (Andrews) Conference Center at 10:30 otherwise obviously wish you a good day.

Thanks very much. Bye-bye.