SmartCentres Real Estate Investment Trust

Huw Thomas - President, Chief Executive Officer Rudy Gobin - Executive Vice President, Asset Management Peter Sweeney - Chief Financial Officer John Darlow - Vice President, Leasing Steven Hughes - Vice President, Operations Chris Coleman - Vice President, Investments.

Heather Kirk - BMO Pammi Bir - Scotia Capital Michael Smith - RBC Capital Markets Alex Avery - CIBC Sam Damiani - TD Securities Michael Markidis - Desjardins Capital Markets

Thank you very much, Mitchell, and good morning, everyone. And welcome to Calloway's Q4 2014 conference call.

Joining me on the call today are Rudy Gobin, our EVP, Asset Management; Peter Sweeney, our new CFO; John Darlow, our VP, Leasing; Steve Hughes, VP, Operations; and Chris Coleman, VP, Investments. I'll make some opening remarks about the quarter overall, and then we'll open it up for questions.

My comments will mostly refer to the first four pages of our supplemental information package posted on our website, and I do refer you specifically to the cautionary language at the front of that material, which applies to any comments that any of us may make this morning. Overall, we're pleased with the results for the quarter, considering the general economic climate and the overall retail market conditions.

FFO increased 3.2% to $65.8 million and 1.5% to $0.48 on per unit basis compared to last year. There were two material one-time items that influenced the quarter's results.

Firstly, the cost of transition within our finance team for about $1.3 million; and secondly, a provision for about $1.8 million in relation to past issues with a couple of tenants. Other than that, it was largely a normal quarter and the increases in FFO reflect contributions from all of our growth initiatives and a solid performance overall.

Our same property NOI in the quarter was affected by the $1.8 million provisions, I mentioned. And quarterly year-to-date same property NOI growth slipped, but on an adjusted basis it was 1.2% consistent with our past trends.

We've again managed to maintain our market leading occupancy level at 99% for five years now. And that's clearly a reflection of the quality of the assets and our strong tenant relationships.

Renewals completed for 2014 lease maturities ended at 85% with 1.3 million square feet renewed, despite ongoing rationalization by a select few of our tenants. And we ended with a 6.3% increase in this year's renewal rates or 6.7% after adjusting for our significant anchors.

For 2015 renewals, where we only have about 1 million square feet coming due, we've already renewed 51% of that square footage at an average increase of 7.4%. Weighted average rent per square foot, excluding anchors, is up to $21.43 per square foot at the end of the year versus $20.88 for the same time last year.

So overall, looking at all of that data, I think we've done well, despite the tougher market conditions. I've said previously, it's becoming a little harder for each quarter to maintain our exceptional occupancy level, mostly refection of the challenges we face with a few fashion retailers as well as slower growth in the Canadian economy, particularly in.

With increased competition, volatile employment levels and fluctuating consumer spending, it wouldn't surprise me to see a modest and likely temporary drop in occupancy rates over the coming quarters. We've also seen a sharp increase in a number of retail bankruptcies, which I don't see as a major issue for us, but rather a natural outcome of fluctuations in the business cycle.

With respect to CIU, we continue to see demand from retailers such as Winners, Sport Chek, Toys R Us, Michaels and good category growth in pharmacy, beer, liquor, fitness, banks and restaurants, all providing reasonable demand for space in most categories across the country. The Dollar Store industry remains strong and continues to grow and as always our core business proposition remains to provide dominant retail centers anchored by major retailers and of course in particular Walmart, all of which drive significant traffic to our centers, and which provide good opportunities for our other tenants to best serve their customer's needs and simultaneously grow their business.

With respect to challenge retailers, the recent announcement of the bankruptcy protection for Target, clearly creates a number of discussion points. Firstly, we only have two shopping centers, where Target stores were located in South Oakville and Laurentian, both are good growth markets with strong population characteristics.

Secondly, we have corporate guarantees for both of these sites, so there is little financial risk for an extended period of time. And lastly, we are working our way through the options available for both sites, and have already received interest from national tenants for both locations.

So at this stage of the process, it's difficult to predict the ultimate outcome of the significant change on the Canadian retail landscape. But I do believe it's fairly obvious that Walmart should be a net winner, and we do expect that our existing 92 Walmart anchored and shadow-anchored sites will overtime benefit from increased traffic, as some former Target sales volume flow to Walmart and the retailers within our centers will also benefit from this enhanced traffic.

Turing to other challenge retailers that we are aware of, the Jacob and Bombay, Bowring bankruptcies will have almost no affect on the portfolio, with only a very few locations impacted. We continue to expect Staples and Best Buy to look for ways to improve performance, but expect no significant adverse effect on Callaway's portfolio, again, owing to the strong drawing power of Walmart and our newer and larger centers.

For Jones New York we have three sites, all in well located Walmart anchored sites. For Smart Sets we have 11 locations, which will transition overtime to other banners, and over 50% of these deals are in the works already.

For NEXT, we have five locations, two of which are in premium outlets, which are all expected to be re-leased at same or better rents. And I should note that we do expect to reopen the currently closed Rona store in Aurora by April, as that business continues its rebuilding.

Now, individually none of these changes are material, but collectively, as I already noted, they will put some modest pressure on occupancy in the coming quarters. Let me turn to growth now, and my comments may by now become quite repetitive, but this is because our philosophy on growth is unwaivering.

We've demonstrated over multiple years that the Calloway platform can deliver a stable income stream with market-driven increases in rents based on strong tenant demand and quality assets. Building both momentum and a suite of initiatives to drive accelerated growth, while closely managing the risk is however a complex balancing act.

But I continue to believe, Calloway has excellent building blocks to achieve this, and is now actually showing the results of our hard work. I've have said no initiative will either dramatically drive enhanced growth or overstress the business, but collectively our growth drivers will ultimately provide our unitholders with both the ongoing stable platform they've come to expect and an improving distribution stream.

For 2015 and beyond assuming, of course, no major market downturn, I see growth in our FFO continue to come from modest same property rent increases, ongoing assets to capitalize on intensification opportunities on existing sites, our relationship with Simon Property Group, refinancing benefits, our pipeline of developments and earnouts totaling approximately 3 million square feet and that's excluding mezzanine loan opportunities, a growing group of properties located in major markets with a potential to convert to mixed use and of course selective accretive acquisitions. I am very conscious in both my actions and comments that investors have clearly come to expect Calloway to deliver a very stable performance.

Our strategy and tactics will continue to respect that stability, but will also recognize that business conditions both generally and in retail certainly are changing. And therefore our business model and focus has to adapt too, if we're to remain amongst the most respective and attractive REITs for investors.

The extremely successful performance of the Toronto Premium Outlets site on Highway 401 at Trafalgar continued to the end of 2014 and we saw sales volume in December 2014, up some 30% over what was already a very strong prior year. This exceptional sales performance reflects the mix of designer and other high-value labels, including new store such as Armani, ECCO Shoes, Diesel and JACK & JONES, and I think the consumers' ongoing interest in the outlet format.

Based on updated sales numbers, the stabilized yield on the Toronto site is approaching 9%, as the property continues to perform at a similar level to a mature property in major markets in the U.S. rather than still as a startup premium outlet center.

Not surprisingly, our joint venture partner Simon Property Group is extremely pleased with the performance to date, and we have ramped up our discussion extremely early compared to any norm on how future expansion will work on the site and the site changes that would be needed for an approximate 160,000 square foot expansion. Our next venture in Montreal, which opened strongly in October last year with approximately 85% of the project leased to tenants, with a further 8% to 10% of tenants committed to open by spring of this year, including HUGO BOSS, Under Armour, LACOSTE and Forever 21.

Preliminary sales numbers are very positive, and again, Simon is very pleased with the site's performance. And overtime we see this as another very successful value-driven outlet location with continued healthy returns.

We're also ramping up discussion with various retailers about locating on the 75 acre retail land we own with Simon and SmartCentre, next to the Montreal site. And clearly, this will benefit from a strong traffic already being generated.

For acquisitions, earlier in the year we added Walmart anchored SuperCentres in Edmonton and Montreal, totaling approximately 610,000 square feet, based on a 100% ownership. And with an additional 112,000 square feet of future development space.

Consistent with our efforts to build strategic relationships with key partners, we acquired a 50% interest in both sites with investor's real property funds. And these two sites represent excellent sites in major markets, with very good tenant rosters and strong growth potential.

And then in Q4, we added a smaller site 55,000 square feet Walmart shadow-anchored site in Penticton, a market where we already own another property. For our development and earnout pipeline, 277,000 square feet came on stream in the year overall, slightly lower than the recent past and that I think reflects current market conditions, but with a healthy yield of 7.8%.

And our committed pipeline for 2015 is stronger with just over 377,000 square feet, with an expected yield of around 7.1%, reflecting somewhat of a rebound. This together with a significant further pipeline of future development means Calloway can continue to deliver high-quality space and healthy yields for a number of years.

The Vaughan Metropolitan Centre development that most of you have obviously had a chance to come up and see now, where over the last few months continues to move forward, and construction of the 360,000 square foot office complex with KPMG as the lead tenant is progressing very well. Site conditions for the development are good and we have now completed up to the fourth storey of the main tower.

We have also finalized the project financing with a consortium of lenders for both the initial tower and the associated infrastructure. We are now actively moving forward to lease up the balance of the office and retail space available in this first phase with a lead broker now are supporting us on the office leasing, and we're responding to a number of RFP space for the region.

We are also in active discussion with two potential tenants for a second office tower, which is expected to be built as part of an integrated parking deck and office development. And overall, we continue to be very excited about the long-term opportunities at this site.

As we continue to develop the master plan for the site, we're looking to preserve the largest range of options for the location that we can as well as considering such things that the second tower noted, the best location for large scale retail, the construction of the Vaughan bus terminal and of course optimizing access to the site from Highway 400. And all of these is part of the overall master plan that we control.

Consistent with a focus on creating a number of growth opportunities, the team with support from SmartCentres has identified several opportunities within the portfolio to intensify existing sites with further retail space, and significantly increasing the potential value of certain sites through mixed use development. One of the most significant redevelopment is Place Bourassa in North Montreal.

We're now well-advanced with our plans to repurpose the four more anchored space. And Canadian Tire will open a new larger format Canadian Tire store in the early spring, which will more than double the size of their existing store in the market.

We're also adding an additional 32,000 square feet of CIU space within the mall and have the potential for a further 35,000 square feet of space on pads on the site. The outside of the mall has now been fully upgraded and we are simultaneously aligning the site with our existing adjacent Montreal North property to create a dominant center with over 600,000 square feet of retail space, including Walmart, Canadian Tire, Super C, Winners, IGA as well as a full range of other supporting retail.

In addition to VMC, we have identified a handful of sites with mixed use potential, totaling some 3 million square feet of new retail, office and residential space. These sites are in the early stages of zoning and with the new councils in place now, this work is speeding up.

And we've previously identified that currently the largest of these sites are the Westside Mall along Eglinton and Toronto. This site will contain the new LRT station as well as projected new GO station, immediately adjacent.

The significant increase in transit capability is supported by a densification study by the City of Toronto, which has designated this site as one of only six major growth notes along the LRT line with a particular sub-designation for tall building. Preliminary estimate show in excess of 1 million square feet of mixed-use density for the site, and we'll of course continue to move this opportunity forward in the coming months.

Two other opportunities have been identified in both Toronto and Ottawa, to provide in excess of 2 million square feet of additional mixed use density. Again, these sites are in the early stages of approval, but are receiving good support from the relevant levels of government.

So in total the combined opportunities already identified provide the potential for well over 6 million square feet of future developments for Calloway over the long-term. I've talked earlier about our need to continue to innovate in our centers and we are very pleased to continue our participation in SmartCentres exciting new venture Penguin Pick-Up on a select number of sites.

Three sites are now open and further sites are expected. In addition we have added free Wi-Fi on sites in Western Canada, as a rollout program that is underway, and we're also moving forward with digital signage on selected sites.

So these are all just the beginning of new programs to ensure we provide the best possible experience for our tenants and shoppers. I look at this overall and our portfolio of opportunities will clearly help begin moving Calloway from a business that simply owned and operated Walmart anchored shopping centers to a business with a broad set of short, medium and long-term growth initiatives, principally in major markets, and based on either existing locations or in exciting new developments.

In Q4, we completed our transition to sell seven smaller properties in secondary markets of proceeds of $111 million, and we'll continue to look for further capital recycling opportunities. And as I've said before, given the high-quality of our assets I am not expecting a significant asset disposition will occur at least in the near future.

With respect to the balance sheet, we are very well-positioned to take advantage of growth opportunities as they arise. Our unencumbered pool of assets has now grown to over $2.4 billion, debt to total assets is at 42.8% and our interest coverage has climbed to 2.7%.

As a result of all of our capital market activity over the last 12 months, we've now been able to reduce the average interest rate on our total debt portfolio by 31 basis points, which I clearly view as very positive. Essentially throughout the last 12 months, we've continue to look for opportunities to refinance our various debt obligations to take advantage of the very low interest rate environment.

We executed a number of transactions throughout 2014, all of which increased Calloway's future financial flexibility. As you will well know, debt market conditions in early 2015 continue to be extremely attractive.

We have approximately $169 million of mortgage that's maturing during the year at an average rate of 5.68% and that clearly provides significant refinancing benefits to FFO, as current 10-year fixed offerings are in the low 3% range, and we are close to finalizing commitments for all of this secure debt. A very successful $160 million 10-year debenture offer at 3.566%, which was completed two weeks ago, also reflects strong market confidence in Calloway's long-term future.

So overall, I believe all of our capital market activities have positioned Calloway very well to move forward with a strategic its agenda, while significantly improving our overall key credit metrics and future flexibility. Turning to distributions for a moment.

Our payout ratio continues to decline and is now at 84.7% versus 88.6% in 2013. Substantial decrease and well within our updated targeted range of 82% to 87%, and I expect that trend will continue.

Our current preference is to continue to look to maintain our payout ratio in this range. And over time, we expect Calloway to provide a balance of regular, modest distribution increases, while still retaining a certain amount of our cash flow to fund future growth initiatives and the platform we are building will, I believe, allow us to do both.

At this point, we call in for another year of good growth in our FFO for 2015, in the 4% to 5% range. Given the level of recent uncertainty in the retail market, we are taking a relatively conservative view at this point, but as the year progresses and we get a better view of tenant activity and the overall economy, I would expect to be even more positive on our expectations.

As I have consistently said, we're building a better Calloway for short, medium and long-term growth. And I believe we're well on the way to doing that.

Overall, I remain very excited about Calloway's future and look forward to spending time with you and our investors, continuing to discuss Calloway and its future growth. I'll close by noting how pleased I am to have Peter Sweeney now as part of the executive team.

And also note, two gentleman I mentioned at the beginning of the call, Steve Hughes in operations and Chris Coleman in acquisitions, new additions to the team as we continue to upgrade our key management capabilities. So with that, I'll turn it over for questions.

Operator?

Just with respect to your comments on the evolving retail market, I'm just wondering if that might entail additional asset sales or how you're thinking about sort of positioning the portfolio.

I don't see us looking at additional asset sales at this point, Heather. I mean, we have, if not the youngest, certainly very close to the youngest portfolio.

The sales that we made last year were to dispose off some lower growth market opportunities. So we feel pretty good about the portfolio that we've got now.

And clearly, given that 40% of our square footage, 91 of our sites are either Walmart anchored or shadow-anchored there. And with the retail conditions as they're unfolding, where as I said, I clearly believe, Walmart will be a winner out of this exercise, and therefore by association ourselves, then as I said, we feel very good about our core portfolio.

I mean, having said that, we will always look on the edges to see if there are some opportunities to continue to upgrade, but overall feel very good about the quality.

And in terms of your organic growth outlook, you've mentioned that it was 1%, which seems to be sort in line with what we've seen historically. But by the same token, you've highlighted issues with Target, Reitmans and others.

And I am just wondering, if you can kind of walk through, I guess, I would have expected maybe it to come off given some of the friction. So are you seeing better strength in some areas that's going to offset that?

And if you could just elaborate on how you sort of see that re-leasing process playing out?

I mean, I mentioned, obviously that there has been a lot of noise in the marketplace, but when you look at all of the cumulative impact of it, it is really isn't that significant in the context of a 27.5 million square feet portfolio. And I am optimistic that, I mean if I am sitting there, and particularly if I was a CIU tenant, currently located in a Target-based location where an anchor is leaving and you're thinking about what your future space location should be, if there're opportunities that exist in a very stable Walmart anchored Calloway site, then that to me would be an intelligent decision for a retailer to make about where they would be locating.

So I have some optimism that as the year progresses, that opportunity will actually turn into tangible impacts for us. So I combine those two things and overall feel that -- well, yes, I'm certainly acknowledging conditions in the short-term will be a little more challenging than we've seen, that I don't see this is a major issue for us and clearly we will work our way through it.

And in terms of timeline on the Target, I believe they've got a June outside date. Do you expect to hear back on whether your leases have been sold or whether they're coming back to you?

What's the timeframe on that?

I'm not going through that, the monitor process right now. We expect that they will come back to us.

Again, both of these locations -- as you know, all of the Target locations are well-positioned, if you will, with regard to rents, but we expect that, yes, they'll come back to us. We've had a number of queries already about the locations.

So we expect that it maybe Target who was talking to a lot of other retailers in the marketplace who are now calling us and asking us about their interest in the center. So between now and June we certainly expect to hear from them and another retailers.

Do you have any interest in buying the leases out yourself?

That's something we would evaluate depending on what it is that they bring forward. Again, we have a number of retailers, anchor, national retailers that have come to us, and expressed an interest in the centers, so it's not within our control, because it is going through the process.

So at this point, it all depends, right.

And just a final question on the CapEx, on the development side, that you've got $332 million for the next three years. Do you expect that to be evenly doled out over the next three years or is there any lumpiness to that given the VMC?

I think that a reasonably even spread is a fair expectation, Heather. So I don't think there's any significant lumpiness that would be there.

I think we have little more front-end maybe just as one or two other projects like Place Bourassa and other projects, but generally speaking if you think of it's relatively evenly spread, I think you'll be fine.

Just with respect to VMC, how should we think about the additional spending over the next couple of years? And with its fall, I guess 2016 scheduled opening, what's your target for in-place occupancy at that point?

The total capital commitment between ourselves and SmartCentre to the first phase of the development, for the first tower and infrastructure was about $190 million or so, Pammi, so that would get spent over -- obviously some has already been spent this year and next year with probably incidental amounts to trail over into 2017. As to occupancy, we don't have a specific target in place at this point.

As I've said, we've only recently added the broker into the process. We're very pleased about the level of interest being associated with the site and a number of RFPs that are now surfacing.

And I think the fact that there is a second potential tower with a totally different tenant that is interested in coming to the site is just another reflection of -- I believe our biggest issue remains awareness. Now, there were conversations that we've had with a major financial institution about the site.

The head of real estate was not aware that the subway was being built. And I found that amazing, but an opportunity, so we'll turn it around and we're actively thinking about how we over market the site to raise awareness and so on, because anybody who comes up here as you have done and others have done and becomes aware of the potential of the site, the infrastructure that exists or will be there from a transit perspective is virtually unprecedented in an urban or near-urban development.

So all of those things we think will help us as we move towards obviously leasing up certainly the first half, but now it looks like good potential for additional property as well.

And just maybe switching gears, looking at the earnouts and developments. You ended the year, I guess, $60 million of completions.

And as you mentioned that is down a fair bit year-over-year and from what you've typically done. You talked a bit about a rebound this year, but when you think about the changes, the changes you mentioned in your commentary in the retail landscape, do you expect that you'll get back up to that $150 million, $200 million range going forward?

Or is it getting tougher to secure lease commitments on some of these sites?

We have a better level of confidence as I look forward, just because as I look at what will make up a substantial portion of what those earnouts and developments are, than there what I will call more front-end loaded or we have very clear visibility to who the tenants will be, the very specific sites, and so on. So it's not a lot of square footage at the backend, with at this point no clear designated site.

So the fact that obviously somewhere like Place Bourassa will come on stream this year, et cetera, that gives me a lot more comfort certainly for 2015, and even as I look out to 2016, and I look at the detail that we reviewed with the Board yesterday. Then again, the number of designated tenants, where leases are either in place, or they, what I will, a center above in terms of discussion, then that gives me a confidence level that the numbers that we're showing certainly will trend in a much more positive tone.

And then just looking at the balance sheet, and of course these ongoing development activities, how do you feel about your funding, your capital needs between additional debt and equity at this stage?

It would have been an easy comment previously, when our units were trading well below NAV that equity was not on the agenda. Obviously, we've had a fairly descent run over the last couple of months that have put us in a position, where equity is at least a possibility.

But we've put construction financing with respect to VMC. With the capital raising that we see available in the traditional avenues of both the unsecured market where we were clearly very well received with the recent offering, I think we were twice oversubscribed in 20 minutes with our offer that went to the market.

And then as I said, on this secured side, we're virtually complete in terms of the commitments for all of the maturities this year at very healthy levels. I think we have more than sufficient funding, that's without touching a $350 million operating line that we put in place last year.

So it feels like on the debt side, there's absolutely no issues whatsoever in terms of huge flexibility from a funding standpoint. And if the size of the overall investments makes us uncomfortable in terms of slight increases in leverage, then if the market conditions were appropriate, if we were comfortable with the unit value, et cetera, then we might consider equity.

I just have a couple of questions on Target. At the end of the day, when all is said and done, do you expect to have more income than before?

I mean, the traditional answer, obviously when a anchored tenant, Michael, that was paying relatively low rents leaves, is that it depends, it depends on what's the strategy. Do you end up with a similar anchor tenant who takes all of the space, that is well aware of those market condition or market rents or low market rents, and therefore wants to enjoy the same benefits.

If you end up in a situation where you break up the box, then atypically certainly, if you're going to smaller space, then you're clearly going to see of the likelihood that you're going to have higher rents, than you were enjoying. And we've seen that in boxes on a smaller scale, where you've had a best-buy leave or down-sized, and we've split the 40,000 into two 20,000 or the 30,000 into 20,000 and 10,000 and because of the date when original lease was signed, and increases in market rents that we've been well ahead in terms of the economics, when we put in, let's say, a Dollarama or Dollar Tree into that 10,000 square feet that we freed up.

So it either depends, but I would say, it's pretty unlikely that's going to be lower. So I would view that yes, anything with very likely to be at least flat and more likely a positive.

And would you expect the Kitchener property to be broken up or is it too early for you to know that for certain, but your initial thinking?

Well, again, it goes to the rights that Target has under their lease, and to the extent they find a similar used-type tenant for the space, it will just be that. And they have rights under their lease, just like Zellers had rights under their lease when Target took over and Target simply took it over and most landlords just assumed Target would be fine handing those locations.

We have had, again lots of interest in both locations that we have with, and the two locations we have, so both are possible.

Can you talk about food covenants, is that an issue?

Well, food covenants, in both locations we have food not far away and in both locations as you know Target sells food. So it's not a big issue, because as you know Target did sell food, so that's not factoring in whole a lot.

And just switching gears for the second tower of VMC, could you give us a ballpark size of the tenants you're talking to, the two large tenants you're talking to?

One is 80,000, the other is probably 80,000 to 100,000. And one would be pure office.

Another would be, what I will call a more of a mixed-use type space, Michael. So we're in active discussion with both of those.

So I would say the discussions on the 80,000 are further advanced, and going through potential designs, et cetera. Obviously, it would be incorporated as I mentioned into a parking deck, adjacent to the new Vaughan Bus terminal.

So you'd have a multi-use building providing parking for some of the properties that will already be on site as well as general parking. So it has the ability to create some fairly innovative designs that we're quite excited about.

And for the balance of the space in the KPMG tower, is there any change in your expectations in terms of rental rates?

No. All of all the feedback that we're getting based on tenants that have RFPs in the market or the conversations that we've had with the broker certainly say that the rents that we're contemplating are within markets.

So we haven't had any people go you're crazy, that no those rents are very much reasonable for the location.

And just final question, do you expect the benefit from Walmart's expansion?

It's unknown at this point. Sorry, do you mean Walmart, that they have recently announced Walmart expansion?

Yes.

Well, just so you know, the announcement Walmart has done is an announcement to not only have new stores, but to expand into food. And as you know in our 90 locations that we have, they are not in food in every location and their plan is to be in food in every location.

So a lot of those locations are already our locations. So you can expect that in every location where Walmart is, they will want food.

And it was incorporated into their numbers that they announced.

And I do believe Michael, as I said, that there is an element that we will benefit from, or what I will call the Walmart halo effect. I mean, they clearly are very committed to Canada, they continue to invest substantial amounts of money here.

They continue to grow their portfolio and they're becoming more and more relevant to Canadian consumers. So that's more and more stores opened with food.

And on the face of it, at least, no clearly obvious direct competitor that's going to come into the market, then I think that's only going to allow them to grow further, allow them obviously to be even more price competitive. And that's atypically in retailers the positive reinforcing loop.

The bigger you get the more efficient you are, the better offer you can provide, the more you can spend on promotion, et cetera. And as we all know Canadians are very value-focused and very promotionally-oriented.

So we feel obviously clearly very good about an effect that the wagon that our horses' been hitched to.

Huw, I was just hoping you could I guess provide a little bit more context to your comments on energy and your expectations for some potential headwind there.

I mean only with respect to, not that long ago, we were a very much Eastern-Canadian centric business reflecting to a certain extent how Walmart and SmartCentre had grown their business and our presence in the west was somewhat more muted. More recently, clearly, we are an Eastern-centric business with 72% of our square footage in Ontario and Quebec, so the two provinces that are seen as the highest growth provinces in Canada for the next little while, and obviously most of those sites would be Walmart anchored.

So I think the view of the portfolio would certainly have been enhanced as the economic structure of the country was adjusted over the last little while. Now, longer term, I think people still think Western Canada will clearly be very important to Canada's long-term future.

And we will actively look to see if this change in circumstance presents opportunities for us to pick up properties that will make sense for the long term. At the same time, as we are obviously looking at properties that we can acquire now in both provinces where clearly most of Canada's population is.

The other thing I'd say if you look at where we have acquired sites, we have acquired sites where population is being located growing. So if you look at across the whole country, it's a Walmart strategy to be in markets where there is population need and there is growth and there is spending.

So wherever it is in Canada, where there Calgary, Edmonton, Winnipeg, Richmond BC, on the island Courtney, wherever it is the Walmart anchored site are dominant sites in Western Canada, in Eastern Canada, in Central Canada and our intention is to just continue doing what we're doing. We are not shifting, because energy is shifting.

We are doing what we were doing as and when the population and demand of those communities demand it.

So just wanted to be clear, this is just more of a cautionary statement and any observation or any changes that you're seeing in the recent momentum or anything else, or perhaps Q, it's reflection of your previous experience. Is it just a general caution or is there something you're alluding to?

It's much more, as you say, Alex, of a general comment. I mean the other element of energy clearly is disposable income that flows into consumer's pocket.

My prior experience shows that what happened when consumers basically had a fixed amount of money in their heads that they were willing to spend on their car. When gas prices went down, they've spent more money on servicing and on parts on their car.

When gas prices went up they deferred servicing and parts, because broadly speaking their budget only allowed certain amounts of investment. As gas prices have clearly declined substantially then I suspect certain businesses will do better in certain areas as that money gets in effect reinvested in different areas.

And then the additional amounts will flow into general disposable income, which will get spent either on day-to-day activities, or if the amounts are more substantial, then actually on more tangible, larger goods, depending on individual consumer's circumstances.

And then just on the recovery dispute provision that you booked in the quarter. I just wanted to clarify, it was one-time and it was before magnitude of the potential amount?

Yes.

Was there a trigger for resolution in the quarter?

We believe that we will resolve that relatively soon. We have had obviously ongoing discussions about resolving something.

We think we are getting closer to having that figured out.

And then just on the leasing spreads, you noted that you, I guess, delivered 6.3% for the full year. I think it was closer to 7% at Q3.

And I was just wondering if you can provide a little bit more color about what was executed in the quarter? Was there a large anchor renewal in there or something else that skewed the numbers of the quarter?

Alex, that's exactly what it was. I mean, our budgeting for our quarter, we did have anchor tenants that are coming up in the Q4.

So that's exactly what it is. So nothing unusual happened with regard to the regular CRU, mid-box, small-boxes across the portfolio.

So I think I mentioned, Alex, on an adjusted basis x anchor or two, it was 6%, 7%. So it gives you an indication of impact.

That 6%, 7% was for the full year, correct?

Yes.

Just on your outlook for the year for 4% to 5% FFO growth. I wonder if you could speak to what occupancy assumptions maybe behind that, if you do see dip partway through the year potentially from a target vacancy depending on how that plays out and where you see your end occupancy sitting in 2015?

Sam, we see that there is going to be challenges in Q1 that we are already aware of in terms of the tenants that we are aware of, the NEXT, the Jones & Jacob and so on. And we are fortunate enough that in almost all of those cases they're in Walmart anchored sites located across the country and we believe that we will not have a long term issue in terms of releasing the space.

In the short term, however, we do see some deterioration in our 99% occupancy to the extent of that is we covered over during the year or by the end of the year. So whether that's a quarter point or a half a point, we're not sure yet.

We are going to obviously be working really hard to lease up that space as and when it comes up and we have a little bit of lines of sight as to when those things are coming up, but its probably not magnitude for the short term.

So is your budget for minimum 99% at the end of the year or you're not willing to --

No, again, we're in the -- again, anywhere from a quarter-point off to half-a-point off during the year and by end of the year, maybe a quarter-point off again. The fluctuations during the year is obviously all dependent on our lease up, but we are anticipating being down from that 99% by anywhere from a quarter to a half throughout the year.

And then you could assume it's smaller at the end of the year.

And the half point we contemplate, Target being included in the vacancy there?

No, not at all. Again, it depends, right.

There is so much interest in the site that we are not anticipating that we will have downtime there from a rent perspective.

What's the length of the guarantee you have from parent there?

Well, that's something that's obviously confidential in the lease that we can't disclose to you, because we would be breaking the confidence, but you can assume that it's not short term.

And the average rent preferred on the two stores?

Again, that's in the lease that's confidential. And I don't want to trust monitors doing less for disclosing information in the document that's under CCAA, but again you should expect that it's low in line with other locations across the country.

Again, maybe just to highlight the point though, I think that Rudy's making is that we believe this to be a very temporary challenge with respect to occupancy.

The Montreal outlet, how much NOI was in Q4 and what increase would you expect for Q1 and Q2 on that project?

Unfortunately, Sam, I don't have the specific number. We will certainly find that and let you know and anybody else who is interested.

I mean, given, it was only open for two months, its not going to be a massive number. Clearly for 2015, we'll have the benefit of both a whole year and the lease up, as I indicated in the first quarter.

So it's going to be a much bigger contributor. And based on past performances, certainly if Toronto was any indication, then second year is always better than first, even though we did a lot of work on raising awareness then there will be other time when people will become aware of the site.

And there is a large SmartCentre development just over Highway 15 in Blainville, which is developing out. The Walmart is already open.

So you're getting the beginning of a substantial retail note. And as I mentioned in my comments, we're already moving forward with active discussion with new tenants for the 75 acre site, which basically horseshoes around the Montreal premium site.

So overtime, we clearly expect that that will be a very significant retail though.

And was the 85% occupancy fully rent paying for the two months that it was opened in the quarter?

Yes, it was Sam. Yes.

There were a few, as there always are, as they were in Toronto, temporary tenants that may become more permanent overtime and see typical Simon model to obviously do that. And I think I commented to a few of you that some of the American retailers were somewhat reticent about Quebec and the complexities of operating in Quebec.

But we're very optimistic just based on the discussions that we've had and so on, and we'll see now good follow-on interest as people clearly have seen that this is going to be another successful site, traffic is strong. And there's still at least one premium European retailer we're talking to that I am optimistic will absolutely be a game changer for the site.

Just finally with the changes to the senior management team, all kind of it complete now. What's your outlook for the G&A expense line in 2015?

Modest increases only, Sam. There is nothing that I see in terms of any significant increases in G&A.

We've only added one net new, let's say, VP to the team. So much as it was with Peter, I was focused on making the right decisions and taking the time to get us there.

So certainly, it's taken us a while to add all of the people that we wanted, but we're very excited about both the capabilities and quality of the people that we've added. So we think we have a very strong team now with a very varied experience base.

Just to recircle back to your outlook for 2015, 4% to 5%, I know this is the first time you've probably formalized it in your supplemental, but it doesn't seem any different than past commentary. What I would say is, perhaps the refinancing benefit has maybe increased over the past three months.

So given that, are you prepared to say where your same property NOI assumption is? I mean, we talked about 1% earlier, but it would seem to be that perhaps we're thinking something a little bit lower than that in 2015?

Tiny bit lower, Mike. And you're right that, I mean, in terms of the confidence of the number than the refinancing benefits based on the secured debenture that we were able to put -- sorry, the unsecured debentures we've been already put in place, the secured financing that we've largely got locked down, et cetera, then the refinancing is pretty much guaranteed as it were.

So we're only talking about the rest of the business. So I think as I said in my comments that the level that we are looking at, at the moment, we feel very good about in terms of the ability to deliver that.

And as we get better visibility to how the markets actually responded, some of that moving parts that are a little bit uncertain at this point. And I am optimistic that we'll end up with a bigger number.

And just in comparison, say to, the November call, you just said that your confidence in the market from a tenant demand perspective have stayed the same or gone a little bit worse?

I mean we're clearly seeing more retailer bankruptcies than we had seen at the November call. But as I've said a couple of times this morning, then I believe the target activity actually plays into our wheelhouse very strongly.

That overtime, the quality of the sites we have and the fact that Walmart is becoming a stronger and stronger force than the fact that we have such a strong commitment to them, and they to us, I think can only play in our favor over the longer-term. And we'll obviously be emphasizing that in our discussions and the work that we're doing and so on with tenants and others.

So net-net, I think we're probably flat or even depending on how all of the Walmart Target issue unfolds, maybe even a little bit more optimistic.

And just circling back to VMC, the 360,000 KPMG Tower, can you just remind me how much KPMG accounts for that space?

They have five-and-a-half floors, so they're about between 125,000 to 140,000 square feet, in what's roughly a 300,000 square foot tower, so close to half. The 60,000 is the two storey associated podium, which will be a combination of retail or retail services.

So I have no concerns at all about our ability to lease up the kind of supporting retail services. There has been very active interest from all of the people you might expect in the food services, drug, banking and other.

So we're really only talking about the balance of the office tower. And as I said, we are responding now to a number of RFPs with respect to that.

So as momentum builds, awareness increases, then obviously, I have increased optimism about our ability to lease out the balance of that tower.

And with respect to the second potential project, it sounds like you're getting closer on, would you need to see more office leasing in tower one before proceeding or would the 10 commitments you have be big enough to justify it? And what pre-leasing threshold would you be looking out for that?

That one in effect would be a 100%. So what we're talking about, it's a slightly different format.

As I indicated, it incorporates a parking deck. So with the tenants that we're discussing, we have the potential in essence that that second building would be full with what we're talking about.

So we would, obviously, just be then focusing on the balance of the first tower. And at some point, hopefully, thinking about the next relocation, either of large scale retail or whether there is the possibility of moving forward with residential, as anybody who visited up here.

So then at both ends of -- not really the site, because both of the developments that are happening are not actually on the VMC, but the two condominium towers to the East are very well developed and the residential development at Western road and the 401 has broken ground, and foundation work now is beginning at the old Paladin site. So I think that just endorses, again, the long-term potential of the total new Vaughan downtown.

And as I obviously can't resist emphasizing, we're at center right, right next to the subway, the bus, et cetera. So we clearly feel very good about again the long-term potential that we have here.

And just on, Pammi has alluded to the funding question earlier. You're leveraging the low 40% range, notwithstanding where the cost of equity is.

Is there a certain level of leverage that you're prepared to go to the fund developments or how are you guys thinking about that as it progresses?

I mean, as things have unfolded, we are probably the lowest amongst most of our peers, in terms of the leverage that we have in our balance sheet. I don't think it could be in much better shape in terms of all of the key ratios and so on.

And as I said, our access to funding, are at every contemplatable form. I've also said, at least to some people that if we saw a compelling opportunity, we'd be willing to increase leverage to a certain extent not dramatically, but certainly up some hundreds of basis points, let's say.

But not as a long-term commitment by into the model of relatively lower leverage, relatively lower payouts. I think investors are expecting that or embracing that.

So I don't see us going against that trend. But I could see us if, as I say, a compelling opportunity presented itself, we might change a little bit, but then bring it back into line overtime.

And just finally one housekeeping question for me. Just on Place Bourassa, can you just confirm, to make sure I have that straight, that does sit in the committed earnouts or the committed developments number for 2015?

Yes, it does.

Well, to those of you still on the call, thank you very much, obviously, for your time and attention. As always, we greatly appreciate it.

And we look forward to obviously meeting with you, talking with you in the coming weeks and months. Have a good day.

Bye now.