SmartCentres Real Estate Investment Trust

Huw Thomas - CEO Peter Sweeney - CFO Peter Forde - Chief Operating Officer Mauro Pambianchi - Chief Development Officer Ruby Gobin - EVP, Portfolio Management

Jenny Ma - Canaccord Genuity Michael Smith - RBC Capital Markets Alex Avery - CIBC Mike Markidis - Desjardins Capital Markets Pammi Bir - Scotia Capital

Thank you very much operator, good morning everyone on this busy Friday. Welcome to Smart REIT's Q2 2015 conference call.

I'm Huw Thomas, President, CEO with Smart REIT and my pleasure to be leading the call this morning. Joining me are Peter Forde, our Chief Operating Officer, Mauro Pambianchi, our Chief Development Officer, Peter Sweeney, our Chief Financial Officer and Ruby Gobin our EVP, Portfolio Management.

I'll make some opening remarks about the quarter overall, and add some high level comments on the transaction, we finalized on May 28th and then Peter Sweeney will talk about the funding elements of the quarter 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 refer you specifically to the cautionary language at the front of that material, which applies to any comments we make this morning.

Overall we're pleased with the results for the quarter considering the general economic climate and the overall somewhat challenging retail market conditions for certain segments of retail. FFO increased to 11.8% to 74 million and 6.1% to 51 or $0.518 on a per unit basis compared to Q2 of last year.

The increases in FFO reflect contributions from all of our growth initiatives including one month of our recent large transformative acquisition and I think a very solid performance overall. Our same property NOI in the quarter was a very consistent 1.1%.

Turning to shopping centers which are and will remain the core of our business, for the second quarter this year, our market leading occupancy level was maintained at 98.6, had we treated the two format target anchored locations which we're now redeveloping as vacant -- our occupancy would have been approximately 98%. Essentially, a number of retail bankruptcies and restructuring over the last few months have driven a short term impact on vacancies.

However relatively to the market overall I believe our performance is a clear reflection of the attractiveness of our shopping centers to a wide variety of tenants. At the end of Q2, renewals completed for 2015 lease maturities were at 72% despite ongoing rationalization by a select few of our tenants.

Weighted average rent per square foot excluding anchors is up to 21.72 square foot at the end of the quarter versus 20.13 at the same time last year over 2.8% increase. So overall looking at all of that data we've done well despite the tougher market conditions for all retail landlords.

I've said previously it's been a little hard to reach quarter to maintain our exceptional occupancy level which is mostly a reflection of the challenges that are faced by a few fashion retailers as well as slower growth in the Canadian economy, particularly I think in Western Canada with increased retail competition, volatile employment levels and we'll see what happens this morning obviously and fluctuating consumer spending. We've seen an increase in a number of retail bankruptcies which I don’t see as a major issue for us as our number is show, but rather a short term situation and a natural outcome of fluctuations in the business cycle.

With respect to CIU, we continue to see good demand from retailers such as Winners, Sport Check, Toys R Us, Michaels and category growth in pharmacy, beer, liquor, fitness, banks and restaurants, all of which provides reasonable demand for space in most categories across the country. As the Dollar Store industry also remains strong and I think we're up to 64 Dollar Stores now in our network.

Our core business proposition remains to provide value and convenience and to satisfy everyday shopping needs through our dominant retail centers which are anchored by major retailers and of course particularly Wal-Mart, all of which drive significant traffic to our centers, and which provide good opportunities for our retail tenants to best serve their customer's needs and of course, simultaneously grow their own businesses. I think it never has to remember that virtually all of our 137 shopping centers contain both a food store and a pharmacy either in a Wal-Mart store and/or as an independent retailer and in fact with many centers containing more than one of each.

And of course these categories continue to be key drivers of daily shopping paths. With respect to challenge retailers, Target's exit from Canada creates, I continue to believe longer term opportunities for us as 75% of our shopping centers are Wal-Mart anchored or shadow anchored and Wal-Mart now has become the strongest big box value oriented retailer in Canada providing even greater strength and stability to our core portfolio.

Looking specifically at the impact of announcements over the last few months, we only have as we indicated previously two shopping centers where Target stores were located and both those centers are anchored or shadow anchored by a major grocery retailer. So, traffic is still being attracted to the sites.

Both are in good growth markets with strong population characteristics and we have received already interest from national retailers for both sides but because of the magnitude of the vacancy we've taken this opportunity to focus on redeveloping both sites and we see this and we see this is the best way to maximize our long term returns from the two locations. In terms of financial consequences of the closure of the Target stores both leases have corporate guarantees which have being confirmed by the parent company and is expected that the bankruptcy process will take some time.

But we see minimal financial risk over the long term. For the shop banner we have six sites which were identified for closure with Best Buy confirming rent continues until the end of the respective lease term.

We already have three sites where other retailers have expressed interest and we are in discussion to release the space and therefore again we don’t consider this to be a major issue for us. Turning to other challenge retailers for Jones New York we have three sites, all in well located Wal-Mart anchored sites and last week’s announcements of the acquisition by Grafton Fraser should be good news for the future of these stores.

For Smart Set we have 11 locations which will transition over a number of years to other banners and 50% of those already have deals in the works. The announcement by Stern Partners who are the owners of warehouse one of their acquisition is a forma Comark locations again I think demonstrates with strong retailer off sale still attracted by access to good locations.

For [indiscernible] we've no information that our portfolio may be effected by their recent store closure announcement. But excluding their large-format stores they only represent about 1% of the portfolio in total.

So we're not concerned regarding any material impact here either. And similarly we were not affected by the GAP or Black announcements in any significant way as we only had one small store that was impacted.

So in total while individuating none of these changes are material to us collectors these have already noted they have put some modest pressure on occupancy just given the share volume of square footage which undoubtedly based on recent results appear to be affecting other landlords more significantly and us at this point which again I think is a testimonial quality of our locations. So if you turn to growth for 2015 and beyond assuming of course no major market downturn.

We still see growth in our FFO continuing to come from very stable same property rent increases continued refinancing benefits. Our ongoing efforts to capitalize on the intensification opportunities on retail side, particularly for retail.

Our continued relationship with Simon Property group. The pipeline now is developed at earn outs, which total approximately 4.7 million square feet.

Our growing group of property that are located in major markets with the potential to convert to mixed used and I’ll talk about that a little more in a moment. And of course with the addition of the SmartCenter platform potential future development with Wal-Mart and with third parties and as we demonstrated after the quarter selective accretive acquisitions over and above the recently completed major transactions.

I see this menu approach to growth opportunities where there are multiple areas where we can grow the business is key to providing a wide and flexible range of opportunity for us over the short medium and long term while at the same time mitigating risk. Overall our strategy and tactics will continue to support the stability of the core shopping center operations which are obviously key to our business.

But we'll also recognize that business conditions both generally and particularly in retailer changing and therefore our business model and focus have to adapt two if we’re remain amongst the most respective and attractive REITS for investors. Looking at some specifics we're extremely successful performance of the Toronto Premium Outlets on Highway 401 at Trafalgar continues with exceptional sales performance continuing to grow reflecting the mix of designer and other high value labels at the locations.

And not surprisingly we and our joint venture partner Simon are extremely pleased with the performance of this center to date and we have wrapped up by discussions on our future expansion will work, what site changes would be needed, et cetera. Our next venture in Montreal open strongly in October last year and we'll be in excess of 90% lease by the end of the summer with new tenants committed and going to the process of opening the stores including Hugo Boss, Under Armour, Lacoste, and Forever 21 and we're also expecting and hopping to add another strong European retailer and we'll be able to announce that shortly.

Overtime we see this as another very successful value driven outward location with healthy returns and we're also wrapping up discussions with various retailers another uses about locating on the 75 acre retail lands that we own with Simon and Penguin properties next to the Montreal site. And that clearly will benefit from a strong traffic already being generated both by the premium output location and the Wal-Mart anchored site just over the highway.

From the acquisition standpoint then we've highlighted I think recently the Smart REIT quality, well tenant assets in strong markets are clearly in short supply which really emphasize this to us for significant benefits of the 1.1 billion portfolio we closed on in May. We were however pleased that we're able to require 227,000 square foot soon to be Wal-Mart super center anchored shopping center in the middle of Maple Ridge in BC for approximately $58 million and that was obviously subsequent to the quarter end and that will certainly add to our portfolio in Western Canada.

For our development and earn out pipeline, we had 138,000 square feet come on stream in the second quarter with a yield of 6.4% and the committed pipeline for the balance of 2015 and 2016, currently sits at about 320,000 square feet with an expected yield of 6.3%, and I certainly expect that, that will grow in the coming quarters those are all the initiatives we're working on come the provision, this together with a significant further pipeline of future development which was provided by the recent transaction means Smart REIT can continue to deliver high-quality space at healthy yields for a number of years into the future. For our largest development, the Vaughan Metropolitan Centre continues to move forward and construction of the 360,000 square feet office complex with KPMG as the lead tenant is progressing very well.

KPMG have recently indicated they'll take the further 11,000 square feet on the site so the floors nine to fourteen are now fully leased and construction remains on schedule and very significantly under our original construction budget and we've now completed all of the concrete pour for the main tower and glazing is completed after the 12th floor. We're actively moving forward to lease up the balance of the office and retail space available in the first phase and have a lead broker now supporting us on the office leasing.

And now responding to a number of RFP's both from government and industrial tenants, we're looking for space with lot more activity from potential tenants, certainly happening even in the last few weeks. We're also in active discussion with two potential tenants and write the letter of intent stage for approximately 160,000 square feet in a second office tower which is expected to be built along with an integrated parking debt as part of Phase II of the development.

So overall we continue to be very excited about the long-term opportunities at this site and as we continue to develop the master plan for this site we are not surprising looking to preserve the largest range of options for the next components of the project including the best locations for a large scale retail, the construction of the Vaughan Bus Terminal and optimizing access to the site from Highway 400. Consistent with the focus on creating a number of growth opportunities the new Smart REIT integrated team is currently reviewing our entire portfolio properties looking to identify opportunities to intensify existing sites with both further retail space and significantly increasing the potential value of certain sites through adding mixed use.

Certainly, I think the trend we're seeing obviously in a number of other businesses. For us at least in addition to that large sites that we've talked about before such as the MC and Westside Mall, Eastern avenue we're actively working on.

We’ve identified a number of other large sites with mixed use potential for both new retail, office and residential space. The sites that generally in urban areas and we're now in the process of analyzing these sites in a lot more detail to provide a short, medium and long-term view of that potential in terms of returns, capital demands, et cetera.

And as I've indicated to a number of you expect to be able to share this more comprehensive information with you in the fall. For Wal-Mart specifically in addition to working on three large urban sites in Toronto and Richmond BC for the Wal-Mart's SmartCentre joint venture.

We continue to support Wal-Mart as they evolve this store growth strategy and expect to add further shopping center developments to our portfolio in due course as that work progresses. I've talked earlier about our need to continue to innovate in our centers and we are very pleased to continue our participation in SmartCentre's exciting new project Penguin Pick-Up on a select number of sites.

Four sites are now open of which three are of Smart REIT sites and there will significantly more sites expected to follow up. Consumer response has been very positive and we continue to add new retailers to the Penguin Pick-Up program and of interest our research has indicated that many of the shoppers continue to shop at the relevant center after they have come to complete their actual pick-up.

So, it's doing what it was intended which is obviously helping drive traffic to our sites. Overall, the significant portfolio growth opportunities we're developing will clear move Smart REIT from a business that only owned and operated a broad base of Wal-Mart anchored shopping centers to a business with a menu of short, medium and long-term growth initiatives, principally in major markets, based on either existing locations or in exciting new developments.

Now I'll turn things over to Peter Sweeney for a moment to comment on the financing aspects of the business.

Thanks very much, Huw. With respect to our balance sheet we are very well positioned to take advantage of growth opportunities as they arise.

Our unencumbered pool of assets is approximately $2.5 billion. Our debt to aggregate assets ratio is at 45.4% and our interest coverage ratio has now climbed to 2.9 times.

Each of these financial metrics underscores our unyielding commitment and our strong and conservative balance sheet. As a result of our capital market activity over the last three months we have been able to reduce the weighted average interest rate on our total debt portfolio by 33 basis points to 4.52% and extend also our weighted average mortgage term to 5.8 years, both of which we view as being very, very confident.

We see these financing metrics being further enhanced as the year progresses and we were able to refinance additional secured debt at materially lower interest rates upon the refinancing of maturing existing secured debt. Essentially, since the beginning of the year we have continued to look for opportunities to refinance our various debt obligations to take advantage of the very low interest environment.

We executed a number of transactions throughout the quarter all of which increased SmartREIT future financial flexibility and debt market conditions continue to be attractive. We started the year with approximately $169 million of mortgage maturities having an average rate of 5.68%.

As of July 31st we have now completed new financings or have commitments in place for a total of $488 million of an overall weighted average rate of 3.28% substantially all of which are represented by 10 year terms. For the duration of 2015 we have no remaining term mortgages left to finance and have already begin discussions to look at 2016 maturities.

On April 24th we were able to complete permanent financing for the Toronto premium outlet center for seven years payable on an interest only basis with limited resource at a very attractive rate of 3.13%. Again this reflects our conservative approach to refinancing.

Turning now to distributions for a moment, our payout ratio continues to decline and is now at 82.1% versus 84.1% in Q2 of the prior year. This represents a substantial decrease and is close to the lower end of our updated target range of 82% to 87%.

When we announced our first distribution increase at this time last year we indicated that we did not see this as a one-off initiative, but rather something that we would address from time-to-time as appropriate. On that basis we’re pleased now to provide a further increase in distributions of $0.05 per unit representing a 3.125% increase moving us from $1.60 per unit to a $1.65 per unit effective for the October, 2015 record holders.

As we look to the future we expect SmartREIT to review the appropriateness of further modest distribution increases while still retaining a certain amount of our cash flow to fund future growth initiatives. The platform that we are building will we believe allow us to do both.

And with that I’ll now turn it back to Huw.

Thank you very much Peter. Let me close with two final comments.

Firstly, on the integration of the SmartCentres platform and real estate portfolio; we’re working hard on the various issues that naturally arise to ensure a smooth integration and overall have been pleased with the process to-date and excited about the potential to be delivered. We have had as you can imagine a significant number of the meetings with our existing and potential investors and to the person they have embraced the strategic rational of the transaction have been extremely supportive and obviously we’ve seen positive indications in the capital markets of the support for what we’ve undertaken.

And secondly we’re calling for another year of good growth in our FFO for 2015. We see it in the 5% to 7% range for the integrated business so the combination of our old Calloway business and the impact of the recent acquisitions.

Given the level of recent uncertainty in the retail world I mentioned above we’re taking a relatively conservative view, but as the year continues to progress, we get a better view of tenant activity then obviously we’ll continue to update our outlook. I have, I know, constantly said we are building a better SmartREIT for short, medium and long-term growth and based on a result and the potential we see then I certainly believe they’re well underway to doing that.

So overall management remain very excited about SmartREIT future and we look forward to spending time with you and investors discussing our plans and our future growth initiatives. So with that I’ll turn it back to the operator for questions.

Huw, in the last conference call in May after the announcement of the Smart transaction you guided towards maintaining occupancy or it staying closer to the 99% level, especially given that the portfolio acquired was at 99%. Can you discuss, what's the incremental tenant departure issue you have had that resulted in occupancy coming in a bit lower?

Was it in the Calloway portfolio or was there a bit of slippage in the acquired portfolio as well?

I would say Jenny that the only real impact was with respect to how you might consider the treatment of the Target vacancies. So ex that we said we're 98.6 so we would be I think very consistent with where we were at the end of the first quarter.

Outside that and obviously there were a number of as I indicated small bankruptcy which if you add up the individual impact that small black store, small store amongst some of the other fashion retailers and so on than those might have contributed 0.1%. But outside that we haven’t seen any other trends affect us.

With respect to the Target space, can you provide a little bit more detail in terms of what your plans are? You mentioned there was some interest in the space.

Is that for the space as is, or is this pending splitting up the space and taking some time? Or have you turned away the initial interest in order to do something that might create more value over the longer term?

I'd say a combination of all three Jenny. So there is a potential still for one side at least that we made to one stop solution.

But for one of the other site than we believe it certainly will be a truly development where we will break up the box. But again in one of the sights we see potential to step back and do a more comprehensive re-development that might include some residential development and so on.

So we're looking at all of the options really to maximize the value in both sides having had this occur, it's given us an opportunity to step back and do something and maybe we wouldn’t initially contemplate the given as they say the occurrence of the Target departure it's presented an opportunity.

For the site that requires a little bit more work, what would you say is the timeframe before it starts cash flowing?

I'd say 18 months or two years, realistically.

Okay. My next question is for Peter with regards to the G&A expense.

Looks like there was quite a bit of an increase. Can you talk whether or not there were some one-time items and what we can expect for a run rate going forward?

I think it's a bit over 2%, which is tracking above the historical average.

Yes good question Jenny. The highly I think for the quarter and we've described it in the MD&A we had a change to the investing period associated with units held by our trustees.

This was suggesting by one of the unit holder rights advocate groups to our board some time ago. As a result of that suggestion or recommendation we change the investing period for units distributed or held by our trustees such that they would vest immediately on granting or being granted.

As a result of that change there was a catch up if you will from an accounting point of view that resulted in approximately in $800,000 charge to the second quarter earnings representing sort of that one time pick up for the deferred units that would otherwise have invested over a three year period. In addition to that we -- again this is perhaps good news for everyone, we took a very close look in the second quarter at devaluation of our LTIP and found given the REITS success relative to the industries in the marketplace that we had to pick up an extra $400,000 to $500,000 in LTIP cost for the quarter.

So those two items the second compliance the LTIP component obviously is a function of the value of the units relative to where the market is tracking. So I think as you mentioned we do expect moving forward that the REIT will continue to we hope performed.

Assuming that the market sees that and it desires of rewarding us accordingly we would expect that LTIP amount of $400,000 to $500,000 quarter at least for the next couple of quarters will likely continue. Otherwise from a run rate perspective I think I've mentioned to many of your colleagues since we announce the 20-20 transaction that on a run rate go forward basis we would expect the impact on an annualize basis to our G&A cost to move by about $2 million to $2.5 million again on an annualize basis as a result of bolting in the SmartCenters team.

Thank you. I just have a question on the Vaughan Metropolitan Centre.

In our supplemental information package, it says a second potential office tower now under construction, with a letter of intent stage. And you in your prepared remarks talked about two tenants.

If I say -- when you say potential, does that mean if the letter of intent does not follow through to a lease, you will just stop the project?

Yes I would say so Michael it's not our intent to build truly speculative space. We obviously have space still in the initial tower that we would expect to lease up in the due course of time.

But to the extent that we're progressing very well with the letters of intent with two separate tenants for the second tower then we feel very good about that potential, we expect nothing changes, we’ll be announcing details of that in the next little while, but if for whatever reasons it would reach some dramatic change in the intent of both of those tenants, then I don't think it will be prudent given the existing vacancy for us to go ahead and construct the second tower without any known tenancies.

You must be reading some of the -- except you said under construction, it's not actually under construction, at the moment it's in the planning phase and if we are still -- so we’re in the early stages of that planning but physical construction is not going on right now.

That's on a mission on our part, some of these pointing it out to me as we speak and so that should not say that this is under construction it is not under construction to be clear. There's lots of planning, lots of activity everything else like that but yes, the second tower is not being built and will be built unless we have guaranteed tenants in fact.

Okay, and so 160,000 feet is from what I understand are the two tenants under letter of intent. How big would the building be if you did decide to go through?

It's somewhat of a hybrid building in terms of its construction because of the nature of one of the tenants, we don't think at this point that we would add incremental space to the tower, to make it larger, so it would be smaller than the BMC tower, but we're comfortable with that based on the nature of the building and so on.

And what type of -- let's say this does all go through. What -- roughly when would it be complete?

2018 I would say, practically speaking where we are in terms of the development phase and then everything else. So, we have the first tower come on stream obviously at the end of 2016 you'll have the subway open, at this point based on everything we know and being it now on plan at the end of 2017 and this tower will open in 2018.

And I firstly -- I'd like that as I sort of talked about a number of times, I view all of the growth initiatives that we've has been a menu or portfolio or whatever words you want to use and that I see when we have growth occurring it's going to come from multiple avenues, in any one year we may have a Simon expansion, the new Simon property or VMC office tower potentially a residential development, other retail or mixed use expansion, our pipeline all of those things will contribute and then in any one year you're going to have a combination of any of those things that we'll deliver growth in addition to standard same property growth and so on.

Okay. And if one of those tenants at the letter of intent stage now went away for whatever reason, could the other tenant go into the first tower, the KPMG tower?

I don't think so, no, just because of the nature of the tenancy and the nature of the space that they would be looking at. So, as I said we feel at this point very comfortable with both of the future tenants while we're talking of letters of intent, we're at the third stage with one of the tenants and we're down to the sort of dotting the I’s and crossing the T’s and the other one, our conversations have been substantial a lot of approvals are in place, et, cetera.

So we're not seeing anything that we would still the second tower at this point, but until obviously everything is finally signed and so on, we don't feel comfortable and that would either commit to the tower or commit to the outside world that we have a second tower that we would move forward to and we were always conservative in terms of how we think about these things and that's just reflecting that conservatism.

Okay, and just switching gears over to Reitman's. I think you suggested that all of the stores would be either switched to other Reitman's banners or would be let to new tenants.

What do you anticipate the split to be between other Rietman banners and new tenants altogether?

I would say half and half, Michael is how we feel at the moment in terms of the conversations we're having and so on. So, I think as Reitman's continuing to look at their business and to understand where they see growth potential in certain segments of their business and in other parts like Smart Set and as look at obviously to redeploy the store assets and with REIT owns the opportunity then a typically as for a lot of our vacancies they're in, Wal-Mart anchored shopping centers where there's good demand for space and at the size of the is obviously relatively modern and that size of store is obviously a lot easier to fill than a 100,000 square foot that might open up.

And lastly, are you still demand from banks?

Yes, absolutely, so despite conversations that might happen about e-banking and the growth of e-commerce and a whole variety of different ways. Banks are still seeing a physical presence as part of their growth strategy, so be it in the BMC, we're actually very close to finalizing lease with the bank with respect to that location and actually conversations with other banks over and above the first one, so we might end up with multiple banks even in the first half and the another sites will certainly seeing demand from bank as well.

Thank you and congrats on a strong quarter. Don't have many questions, I was just listening to your commentary about the opportunities that you are exploring now that you have the SmartCentres development platform.

It sounds like the initial focus maybe just taking a fresh look at the Calloway portfolio. But are there other initiatives that you are discussing or thinking about in terms of what you do with this new in-house capability?

As I said before Alex, and you are comments exactly right, that the first thing obviously where our whole business is shopping centers. So looking at the 137 shopping centers we have and understanding what opportunities exist with respect to intensification of those sites from a retail perspective then it’s stepping back and going if we take literally a short medium and long-term and short, medium 5, 10, 15 year perspective on what might the opportunities be, either if retail trends changed and vacancies increased or if transfer expansion plans are actually fulfilled or other things happen, than what’s the potential that we have across all of our sites with respect to mixed use in whatever form that might be and beginning to think about now what approvals we need to put into place or zoning changes would be need and so on that we would be ready both now but also well into the future to maximize the potential of the properties that we have.

So some projects will happen sooner because we see redevelopment opportunities now either because of vacancies those we’ve talked about the Target or other sites. Others realistically short the sites are full and that the economic equation to look at mixed use would not make sense for us, because with in place rent the economics has changing the development simply are not appropriate.

But overtime because of their location and because of their potential than they may create value and we think is appropriate to start to put the building blocks in place now to make sure that those if opportunities crystallize, we’re absolutely ready to go. Over and above that it’s a natural occurrence that as we’re actively looking for new sites for Wal-Mart or we’re going through our process than other opportunities will occur.

As I said we’ve acquired the most experienced retail real estate development team in their country by far and obviously the relationships with the team has the work that they’re doing in terms of driving the streets, looking for opportunities well I think overtime crystallize other opportunities which maybe either redevelopment or other opportunities that will move forward. So with back to back portfolio approach where we’ll just leverage all of the skills in the assets we have and look for the most appropriate way of crystallizing value overtime.

Okay. That’s great colors.

Thank you.

Thanks, good morning. Just a couple of quick ones for me here.

Peter, on the Target space that went dark during the quarter, are you continuing to book income given that you have the indemnity in place for the time being or have you stopped looking in there?

At least as of the end of the second quarter Michael we continue to accrue revenue for the subject Target space I think it’s appropriate as we now enter Q3 to review that process given some of the IFRS constraints. We’re also going to I think seek some input from our peer REITs to see what they too maybe doing and we’ll have I think a little more visibility for the group on that as we move forward and have our Q3 disclosure in November.

Okay. And we are obviously aware of some of the small tenant issues and isolated incidents in the --.

Sorry, maybe just for the group’s benefit. Keep in mind that we do have guarantees in place for both of those properties, both of those target properties from the parent company in United States and there has been nothing that they have set or done so far to suggest that they would not be prepared to honor their commitments.

In fact the exact opposite we have specific indication from them that they will honor their guarantee but not surprisingly they expect everybody to go through the process and the process being the bankruptcy filing, efforts on our parts to mitigate and so on. But ultimately we at least have no concerns about the ultimate realization of the amounts that under the guarantees they provide.

Understood, Just switching over to the retail environment and obviously you're not immune, but if you hold up well in a few isolated incidents, rationalization and bankruptcies that you spoke to. I just noticed here as well that the lease termination income for the last two quarters has been fairly elevated.

Wondering if you give us some color on what specifically has been driving that. Obviously closings, but just wondering if it was a particular retailer or particular large site.

No it's not actually not any specific retailer what we're doing is that tenants you are continuing to either rent and have told us they’ve might even one at downsize their store or relocate. What we're doing is we're having them continue to operate and then as and when we find replacement tenant that we think suits the shopping center, we’re going them saying okay now you can exist and then we're taking that big buy out.

So it is being strategically driven by not just there would probably a lot more tenant I would say, hey as you know we would like to like the future shop for example who have closed a few occasions but they are any leases, they're continuing to pay rent and we have them continue to pay rent until we can utilize the space in a way that serves us better. So no there is no one specific tenant that to be consult.

[indiscernible] is because of us the attractiveness of our sites. I believe the relationships that we have with our tenants is strategic to the extent of it we are part of their discussions.

We've always taken their view that we want to have tenants for the long term and that I read some people might say maybe slightly below market that we would rather have the tenants be successful and we be successful. So we've part of the discussion as they think about their store strategies and so on.

Okay, that is helpful, thanks. And just lastly on another technical question.

Peter, the CAD2 million to CAD2.5 million annualized increase of G&A for the integration of the SmartCentres team, could you just remind me is that going to be net -- is that a net number net of any related income that the platform earns, or does that flow through the income statement somewhere else?

So the simple answer is the 2 million to 2.5 million is net of any other recoveries Mike that would be forthcoming from a variety of sources. Those sources would principally be in the areas of recoveries directly from properties through recoveries from tenants so to speak.

A second element would be from recovery income charged to the Penguin properties for work done on their behalf. And then lastly from charging amounts to the various capital projects that are being done now by the RIET the ownership structure would suggest the RIET owns all perhaps a portion of.

So those are the three buckets if you will that the aggregate of overall G&A cost will be a portion to the amount that otherwise would not fall into any or all of those free buckets, nets down to the $2 million and $2.5 million number.

Just looking at the VMC, it's pretty encouraging to see where you are in terms of cost or construction coming in well below budgets. Can you just comment on how does that change your expected yield and the actual cost that all-in will be incurred?

You are right Pammi in terms of encouraged, obviously we're delighted and best estimates at this point is where between $80 million and $20 million below what we originally contemplated with respect to construction budget. I think Peter has also previously indicated that we -- with his efforts with respect to financing over the term of the financing that we put in place where in effect of blocking constructing financing savings that’s was pro forma there or in the range of 5 million.

So I'd say we're solidly in the 6% to 7% range with respect to the yield that we will generate of this first half and firstly at least for the first ventures that we've had and given all of the complexity associated with the site, the inter relationship with the subway development and everything else like that and as I say given this is the first office development that we have ever done at substance there was a small development in Ottawa that’s the forma SmartCenter team executed on. I'm very pleased with that and I think investments in the market generally should be very encouraged that we're demonstrating that level of capability and in area that obviously is relatively in it's infancy for us.

But clearly would be a more important part of the business going forward.

Thanks. That's certainly helpful.

In terms of the -- I'm just looking at the earn outs and developments, on the 324,000 of committed space. The yields on that, I think you disclosed are in the low 6%s.

Can you provide some color on why it is so low? Are these perhaps some projects in more urban centers?

I'm trying to get a sense of that compared to what you've typically done which has been close to 7% and higher.

No, I think it just is a function of when these projects -- these specific projects come alive overall that is our range that's higher range but again in any specific quarter or any specific period that they should be higher or lower and the other things keep in mind we're viewing all of these deals that you're looking at as retail development and right now we're going through that exercise of reviewing the portfolio for this pipeline to determine where we have mixed use and intensification which is not built into that deal. So again right now we're looking at being conservative and building it out on a retail perspective as and how we had actually acquired these properties over time and as you know we update the pro forma and forecasts for each of the properties every quarter so, that's where it is for this quarter and again stay tuned as we finished our classification and mixed use review in the portfolio.

And at this time we feel with all the work that Peter has done on our cost of debt and the fact that the market is beginning to at least give us some credit with respect to I think the balance stability and growth that we’re demonstrating then our overall cost of capital is going down and so with the relative spread between cost of capital and the yield that we're earning is increasing which is obviously a positive trend.

And then maybe just looking at some commentary in the past about a possible U.S. entry alongside perhaps Wal-Mart, where does that -- thought process as of today?

It's still something which is on the radar stream, we have had some initial discussions and are going through the process to at least understand what size of the opportunity might be, what the structure or elements of that might look like, obviously more recently you’ve had some other businesses leaving United States, but we would still view this as potentially at least of exciting opportunity because of the partnership or the relationship that we would leverage et, cetera. But, no commitments in anyway, just very much at the exploratory stage at this point, but we will continue to explore and understand if it does represent a viable and attractive growth opportunity for us and as and when we come to those conclusions then obviously we would be pleased to share them and highlight how we would progress and everything else like that.

To be clear, it would be tied to the Walmart relationship.

Yes, I am not believing that it would be appropriate given all of the other opportunities that we have, to be thinking about going to the United States without some form of clear commitment in terms of relationship. It may not be in the same structure as the existing mall in Canada or initially that might develop overtime, we don't know, but it certainly would not be the idea that we would go to United States alone, it would only be because we see opportunities to help a key relationship that we have with their growth strategy that would in turn provide opportunities for us.

Thank you very much operator and thank you all obviously for joining us. We understand how busy you are at this time of the quarter, so we very much appreciate your time.

Peter and I and others are available should there be any follow-up questions otherwise obviously have a great day and look forward to speaking to you soon. Thank you.