Primaris Retail REIT
TSX : PMZ.UN

Primaris Retail REIT

May 03, 2007 18:01 ET

Primaris Retail REIT Announces First Quarter Financial Results and Acquisitions Update

TORONTO, ONTARIO--(CCNMatthews - May 3, 2007) - Primaris Retail REIT (TSX:PMZ.UN) is pleased to report a 14.3% increase in net operating income for the first quarter of 2007, as compared to the first quarter of 2006.

President and CEO, Michael Latimer, commented "this quarter was very productive for Primaris. Two of our three redevelopments started to come back on stream during the first quarter and they should all contribute meaningfully to growth in 2007. The projects have been very well received in their respective markets and came in on time and on budget. Moreover, we are pleased to have started two more redevelopments, at Place du Royaume and Midtown Plaza. These projects should enhance the respective assets' market position, increase net operating income and build unitholder value."



Highlights

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($000's, except per unit amounts) Q1 2007 Q1 2006
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Funds from operations (i) $20,234 $17,444
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Funds from operations/unit fully diluted (i) $0.345 $0.341
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Net Operating Income $30,569 $26,732
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Net Operating Income - same properties $27,914 $26,732
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Distributable income $18,401 $16,351
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Distributable income/unit fully diluted $0.314 $0.320
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Net Income $3,730 $3,509
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Net Income/unit fully diluted $0.064 $0.069
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Debt to gross book value 47.7% 48.0%
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(i) The 2006 figures have been re-stated.


Funds From Operations

- Funds from operations for the first quarter ended March 31, 2007 was $20.2 million or $0.345 per unit fully diluted, up 1.2% on a per unit basis from the $17.4 million, or $0.341 reported for the first quarter of 2006.

Net Operating Income

- Net operating income for the first quarter ended March 31, 2007, was $30.6 million, substantially higher than the $26.7 million recorded in the first quarter of 2006. The large increase was driven by acquisitions and by improved results from assets owned during both periods.

Same Property - Net Operating Income

- Net operating income for the first quarter ended March 31, 2007, on a same property basis, increased 4.4% over the comparative three-month period. Excluding the net negative effect in 2007 of lease termination fees the increase in same-property NOI would have been 6.3%.

Distributable Income

- Distributable income for the first quarter ended March 31, 2007 was $18.4 million, or $0.314 per unit fully diluted, as compared to $16.4 million, or $0.320 per unit fully diluted, reported for the first quarter of 2006.

Operations

- The REIT renewed or leased 137,132 square feet of space during the first quarter. The weighted average new rent in these leases, on a cash basis, represented a 11.7% increase over the previous rent paid.

- Overall occupancy was 97.1% at March 31, 2007 as compared to 94.8% at March 31, 2006 and 97.0% at December 31, 2006. The occupancy rate has increased from March 31, 2006 due to leasing activity at redevelopment projects during 2006 and 2007.

- Same-tenant sales, for the nine properties owned during all of the 24 months ended February 28, 2007 increased 4.6% to $496 per square foot as compared to the previous 12 months.

- The first quarter results included seasonal revenues of $1.8 million, the same as the $1.8 million recorded in the first quarter of 2006.

Financial Results

Funds from operations for the three months ended March 31, 2007 was $20.2 million or $0.347 per unit basic ($0.345 fully diluted). This compares to funds from operations of $17.4 million or $0.345 per unit basic ($0.341 fully diluted) earned during the three months ended March 31, 2006.

Net income for the three months ended March 31, 2007 was $3.7 million or $0.064 per unit (basic and fully diluted). This compares to net income of $3.5 million or $0.069 per unit (basic and fully diluted) earned during the three months ended March 31, 2006. The change in net income reflects the positive impact of acquisitions and operations, offset by the negative impact of accounting policies requiring accelerated depreciation of acquired assets.

Distributable income was $18.4 million for the quarter ended March 31, 2007, or $0.315 per unit basic ($0.314 fully diluted). This compares to distributable income of $16.4 million or $0.324 per unit basic ($0.320 fully diluted) earned during the three months ended March 31, 2006.

The REIT acquired one property at the end of the first quarter of 2007. This property did not contribute significantly to operations throughout the three months ended March 31, 2007. The REIT acquired four properties on June 14, 2006 and made a fifth investment during the fourth quarter of 2006. These five properties and the related debt and equity financings explain a significant amount of the difference between the results for the current period and the comparative period. These acquisitions contributed to the financial results in 2007 but made no contribution to results for the comparative period.

The distribution payout ratio for the first quarter of 2007, expressed on a per unit basis as distributions paid divided by fully diluted funds from operations was 85.5% as compared to a 83.6% payout ratio for the first quarter of 2006.

At March 31, 2007, the REIT's total enterprise value was approximately $1.91 billion (based on the market closing price of Primaris' units on March 31, 2007, plus total debt outstanding). At March 31, 2007 the REIT had $720.2 million of outstanding debt equating to a debt to total enterprise value ratio of 37.7%. The REIT's debt consisted of $712.1 million of fixed-rate senior debt with a weighted average interest rate of 5.6% and a weighted average term to maturity of 8.7 years, and $8.1 million of 6.75% fixed-rate convertible debentures. The REIT had a debt to gross book value ratio, as defined under the Declaration of Trust, of 47.7%. During the three months ended March 31, 2007, the REIT had an interest coverage ratio of 3.0 times as expressed by EBITDA divided by net interest expensed. The REIT defines EBITDA as net income increased by depreciation, amortization, interest expense and, if applicable, income tax expense. EBITDA is a non-GAAP measure and may not be comparable to similar measures used by other Trusts.



Operating Results

Net Operating Income - Same Properties

Three Months Three Months Variance to
Ended Ended Comparative Period
Favourable/
March 31, 2007 March 31, 2006 (Unfavourable)

Operating revenue $ 50,454 $ 48,008 $ 2,446
Operating expenses 22,540 21,276 (1,264)
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Net operating income $ 27,914 $ 26,732 $ 1,182
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The same property comparison includes only sixteen properties that were owned throughout both the current and comparative three-month periods. Net operating income, on a same property basis, increased $1,182, or 4.4%, over the comparative three-month period.

Net operating income, on a same property basis, would have increased 6.3% if one allowed for the net change in lease termination income between the two periods.

Tenant sales

Tenant sales per square foot, on a same-tenant basis, have increased 4.6% to $496 in the 12 months ended February 28, 2007. Total tenant volume has increased by 7.2% when comparing sales for the same properties.



Same-Tenant
Sales per Square Foot Variance
2007 2006 $ %
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Aberdeen Mall $ 445 $ 431 $ 14 3.2%
Cornwall Centre 447 419 28 6.7%
Dufferin Mall 530 527 3 0.6%
Edinburgh Market Place 409 397 11 2.8%
Midtown Plaza 509 475 34 7.1%
Northland Village 455 409 46 11.3%
Orchard Park 558 526 31 6.0%
Park Place Mall 467 442 25 5.8%
Stone Road Mall 512 510 2 0.4%
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$ 496 $ 474 $ 22 4.6%
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All-Tenant
Total Sales Volume Variance
2007 2006 $ %
----------------------------------------------------
Aberdeen Mall 54,893,104 $ 53,200,060 $ 1,693,044 3.2%
Cornwall Centre 68,566,798 63,624,684 4,942,114 7.8%
Dufferin Mall 85,876,645 87,075,165 (1,198,520) (1.4%)
Edinburgh Market Place 7,039,984 5,975,218 1,064,766 17.8%
Midtown Plaza 109,611,889 100,283,409 9,328,480 9.3%
Northland Village 41,757,415 36,995,346 4,762,069 12.9%
Orchard Park 133,905,777 119,545,025 14,360,752 12.0%
Park Place Mall 73,867,488 68,113,902 5,753,586 8.4%
Stone Road Mall 114,444,582 108,917,043 5,527,539 5.1%
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689,963,683 $ 643,729,852 $ 46,233,830 7.2%
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The REIT's increase in sales per square foot of 4.6% is more favourable than the 3.2% national average tenant sales increase for the same period, as reported by the International Council of Shopping Centres for the 12 months ended February 28, 2007. The REIT's sales productivity of $496 is lower than the ICSC average of $550, largely because the ICSC includes sales from super regional malls which have the highest sales per square foot in the country.

Leasing activity

Primaris Retail REIT's property portfolio remains well leased.

The portfolio occupancy rate increased during the first quarter to 97.1% at March 31, 2007, compared to the 94.8% at March 31, 2006 and 97.0% at December 31, 2006. These percentages include space for which signed leases are in place but where the tenant may not yet be in occupancy.

The REIT leased 137,132 square feet of space during the first quarter. This represents 57 leases of generally smaller stores. Approximately 61% of these were renewals of existing tenants with weighted average new rents, on a cash basis, representing a 11.7% increase over the previous rent paid.

Development Activity

The REIT has launched two new redevelopment projects in 2007 and continues the planned execution of three redevelopment projects started in 2006.

In mid April the REIT agreed to terminate the lease of an 86,500 square foot Bay department store at Place du Royaume located in the Saguenay, Quebec. The store will close no later than early June, 2007. The plan is to reconstruct the existing space for use by other retailers. Conditional Offers to Lease are in place for approximately 51,000 square feet or 60% of the leaseable area of the project. The common area of the mall will be extended through the former department store and reconnect with the mall on the other side of the store, thereby improving customer circulation throughout the mall. As part of this new circulation plan a small part of existing common area will be backfilled by retail use. The budgeted cost of this project is approximately $14 million. The REIT expects there will be 12 months of downtime in the former department store space and that there will then be 7 months of downtime while the backfill of existing common area occurs. The project is anticipated to generate a positive incremental return on the property.

In early April the REIT demolished a 25,000 square foot single-storey office building that formed part of Midtown Plaza in Saskatoon. The previous tenant paid rent until March 31 and then vacated the premises. Work is underway to convert the site to a paid parking lot, with the expectation that the lot will be operational at some point during the third quarter of 2007. This $4.8 million redevelopment also includes the renovation of the existing food court, new washrooms for the food court and the conversion of a former theatre space to retail use. The conversion of the former theater space and the renovation of the food court will commence in the second quarter of 2007 and be ready for tenants in the beginning of the fourth quarter of 2007. The redevelopment is projected to have a positive impact on the property.

During 2006 Primaris commenced a $30.0 million redevelopment project at Stone Road Mall in Guelph, Ontario. As at March 31, 2007, the first of two phases is nearing completion and $21.5 million has been incurred and capitalized. The first phase of the redevelopment included the re-demise of the former Zellers store, the conversion of a theatre space to retail use and the addition of a new food court. The second phase is an interior renovation of the remaining portion of the property, which commenced in April 2007. The re-demise of the Zellers store and the new food court were completed on time and on budget and the renovated areas opened to the public in November 2006. Management anticipates these enhancements will have a positive effect on profitability of the property. Leasing on the redevelopment is 98% complete.

In the first quarter of 2006, the REIT commenced a $23.0 million redevelopment at Orchard Park in Kelowna, BC. As at March 31, 2007, $17.4 million has been incurred and capitalized. This redevelopment included an expansion and the re-demise of the former Wal-Mart store, which resulted in 60,000 square feet of in-line tenant space and a 42,000 square foot Sport Chek store. The redevelopment was completed on time and on budget. The balance of the stores are expected to open in the second quarter of 2007. The majority of the new CRU spaces and the Sport Chek store opened in the beginning of November 2006. Management expects the positive impact of this project to materialize starting in 2007. Leasing on the redevelopment is currently 87% complete.

Early in the second quarter of 2006 the REIT began an $11 million capital program at Dufferin Mall, located in Toronto, Ontario. The first phase of work included: interior flooring, ceilings, lighting, washrooms and improved communications and electrical distribution. As at March 31, 2007, $5.2 million has been incurred and capitalized. The remaining phase is a refurbishment of the exterior of the property, including landscaping and refurbished entrances which commenced in April 2007.

Acquisitions
In late March the REIT acquired a small property in downtown Toronto at a $19.2 million cost. This income producing asset currently comprises both retail and office use. Management expects that in the medium term this asset should generate additional returns through redevelopment.



Comparison to Prior Period Financial Results


Variance to
Three Months Three Months Comparative Period
Ended Ended Favourable/
March 31, 2007 March 31, 2006 (Unfavourable)

Revenue
Base rent $ 33,093 $ 28,611 $ 4,482
Recoveries from
tenants 19,558 16,976 2,582
Percentage rent 725 712 13
Parking 1,404 1,137 267
Interest and
other income 1,532 1,091 441
------------ ------------- ------------
$ 56,312 $ 48,527 $ 7,785
Expenses
Operating 24,063 20,967 (3,096)
Interest 10,125 8,739 (1,386)
Depreciation and
amortization 16,321 13,776 (2,544)
Ground rent 290 309 19
------------ ------------- ------------
$ 50,798 $ 43,791 $ (7,007)
------------ ------------- ------------
Income from
operations 5,514 4,736 778
General and
administrative 1,783 1,227 (557)
------------ ------------- ------------
Net income $ 3,730 $ 3,509 $ 221

Depreciation of income-
producing properties 15,347 13,412 1,935
Amortization of
acquired deferred
recoverable costs 168 165 3
Amortization of
leasing costs 974 364 610
Accretion of
convertible debentures 15 (6) 21
------------ ------------- ------------
Funds from operations
(i) $ 20,234 $ 17,444 $ 2,790
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Funds from operations
per unit - basic (i) $ 0.347 $ 0.345 $ 0.002
Funds from operations
per unit - fully
diluted (i) $ 0.345 $ 0.341 $ 0.004
Funds from operations
- payout ratio (i) 85.5% 83.6% 1.9%
Distributable income
per unit- basic (ii) $ 0.315 $ 0.324 $ (0.009)
Distributable income
per unit- fully
diluted (ii) $ 0.314 $ 0.320 $ (0.006)
Distributable income
per unit- payout
ratio (ii) 90.8% 89.1% 1.7%
Distributions per unit $ 0.295 $ 0.285 $ 0.010
Weighted average units
outstanding - basic 58,382,528 50,527,090 7,855,438
Weighted average units
outstanding - fully
diluted 59,109,252 52,141,865 6,967,387
Units outstanding,
end of period 58,491,743 50,940,143 7,551,600


Notes:
(i) Certain 2006 figures have been re-stated
(ii) The reconciliation of GAAP net income to distributable income is in
the appendices


Supplemental Information

The REIT's consolidated financial statements and Management's Discussion and Analysis for the quarter ended March 31, 2007 are available on the REIT's website at www.primarisreit.com.

Forward-Looking Information

The MD&A contains forward-looking information based on management's best estimates and the current operating environment. These forward-looking statements are related to, but not limited to, the REIT's operations, anticipated financial performance, business prospects and strategies. Forward-looking information typically contains statements with words such as "anticipate", "believe", "expect", "plan", or similar words suggesting future outcomes. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed, projected or implied by such forward-looking statements.

Examples of such information include, but are not limited to, factors relating to the business, financial position of the REIT, operations and redevelopments including volatility of capital markets, consumer spending, retail leasing demand, strength of the retail sector, price volatility of construction costs, availability of construction labour and timing of regulatory and contractual approvals for developments.

Although the forward-looking statements contained in this document are based on what management of the REIT believes are reasonable assumptions, forward-looking statements involve significant risks and uncertainties. They should not be read as guarantees of future performance or results and will not necessarily be an accurate indicator of whether or not such results will be achieved. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause actual future results to differ from targets, expectations or estimates expressed in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, economic, competitive and commercial real estate conditions, unplanned compliance-related expenses, uninsured property losses and tenant-related risks.

Non-GAAP Measures

Funds from operations ("FFO"), distributable income ("DI"), net operating income ("NOI") and earnings before interest, taxes, depreciation and amortization ("EBITDA") are widely used supplemental measures of a Canadian real estate investment trust's performance and are not defined under Canadian generally accepted accounting principles ("GAAP"). Management uses these measures when comparing itself to industry data or others in the marketplace. The MD&A describes FFO, DI, NOI and EBITDA and provides a reconciliation to net income as defined under GAAP. FFO, DI and EBITDA should not be considered alternatives to net income or other measures that have been calculated in accordance with GAAP and may not be comparable to measures presented by other issuers.

Conference Call

Primaris invites you to participate in the conference call that will be held on Friday, May 4 at 8:30 am EDT to discuss these results. Senior management will speak to the results and provide a brief corporate update. The telephone numbers for the conference call are: 416-641-6114 (within Toronto), and 1-866-542-4238 (within North America).

Audio replays of the conference call will be available immediately following the completion of the conference call, and will remain active until May 11, 2007. The replay will be accessible by dialing 416-695-5800 or 1-800-408-3053 and using the pass code 3220214#.

The REIT is a TSX listed real estate investment trust (TSX:PMZ.UN). The REIT owns 21 income-producing properties comprising approximately 8.0 million square feet located in Canada. As of April 30, 2007, the REIT had 58,523,033 units issued and outstanding.



PRIMARIS RETAIL REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
(In thousands of dollars)

March 31, 2007 and 2006

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2007 2006
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Assets

Income-producing properties $ 1,227,097 $ 1,220,618
Deferred costs 34,016 37,432
Rents receivable 6,243 5,115
Other assets and receivables 43,030 39,700
Cash and cash equivalents 63,909 99,328

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$ 1,374,295 $ 1,402,193
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Liabilities and Unitholders' Equity

Liabilities:
Mortgages payable $ 712,183 $ 718,119
Convertible debentures 8,117 8,955
Accounts payable and other liabilities 34,014 47,680
Distribution payable 5,748 5,739
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760,062 780,493

Unitholders' equity 614,233 621,700

Commitments and contingencies

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$ 1,374,295 $ 1,402,193
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PRIMARIS RETAIL REAL ESTATE
INVESTMENT TRUST

Interim Consolidated Statements of Income
(In thousands of dollars, except per unit amounts)

Three months ended March 31, 2007 and 2006
(Unaudited)

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2007 2006
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Revenue:
Base rent $ 33,093 $ 28,611
Recoveries from tenants 19,558 16,976
Percentage rent 725 712
Parking 1,404 1,137
Interest and other 1,532 1,091
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56,312 48,527

Expenses:
Property operating 13,788 11,821
Property taxes 10,275 9,146
Depreciation 15,347 13,412
Amortization 974 364
Interest 10,125 8,739
Ground rent 290 309
General and administrative 1,783 1,227
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52,582 45,018

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Net income $ 3,730 $ 3,509
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Basic and fully diluted net income per unit $ 0.064 $ 0.069

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PRIMARIS RETAIL REAL ESTATE
INVESTMENT TRUST
Reconciliation of Net Income to Funds from Operations
(In thousands of dollars)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 2007 March 31, 2006
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Net income $ 3,730 $ 3,509
Depreciation of income producing
properties 15,347 13,412
Amortization of acquired deferred
recoverable costs 168 165
Amortization of leasing costs 974 364
Accretion of convertible debentures 15 (6)
--------- ---------
Funds from operations $ 20,234 $ 17,444
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Funds from Operations, which is not a defined term within Canadian generally accepted accounting principles, has been calculated by management, using Canadian generally accepted accounting principles, in accordance with REALPac's White Paper on Funds from Operations. The White Paper defines Funds from Operations as net income adjusted for depreciation and amortization of assets purchased, amortization of leasing costs and accretion of convertible debentures. Funds from Operations may not be comparable to similar measures used by other entities.



Reconciliation of Net Income to Distributable Income
(In thousands of dollars)

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Three Months Ended Three Months Ended
March 31, 2007 March 31, 2006
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Net income $ 3,730 $ 3,509
Straight line rent (433) (507)
Depreciation of income producing
properties 15,347 13,412
Amortization of acquired deferred
recoverable costs 168 165
Accretion of convertible debentures 15 (6)
Above and below market leases (196) 16
Amortization of debt premiums (166) (238)
Amortization of hedge gain (64) -
--------- ---------
Distributable income $ 18,401 $ 16,351
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Distributable income, which is not a defined term within Canadian generally accepted accounting principles, has been calculated in accordance with the terms of the Declaration of Trust. Distributable income may not be comparable to similar measures used by other companies. The REIT defines distributable as net income less straight-line rent adjustment, plus depreciation and amortization of acquired leasing costs and debt premiums, plus accretion of convertible debentures, less amortization of above and below market rents and any other adjustments the Trustees deem necessary. Other adjustments may be applicable in future years if, for example, the REIT were to incur gains or losses on sale of assets, or future income taxes.



Calculation of Net Operating Income
(In thousands of dollars)

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Three Months Ended Three Months Ended
March 31, 2007 March 31, 2006
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Revenue $56,312 $ 48,527
Less: Corporate interest and
other income (1,390) (519)
Property operating expenses (13,788) (11,821)
Property tax expense (10,275) (9,146)
Ground rent (290) (309)
--------- ---------
Net operating income $ 30,569 $ 26,732
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Contact Information

  • Primaris Retail REIT
    R. Michael Latimer
    Chief Executive Officer
    (416) 865-5353
    or
    Primaris Retail REIT
    Louis M. Forbes
    Senior Vice President, Chief Financial Officer
    (416) 865-5360
    Website: www.primarisreit.com