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Edited Transcript of CUF.UN.TO earnings conference call or presentation 8-Aug-19 3:00pm GMT

Q2 2019 Cominar REIT Earnings Call

QUEBEC Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Cominar REIT earnings conference call or presentation Thursday, August 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heather C. Kirk

Cominar Real Estate Investment Trust - Executive VP & CFO

* Marie-Andrée Boutin

Cominar Real Estate Investment Trust - EVP of Retail & Development

* Sylvain Cossette

Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee

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Conference Call Participants

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* Bradley Sturges

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Jenny Ma

BMO Capital Markets Equity Research - Analyst

* Jonathan Kelcher

TD Securities Equity Research - Analyst

* Matt Kornack

National Bank Financial, Inc., Research Division - Analyst

* Pammi Bir

RBC Capital Markets, LLC, Research Division - Analyst

* Sumayya Hussain

CIBC Capital Markets, Research Division - Associate

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the cominar second results conference call. (Operator Instructions) Note that the call is being recorded on Thursday, August 8th, 2019. And I would like to turn the conference over to Sylvain Cossette.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [2]

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Thank you, Cindy. Good morning and welcome to today's conference call where we will be discussing our financial results and highlights for the second quarter of 2019. The presentation for this call is posted in both English and French in the Conference Call section of our website. In line with our disclosure principles, access to this call is open to financial analysts, investors, the public and the media. The question period will be open to financial analysts. Before I begin, I would like to draw everyone's attention to the notice concerning forward-looking statements on Page 2 of the presentation.

With me today is our CFO, Heather Kirk; members of our executive management team, Alain Dallaire, Marie-Andree Boutin, Michael Racine, Jean Laramee, Wally Commisso are also here with us.

Q2 2019 highlights. Recent initiatives to improve the efficiency of our platform had a positive impact in the second quarter with in-place occupancy increasing, renewal rents accelerating, organic growth above our full year guidance, and capital expenditures declining. We are confident that recent and future strategic initiatives will allow Cominar to accelerate this positive momentum. Our start to 2019 has consisted of introspection, analysis and action. We have taken a hard look at what we can do to position Cominar for the future, dug deep into the analysis of our culture, operations, processes and portfolio and have taken significant steps to put us on a path to growth. Six months into the year, we see that these initiatives are having a direct effect on our performance.

We are proud of the progress we have made this quarter achieving several significant milestones including same property NOI above 2%, refinancing our credit line, completing $200 million issue of unsecured debentures and most importantly completing a comprehensive, strategic assessment of our business. We have created a transformation plan and clear path structured to deliver operating efficiencies, accelerate NOI growth and crystallize untapped value in order to generate short-term and long-term value for our unitholders. Our plan includes a series of concrete actions to add additional revenue streams, reduce operating costs and streamline G&A, which will have a collective positive impact on FFO and materially accelerate our organic growth. Second, creation of a dedicated Asset Management platform to maximize portfolio returns and enhance our investment decision-making process.

Our plan includes value creation strategies for each asset through NOI maximization intensification of sites with excess density or repositioning potential as well as rigorous investment analysis upon which our whole recapitalize or sell decisions are based. Third, a disciplined reduction in leverage to a targeted 50% debt to asset value by the end of 2021 through growing EBITDA, higher retained cash flow, driving growth in our portfolio and selective dispositions.

Fourth, in order to derisk the execution of our transformation, we have undertaken a number of steps to ensure seamless execution of our plan, including implementation of a change management office to oversee execution of our plan and bring focus, support and accountability to our initiatives. Finally, communication with our stakeholders is an important component of our plan and we look forward to presenting the full extent of our strategic initiatives at our Investor Day in Toronto in the fall.

I would also like to highlight that we have added two experienced and highly qualified executives to the team this quarter, Melanie Vallee, as Vice President, Data and Technology; and Alexandra Faciu as Executive Director Asset Management. Over the past 12 months, we have transformed our senior management team through talent and task enhancement in order to create a culture of excellence, improve capital allocation, drive operating performance and create value for our unitholders.

Moving along to our quarterly results, on Page 7, our committed occupancy rate improved to 93.9%, up 80 basis points year-over-year and 10 basis points since March 31, 2019 and remains above our historical average.

Moving on to Page 8, the Industrial segment recorded the highest committed occupancy at 95.6%, 60 basis points above the corresponding quarter in 2018, followed by retail at 93.1% up 10 basis points year-over-year and office at 92.0% up at significant 150 basis points year-over-year.

By region, our Quebec City portfolio remains strong and steady at 95.1%, while the Montreal portfolio was 93.4% leased, 70 basis points higher than Q2 2018. The most significant improvement has been in our office portfolio in Ottawa, which is now 92.9% leased, a material 270 basis points improvement year-over-year.

Our in-place occupancy rate rose to 89.9% in the second quarter, an increase of 20 basis points over Q1, 2019 and an increase of 340 basis points year-over-year. The in-place occupancy of our office portfolio increased by 240 basis points over Q2 2018, while retail increased by 170 basis points and Industrial increased by 480 basis points.

Moving on to our leasing activity on Page 9, in the second quarter of 2019, our average net rental rate on renewals increased by 2.8%, led by a solid total 9.8% increase in our industrial portfolio broken down 10.1% in Montreal and 8.7% in Quebec City. In the office portfolio, rents on renewals increased by 2.3% with an increase of 2.5% in Montreal, 2% in Quebec City and 2.3% in Ottawa. Retail rents continue to be affected by a more challenging leasing environment. We recorded a decrease in rents on renewals of 1.4% in our retail portfolio, with increases of 2.7% and 4.1% in Quebec City and Ottawa, partially offset by a 4.3% -- decrease in Montreal. The Montreal decline in rent is in part related to space expansion at lower rents to drive NOI. Year-to-date, we improved our retention rate to 57.9% from 57% for 2018. We renewed 2.9 million square feet of expiring leases and in addition, we signed 1.5 million square feet of new leases. Taken together, we completed renewals and new leases totaling 4.4 million square feet, which represents 87.3% of our leasable area maturing in 2019.

Moving on to Page 10 with respect to our seven Sears locations, which totaled approximately 670,000 square feet, we have signed leases for 164,000 square feet or 24% of the total area and 58% of the previous total Sears rent. We are in advanced discussions on 245,000 square feet or 37% of the total area and another 110,000 square feet is under discussion. Combined, time, space and space in advance discussions now totaled 61% of the total available space, an increase from 47% as at last quarter. We remain focused on converting our leasing discussions and negotiations into signed leases.

On Page 11, during the quarter we sold properties for gross proceeds of $116 million. Post quarter we completed the sale of a property for $14 million. Year-to-date as of today, we have disposed $204 million of properties. Our current target remains $300 million of dispositions for 2019.

Moving on to Page 12, our investment properties held for sale decreased to $47 million at Q2 2019 and total approximately 474,000 square feet, of which 42% is retail and 27% is office.

Moving on to Page 13, at 800 Palladium Drive in Ottawa, Ford Canada will be the lead tenant for 85% of 100,000 square feet office development, which will help Ford's Research and Development center for autonomous driving vehicles. The property is currently 89% pre-leased with occupancy expected by September 2020. We are also in advanced discussions for further lease-up with offers received and under negotiation, which would lease out the balance of the space. We expect that the project will be fully leased well prior to completion in 2020 and 18 months ahead of our initial lease-up schedule. The project is budgeted to cost approximately $28 million with a targeted yield on cost of approximately 8%. With respect to our 500,000 square feet Ilot mendel retail project located on Highway 40 in Quebec City, adjacent to Quebec City's IKEA store, the 57,000 square feet Decathlon store is under construction and is scheduled to open in a fall of 2019. This part of the project is both on time and on budget. In addition, a tramways station has been indicated by the city to be located on our side and as a result we are reassessing our master plan for this site, particularly with respect to the potential for multi-res uses.

Heather, will now discuss our financial results.

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [3]

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Thank you. Sylvain. On Page 14, operating revenues of $176.6 million for the second quarter of 2019 decreased by 0.2% compared to the second quarter of 2018. NOI of $89 million decreased by 0.9% year-over-year. This decrease is the result of a decrease of $2.6 million in NOI related to property sold in 2018 and 2019, partially offset by an increase of 2.2% in our same property NOI.

FFO for the quarter decreased by $1.8 million or 3.6% year-over-year to $47.3 million. The decrease was due mainly to a decrease in NOI related to dispositions and restructuring costs, partially offset by a decrease of $3.7 million in trust administrative expenses. On a per-unit basis, FFO for the quarter decreased $0.01 to $0.26 from $0.27 for Q2 2018. Excluding restructuring costs of $3.9 million related to streamlining our workforce in connection with our strategic repositioning, FFO would have been $51.2 million and on a per-unit basis would have been $0.28.

AFFO for the quarter decreased by $4.2 million or 9% year-over-year due to the decrease in FFO as $0.9 million increase in the provision for leasing costs and a $1.7 million increase in maintenance capital expenditures. On a per-unit basis AFFO for the quarter was down $0.03 to $0.18 compared to $0.21 for Q2 2018. Excluding the restructuring cost, AFFO would have been $37.4 million and on a per-unit basis would have been $0.20, which implies an AFFO payout ratio of 90% and a 11.7% increase compared to Q2 2018.

Moving on to Page 17 and 18. For Q2, our same property NOI increased by 2.2% to $90.3 million. We are pleased to have, continue to accelerate our organic growth in Q2, 2019 and continue to be focused on driving a stronger operating performance. Second quarter growth in same-property NOI was driven by a strong 7.1% increase for the industrial and flex portfolio supported by a 2.5% increase for the office portfolio which was partially offset by a 1.6% decrease for retail. The increase reflects an increase in property in-place occupancy of 290 basis points. Same-property occupancy increased for all property types, including 240 basis points for the industrial and flex portfolio, 190 bps for the office portfolio and 220 bps for retail. We are pleased that our operating performance has exceeded our forecast and are increasing our same property NOI guidance to 1.5% to 2.5% for 2019 and we are also confident that implementation of our strategic initiatives position us to accelerate our organic growth.

Moving on to Page 19. Our debt ratio was 54.2% at the end of the quarter, down from 55.3% at the end of 2018 and up from 52% at the end of Q2, 2018. Our debt to EBITDA ratio was 10.4x at the end of Q2, up from 10.3x at year-end and 9.3x at the end of Q2 2018. The year-over-year change in our debt ratio and our debt to EBITDA ratio was affected by the Q1 2018 sales of $1.1 billion of properties. Our interest coverage ratio was 2.3:1 and our unencumbered asset pool stood at $2.5 billion representing 1.5x our unsecured indebtedness. The unencumbered asset ratio was down slightly from 1.53x at year-end 2018.

Moving on to Page 20. We have no material mortgages maturing in 2019 and only $81 million of mortgages maturing in 2020. We have a staggered maturity profile with an average of 14% of our debt stack maturing annually in the next five fiscal years. We have $300 million of unsecured debentures maturing in early December 2019, which we will be repaying with our recently increased liquidity. At quarter end, we had liquidity of $434 million with $10 million of cash on hand and undrawn amount of $424 million on our credit lines. Subsequent to quarter end, we have closed on $14 million of dispositions and $263 million of mortgages and replaced our expiring credit facility with a $400 million unsecured credit facility. Post quarter financing and disposition activity has increased our liquidity position to close to $600 million, providing us with ample liquidity to fund upcoming maturities.

Moving on to Pages 21 and 22. The first half of 2019 has been very active on the financing front. Year-to-date we've originated a $1 billion of new debt including the issue of a $200 million unsecured debenture closing $382 million of new mortgages and closing $400 million unsecured credit facility. We also expect to close on an up $300 million secured line in the coming weeks.

On the mortgage front, since the beginning of the year as I mentioned, we closed on $382 million of mortgages, which reflected [52] properties through six different financing with five different lenders. Mortgages completed had an average loan to value of 63%, an average term of seven years, an average interest rate of 3.5%. Of the $382 million, 236 closed after our quarter-end on June 30. Our most recent financing, which closed last week was a 10-year mortgage on four industrial properties at a very attractive interest rate of 3.28%. We're very pleased with the reception to our unsecured debenture issue, which was priced at a coupon of 4.5%, the second-lowest rate ever for a non-investment issue grade issuer in Canada. Access to the unsecured debenture market provides us with an additional financial flexibility in the management of our balance sheet.

And Finally, Moving to Slide 23 for the quarter ended June 30th, investments in income properties including capital expenditures, leasing cost and leasehold improvements totaled $31.6 million, down 47.8% (technical Diffculty] million for last year's comparable period, including investment in development activities capital expenditures for the quarter totaled $39.3 million, down 39.1% from $64.7 million in Q2, 2018. We expect total capital expenditures in the second half of 2019 to rise somewhat due to investments in Sears locations, which have been leased to new tenants.

I will now pass the mic back to Sylvain.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [4]

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Thank you, Heather. I would like to take this opportunity to thank all of our employees as well as our trustees for their contributions over the last quarter. I will now turn the mic over to Cindy for the question period.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from Sumayya Hussain at CIBC.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [2]

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Just to touch on strategic updates. Can you just expand on additional revenues stream and when you think about accelerating the organic growth, do you it would be exceeding 1.5% 2.5% guidance for the couple of years or soft of the -- within that range?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [3]

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I think that the strategic plan clearly is designed to increase organic growth. So, yes, I would expect that we would be able to be on that range in terms of quantifying what I think little bit premature to be looking at that. In terms of your question on the revenue opportunities, we've done an extensive analysis and benchmarking of our peers to take a look at ways where we can drive additional revenue. It's stuff like charging fees and client construction projects, amortizing of incentive that higher rates were little bit below the market. We've got plans for increasing parking revenues. We're going to be charging fees to our clients where we're doing work for reviewing plans, doing legal work. So there's a long, long list of things that we are looking at what that we think are going to have a positive impact on our performance.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [4]

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And then just also touching on the plan, there wasn't much on asset sales. Is that because the review is still underway kind of waiting to see how that pans out or do you just intend to be more selective going forward?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [5]

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I think it's 2 things. I think it's -- the first thing that you mentioned that we -- we've recently hired dedicated resource for asset management team and we are doing a complete review of the entire portfolio there is that. I also think that we're in a very strong market. So we're not in a rush to sell assets, we want to capture all the upside we have in this market and we are convinced that there is a lot of upside in the portfolio. So in terms of dispositions, I think we really want to make sure that we maximize the value of the assets before we jump into selling anything. And from a leverage perspective, if this is really -- at the end of the day driven in part by wanting to improve our balance sheet, the message we want to make very clear is we want to improve our balance sheet through driving asset values higher within the portfolio.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [6]

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I think that was clear again just lastly if you could just give us an update on office, maybe breakdown operationally what you're seeing in some of the downtown versus suburban properties?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [7]

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On the downtown just remains very stable, very, very strong. So we're still around the 95% occupancy as we go along. We are seeing more progress and more upside in terms of transactions -- potential transactions in the pipeline is in the suburban market, where we struggled a bit more in the past in Laval, especially at Place Laval. We are at some early-stage discussions for a sizable blocks and in our suburban portfolio in Montreal, we are also seeing some positive movement and in Ottawa, as we indicated earlier on the call, we said, we've had some good increase in occupancy too. So I think we're seeing progress in the office portfolio, I'm happy -- couple of quarters ago, we didn't have much to report on for example in Place Lava, and now we have interesting discussions in the pipeline. Quebec remains very stable, that gets just extremely stable for us.

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Operator [8]

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Next question will be from Jonathan Kelcher at TD Securities.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [9]

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If we look at the sales that you guys completed in Q2 and I may have missed this, but what were the cap rates on those?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [10]

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Overall blended, give me a second here. I don't have it in front of me, sorry.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [11]

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But maybe while you're looking at that, on the -- to get for the remaining asset sales, you're playing this year to get to your $300 million, what would you be looking at in terms of cap rates on the dispositions for those two?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [12]

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Look, I would say that on average, there'll be, I would say, kind of in line with what we've done now a little bit higher than our average portfolio, but there are some, it depends. We have some assets that we're looking at that could be tighter. So depending on when some of these things close, whether they get bumped into early 2020, but I would say that, assuming that it's in line with what we've had historically, we're good. The average so far was about 6.9%. So I would say the high 6's is probably your range.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [13]

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In terms of asset sales to come, Jonathan, we have a little bit more than the number in the works that they may move from one quarter to the other, but depending on what gets sold, we have one chunky asset, so I'd be reluctant to give you a cap rate guidance because this is chunky asset, but we are conducting discussions in line with our appraised values.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [14]

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And then the occupancy is running pretty well right now. What do you think you can get in-place occupancy to by the year-end?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [15]

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Kind of in line with what we said last quarter around 90%. I mean I don't see it moving a ton from night maybe in the 90%, a little bit higher than that, I mean in the 91% would probably be the range, but we're not expecting significant acceleration in the back half.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [16]

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So the increase in the guidance on same property NOI is that just on higher renewals. I guess, then you had thought before?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [17]

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It's on a lot of that strategic initiatives. I mean we've already put a lot of this stuff in place, it's been happening over the last quarter. So we've done a lot of stuff. As you saw, we took a $3.9 million restructuring charge and employees don't, I'll go in the G&A line, that hit the NOI. So it's really a lot of the rationalization and initiative that we see coming in the next six to 12 months.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [18]

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And are you basically through your restructurings now.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [19]

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Well we have a restructuring charge contains a provision. So we have certain stages, we still need to complete. And I look to restructuring as being perhaps an ongoing process as you change your process, you introduced technology in a different format you move people more from clerical jobs to value-add jobs. So you'll have additions, you have subtraction. So it will be -- as we move along and enhance efficiencies in our processes that will be a moving target. So I do anticipate that we will run into continuous workforce optimization over the next quarters, but Heather has a significant provision already at the G&A level.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [20]

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And as the G&A as a Q2, is that a good run rate?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [21]

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I think we're looking at about 17.6, 17.7 total for the year, so if you run with that it should be in the ballpark.

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Operator [22]

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The next question will be from Brad Sturges at IA Securities.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [23]

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Heather, just to go back to the revenue stream discussion, would that also include considering JV partnerships to leverage the asset management platform?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [24]

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Certainly, that is definitely part of the discussions and I think particularly with respect to a lot of our intensification opportunities, that's the logical place to start. But, as you've seen in the market with some high profile transactions there are a lot of non-(inaudible) based investors that are looking to enter the market and we think we have a lot to offer.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [25]

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If I can take one example Brad to make it more concrete, in the initial year, we'd be looking at we Mail Champlain, it's a good retail asset. Panama Station is well advanced on the REM development schedule. The South Shore if you look on the REM traffic, the commute traffic that's offshore inbound train and movement is the highest traffic branch of the REM. So we are really trying to work on the best scenario to develop and enhance our offering at Mail Champlain is currently undergoing lease-up through the vacant Sears locations, which is on target in terms of our internal plan. But we want to do something much more grandiose with that and we also have next to Mail Champlain (inaudible), which can be intensified. So a project like that, we would be looking to do in a JV format. So that's a concrete example and we have others like that.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [26]

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So when you're looking into enhance I guess revenue, obviously, even net sellers for a while, you have more asset sales plan. At what point do you -- would you still view the next 12 months to be net sellers or could we start to see some focus on acquisitions?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [27]

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Well, I think our focus right now is really on the asset management side. We have a lot of quality properties and opportunities within our portfolio and we need to really, really knock those out and drive the value creation aspect through our portfolio.

On the acquisition side, in our three asset classes, we would like to increase our industrial waiting, industrial is a red hot asset class in Montreal. It'll be very interesting to see when the final numbers are publicly communicated on the (inaudible) portfolio, which just got priced. I'm sure that when you see the numbers that are going to be very, very excited what it needs to Cominar in terms of value of our portfolio. So I think I'd like to go out and buy more industrial, but industrial is extremely expensive these days. But that reflects very very positively on Cominar. So I'm looking forward to the public dissemination of the whole transaction.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [28]

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Would you consider, given how tight the market is in the rent growth that it seems to be selling there would you consider development in Montreal for industrial?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [29]

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Yes, the market is tight. We have a couple of the land opportunities, primarily in Laval and, the rents are such that we can support construction. So yes, if we had the right opportunity, we would do it. And that's taken the path even though we had tight capital, that's one asset class we've always been very cautious and not losing opportunity. We've actually done some built, our expansion. So, yes, in industrial at the right prices and the right returns, we would look at it, and that's what we're trying to do. It's a good asset class.

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Operator [30]

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Next question will be from Jenny Ma at BMO Capital Markets.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [31]

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Congrats on the strong same-store numbers. .Just digging into a little bit more, just curious as to why the same-store NOI number was a little -- was flat for Montreal? Was there anything that was sort of chunky in there or heavier weighting towards retail just maybe some color on that?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [32]

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It was retail, I think which had minus 4% in Montreal and it was just as we mentioned, there was a question of we generated, we extended a lot of tenants in the past quarters and what that creates, is that on the total space from a per square foot basis they pay less, so it shows that the decrease on the existing, on the step-ups. But at the end of the day it's positive on the NOI and we also have quite a few leases that went from gross to net, that's how sensitive the minimum rent as well, and the minority of those came from some rent reduction that we have to do when some retailers restructured.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [33]

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And when looking -- when we look at retail we are optimistic about the retail portfolio and we may need Marie-Andree want to comment as to when you expect to be out of Sears.

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Marie-Andrée Boutin, Cominar Real Estate Investment Trust - EVP of Retail & Development [34]

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So we expect that by the end of the year, a very large percentage of the Sears Box will be leased. There will be few small spaces here and there that are sort of in between. And we expect that by Q1, 21 we're going to be on the full revenue base with all stores Open and that's the plan and we're gearing very, very well towards this.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [35]

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So that was on the Sears boxes?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [36]

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Yes, correct.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [37]

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So before, when you're talking about that lag in some of the retail lease restructurings, how much do you think that lag will be, is it like a couple of quarters and like in time for the holidays or is it getting a little longer than that.

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [38]

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I'm sorry I don't understand your question.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [39]

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So you said that you're doing some lease restructurings of the Montreal portfolio, converting some from gross to net, which is why there was a little bit of a down tick in same property NOI, but it should be positive down the road. So I'm just wondering what that -- how far down the road that will be and when that NOI may start ticking back in?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [40]

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We expect that we'll be flat on a same-property NOI basis for the year for retail. So we are expecting some improvement in the back half.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [41]

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In the back half of 2019?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [42]

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Yes.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [43]

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And then with regard to your leverage target for 2021, good color on that. I'm just wondering, do you have a debt-to-EBITDA target for the same time frame?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [44]

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We'd like to have it be in the sort of 9% to 9.5% range. But in terms of getting a time frame for that, there's a lot of moving parts and I mean even the leverage, given all the stuff we're doing with the strategic plan and looking to drive asset values, there's a lot of -- you look at what's happening with the mark to market that we potentially may get on or will get on the industrial portfolio, that's going to have a material impact on what those numbers shake out us. So we don't have that hardened fact. I would just say that, number one, one of the questions, I've gotten is if you're delevering, would you do equity and the answer is absolutely not. So the plan is really to have this happen naturally by driving our EBITDA and driving our asset value.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [45]

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Last quarter you had guided to full year straight-line rent of about $1.5 million. Obviously, there's a lot of moving parts with the asset sales and some of the EBITDA leases coming in office leases. Are you still sticking to that guidance?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [46]

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In that range and I know this quarter was a little bit of an odd one, but I think it's come down a little bit. So we're now at $1.4 million.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [47]

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And then my last question is on the $300 million secured line piece. Is that at the same rate as the $400 million credit line or I'm not sure if I saw that somewhere or not?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [48]

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It's a slightly cheaper than the unsecured line.

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Operator [49]

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Next question will be from Pammi Bir of RBC Capital Markets.

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Pammi Bir, RBC Capital Markets, LLC, Research Division - Analyst [50]

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Just maybe coming back to the disposition -- sorry to the leverage target for the end of 2021. What range of dispositions were factored into that if you can shed some color there?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [51]

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I think we're looking at about the rate we have right now, nothing material, I don't think in 2021, but about $300 million for 2020.

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Pammi Bir, RBC Capital Markets, LLC, Research Division - Analyst [52]

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And then if you think out a few years, what percentage of your NOI do you expect retail to make up from where it is today?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [53]

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We're not looking at it as a, let's fix 25% or 30%, we're looking at it as as maximizing the value upfront, so it's -- for sure we'd like to see it come down and I think once we stabilize the assets it will have a better sense of exactly what the timing will be of disposition. And honestly I think our retail portfolio is grossly misunderstood, it's not. We have some assets that we are delighted to be keeping that are strong assets. We are trimming around the edges, things that aren't strategic like one sale/leasebacks strips that are maybe not as strong and in weaker markets, but we're not pegging a specific number. So, unfortunately I can't answer that.

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Pammi Bir, RBC Capital Markets, LLC, Research Division - Analyst [54]

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And then when you think -- when you went through this process over the last few months, I'm just curious whether the distribution level was reevaluated during that and I'll leave it there and then I'll follow up with the next part?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [55]

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Yes. And we're comfortable keeping it where it is. I don't see any horizon where I would be increasing it, where we would be increasing it, but we're comfortable with the level that we're at because we're also very comfortable with what we can deliver on growing the NOI and AFFO line.

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Pammi Bir, RBC Capital Markets, LLC, Research Division - Analyst [56]

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And then just lastly, I guess by extension, how should we think about the -- your maintenance CapEx and leasing costs as we look into 2020?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [57]

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We've brought them up and I think we are constantly reevaluating that. So I don't -- definitely won't be coming down, but I also think we've done some very big CapEx investment in the past, where we're getting to a more stabilized level, but it's always something that we're evaluating. So possibly an increase in 2020, but I don't see it being dramatic.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [58]

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I think we saw some important, Pammi around the CapEx is the -- our process and our allocation of capital to that is a lot more disciplined through the asset management platform that we've added. So that's just not a numbers issue, it's also I think a very cultural dimension to how we allocate capital and the returns we want on our investments.

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Pammi Bir, RBC Capital Markets, LLC, Research Division - Analyst [59]

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Just one last one, when you think about the whole strategic plan and the new initiatives, how much of a cultural shift is this for the organization and is it materially different? I mean, obviously, there have been some reductions in G&A and head count. But I guess I'm just curious how big of a shift is this for the organization?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [60]

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On a scale of 1 to 10, it's about an 8 or 9. It's very, very significant. When we added new management -- new members to the management team and as we continue to add new members, it brings a totally different way of looking at our past and as Heather mentioned, we had historical underperformance. So we've turned the every page and opened every chapter the different segments of our business and we are approaching it with total change in transformation in mind. And we're driving the culture to reflect that internally, just not at the management level, but at the employee level. Just sort of -- it touches operations, it touches processes, it touches technology, it's a total, total change.

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [61]

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And I'd add, it's a positive change. I know when you talk about cultural change, people are concerned about whether employees are on board, like there is a great energy here, a lot of new people around the table, there is a lot of people who've been around the table for a long time and I think everyone here from the top to the bottom is really, really excited about what we're doing. Because we're really seeing the impact and we're really looking forward to continuing to deliver.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [62]

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I think the biggest change in the last quarter for me Pammi from my position -- we've added talent and we continue to have that. In the last quarter, I can really see this team, this organization [jellying] that's the last quarter. So I mean we have a lot of positive and collective advantage to build from. We're not scared internally to talk about our change in culture and how we perform and how we behave together. I'm the big believer in behaviorism. Corporately, It's been a very good and enriching moment for us and we're seeing the reward. The rewards are, it's a bunch of reasons why we're generating these numbers.

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Pammi Bir, RBC Capital Markets, LLC, Research Division - Analyst [63]

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Just the last piece of this, I guess, I have the compensation arrangements been amended at all with respect to management and operational or at operational levels to reflect this shift or is that something to be determined?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [64]

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Now, it's one of the first matters that we tackled was looking at how employees were compensated and bring your competition more in line with their contributions and their performance and that's what the first thing we looked at. We moved more from a structure compensation structure based on seniority or evolution in time. We flipped it around to performance and making sure that we're driving people with the right KPIs and also it ties into bringing in the next generation and succession planning along and creating a place for them at the table.

So these are -- that's one of the first things that we looked at and when you do that, you go through the workforce optimization and [feed] them to changes you make within an organization. It's heartbeat. We've parted ways with close to 80 of our colleagues since the beginning of the year, those are significant numbers. And it's all tied in with that review of contribution and performance, what we expect and redefinition of tasks and we're redefining the organization every quarter, as we continue on our evolution. We introduced more technology and we focus more on value add and less on clerical that will bring other changes to the organization.

We're trying to migrate people to those value add positions and certain cases that you need to move on and that's just unfortunate, but that's part of the cultural change and I think generally speaking, if you're worried about is, are unrest when you're going through workforce optimization and internally I think everyone in the organization is very excited about the path that we're following and how we're generating in the future and they embrace the change. People want to be excited and charge and do value added in their day and non-clinical. So it's been extremely positive.

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Operator [65]

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(Operator Instructions) And your next question will be for Matt Kornack at National Bank.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [66]

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Your industrial peers were a little bit more forthcoming with the cap rate on that disposition and you were bidding in it. So at a low 4, how would you compare that portfolio to what you guys own? And given, given that pricing, I know it's your best NOI generating portfolio, but do you get tempted?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [67]

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Let's say, we all have our sources on the rumor-based side, third leg, low 4's, sub 4's, let's call it low 4's. And so we seem to all have the same number we're hearing. We're carrying our portfolio at a slightly above 6. So that shows you the compression.

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [68]

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Yes, we're at (inaudible). So we clearly won't be putting our whole portfolio at a low 4, but there is definitely...

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [69]

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There is a compression in it. I look at the -- when we actually -- we underwrote that portfolio internally. The 1.5 million square feet of (inaudible), so we underwrote it just to get into the market and better understand where that markets are currently on the buy side and really compare it to our portfolio. And this is not a total reflection of our portfolio, but it lines up pretty well with our portfolio. So if you take your 4 in a rumor base and you put it (inaudible) there is room for us to grow in that in that compression.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [70]

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So there is potential likely fair value gains, but and second question would be, I mean if that is the pricing and it sounds like there is deep demand and not a lot of product available in the industrial space. I mean would you look to maybe lighten up a little bit or is the growth just so great that you want to keep it to yourself?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [71]

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That's the question that we're addressing internally on the asset management side. I mean, when we look at what leases were coming up and we want to keep the growth or we want to try to arrive at some form of an arrangement to grow that portfolio, I mean those are the type of questions that we're addressing internally, but clearly Matt, we have a very exciting industrial portfolio. We're currently -- it's on our books at a higher cap rate and we have a lot of things we can do to create value through that portfolio. So, that's one of the top players we have on our books.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [72]

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On Sears, so it sounds that's good news that you plan to have it fully leased by 2021. How should we think of the timing in the interim period, there is no Sears lease-up this year, is there?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [73]

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Yes, there will be two tenants that will be opening in the fall of this year totaling about 20,000 square feet and there is quite a few in Q1 and then the next right is in Q3 and Q4 and the last remaining, which is the winners and (inaudible) will be in Q1 of 2021.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [74]

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And do you have a sense as to what the total NOI contribution would be from those?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [75]

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The total what we're targeting or the what --

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [76]

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I mean, I won't -- on a quarterly basis, but just what Sears will generate post leases?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [77]

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I do have -- I don't have it right in front of me, can I get back to you on it?

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [78]

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Just quickly on the development side of things. What is the cost to complete the two projects that you have in, one is $28 million with an 8% yield and what's that cap on total spend and yield?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [79]

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Now, look Palladium the $28 million is total costs. So that is -- what have we spent so far? I don't have that spend number in front of me. We're about -- we started the construction about I mean --when did we start construction?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [80]

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In June, so it would be most of that is still to be spent.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [81]

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Still to be spent, so we run to front end of the construction on Palladium. And we're probably like 5%, 10% on the construction cycle at Palladium, so it's on target and the cap on -- we're delivering this very shortly, so it's...

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [82]

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They're opening in October and it's on budget and on target.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [83]

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So it is behind us more or less.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [84]

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Do you know what -- it doesn't have to be the exact number, but generally would be on how much that store cost?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [85]

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Do you have another question, I will --

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [86]

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I'll flip through that.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [87]

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I have it somewhere, just -- (technical difficulty) We have allocated a portion of the land, a very small portion of the [Ilot Mendel], but the big chunk of the 12 is the construction site.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [88]

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And then on timing for Laval on the office side. Is that something that you would expect to see by the end of this year into next?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [89]

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In terms of tying up the opportunities into committed, we are hopeful to try to get some for this year. In terms of when it comes in terms of contributing to that's more out of it, so we were trying to one or two chunky tenants to run release elsewhere. So we'd be locking them up and taking them out of circulation for the future.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [90]

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And is that sort of the issue with straight-line rent, is it some of the straight-line rent that's going to come on would be for space that's committed, but not in place leasing?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [91]

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Well, not for that.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [92]

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But generally Heather is that, is that what drove this quarterly anomaly?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [93]

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The shift, I don't know -- I don't think it's really that. I think it was just a few specific situations where we had, I don't think that is, it's not a question of the spread between committed and...

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [94]

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And then finally on the savings that you've recognized, you mentioned that it's been an ongoing process. So some of it was recognized in this quarter, but should we expect that there will be further savings to be recognized in future quarters and how is the split between G&A versus costs up cost that would hit NOI?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [95]

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I would say that 90% of what we're going to deliver is going to be NOI. Like in G&A, it's basically the senior management team and leasing people, so we'd rather have more people focused on leasing as opposed to less. So G&A, I would say it's going to be -- we're probably, if you strip out $1 million of indemnities that we paid this year, we're probably running at about $16.5 million something in that neighborhood. I would say that's not going to go down materially. We've realized a lot of that and the rest of it's all going to be NOI value-creating initiatives.

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Operator [96]

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And at this time, Mr. Cossette, we have no other questions. So I would like to turn the call back over to you, sir.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [97]

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Thank you very much. Thank you once again for taking part in this conference call and I wish everyone a very nice day.

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Operator [98]

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Thank you. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.