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Edited Transcript of CUF.UN.TO earnings conference call or presentation 8-Nov-19 4:00pm GMT

Q3 2019 Cominar REIT Earnings Call

QUEBEC Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Cominar REIT earnings conference call or presentation Friday, November 8, 2019 at 4:00:00pm 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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* Frederic Blondeau

Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research

* 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, 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 Third Quarter Results Conference Call. (Operator Instructions) Note that this conference is being recorded on Friday, November 8, 2019.

And I would like to turn the conference over to Sylvain Cossette. Please go ahead.

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

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Thank you, Sylvie. Good morning, and welcome to today's conference call where we will be discussing our financial results and highlights for the third 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, Marie-Andrée Boutin, Bernard Poliquin, Michael Racine, Jean Laramée and Wally Commisso are also here with us.

Q3 highlights. The strategic plan that we announced last quarter to improve the efficiency of our platform has now entered its execution phase. Recent initiatives had a positive impact in the third quarter, with an increase of the in-place occupancy; a strong organic growth in the same-property NOI at 3.8%, above our full year guidance and with positive contribution from each of our asset classes; a reduction in our leverage; and a decline in our capital expenditures. While we are all highly committed to keep on delivering more, it is clear that Cominar has hit an inflection point.

The Investor Day that we held in Toronto a few weeks ago was the first of its kind for Cominar and was another sign of our objective to be closer to our investor base and to communicate with enhanced transparency.

Turning to 2020. We intend to keep driving NOI growth and put the emphasis on crystallizing untapped portfolio value and by making the most of some intensification opportunities.

In line with our ongoing transformation, we are also aligning our organizational structure with the dynamic needs of our markets. I am pleased to note the hire of Bernard Poliquin as Executive Vice President, Office and Chief Real Estate Operations Officer. Bernard will oversee the leasing and property management teams for office and industrial assets as well as building operations, maintenance and construction activities for the entire portfolio. Recently, he managed a significant 6 million square feet Ivanhoé Cambridge office property in Montreal and led the transformation of Place Ville Marie. His arrival complements our leadership team and ensures a closer presence in our market in Montreal.

As a result of these organizational changes, I also announced that Alain Dallaire, Executive Vice President and COO, will leave Cominar today. I am most grateful to Alain for his contribution to Cominar since the creation of the REIT in 1998. He's leaving us a solid foundation on which we can build with the leadership team.

We have also added 3 experienced and highly qualified executives to the team, Brigitte Dufour as Vice President, Legal Affairs, and Corporate Secretary; Sébastien Dubois as Vice President, Leasing, Retail; and Jean-Marc Rouleau as Vice President, Operations, Retail. 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.

Let's move along to our quarterly results. On Page 5, our committed occupancy rate improved to 94.4%, up 110 basis points year-over-year, up 50 basis points since Q2 2019 and 90 basis points above our historical average. The in-place occupancy rate reached 90.3% as at September 30, 2019, up 240 basis points year-over-year. In addition, the in-place occupancy rate is now back to our historical average and is, for the first time since 2014, greater than 90%.

Moving on to Page 6. The industrial segment recorded the highest committed occupancy at 96.4%, a 120 basis points above Q3 2018; followed by retail at 94%, up 70 basis points year-over-year; and office at 92.1%, up a significant 130 basis points year-over-year.

By region, our Quebec City portfolio remains strong and steady at 95.6% committed occupancy while the Montreal portfolio was 93.9% leased, 100 basis points higher than Q3 2018.

The most significant improvement has been in our Ottawa portfolio, which is now 93.8% leased, a material 230 basis points improvement year-over-year. Our in-place occupancy rate rose to 90.3% in the third quarter, an increase of 40 basis points over Q2 2019 and an increase of 240 basis points year-over-year. The in-place occupancy of our office portfolio increased by 320 basis points over Q3 2018 while retail was up 130 basis points and industrial increased by 360 basis points.

Moving on to our leasing activity on Page 7. In Q3, our average net rental rate on renewals increased by 2.4%, led by a solid total of 10.6% increase in the industrial portfolio, with an 11.2% increase in the Montreal market and an 8.8% increase in the Quebec City market.

In the office portfolio, rent on renewals increased 2.1%, with an increase of 1.8% in the Montreal market, 2.9% in the Quebec City market and 2.1% in the Ottawa market. We recorded a decrease in rent on renewals of 2.7% in our retail portfolio, with a strong increase of 5.5% in the Ottawa market, where we have a small presence, partially offset by a 4.8% decrease in Montreal and a 0.4% decrease in Quebec City. The decline in rents is, in part, related to space expansions at lower rates to drive NOI.

Year-to-date, we improved our retention rate to 66% from 64.6% for 2018. We renewed 3.4 million square feet of expiring leases, and in addition, we signed 1.9 million square feet of new leases. Taken together, we completed renewals and new leases totaling 5.3 million square feet, which represents 102.3% of our leasable area maturing in 2019.

Moving on to Page 8. With respect to our 7 Sears locations, which total 672,000 square feet, we have signed leases for 230,000 square feet or 34% of total area. We are in advanced discussions on 242,000 square feet or 36% of the total area. Combined, signed space and space in advanced discussions now total 70% of the total available space, an increase from 61% as of last quarter. To sum it up, 70% of Sears space is about -- is or about to be leased and will generate 53% higher rental income.

On Page 9, during the quarter, we sold properties for gross proceeds of $20 million at pricing $4 million above our most recent IFRS values at an average cap rate on in-place NOI of 4.6%. Year-to-date, as of today, we have disposed of $210 million of properties at an average cap rate on in-place NOI of 6.8%, excluding 3 properties sold on a land value basis. As our refinancing activity is ahead of schedule, we have revised down our target for dispositions at $250 million in 2019.

Moving on to Page 10. Our investment properties held for sale totaled $67 million at Q3 2019 and total approximately 587,000 square feet, of which 64% is retail and 26% is office.

Moving on to Page 11. At 800 Palladium Drive in Ottawa, Ford Canada will be the tenant for 96% of our 100,000 square feet office development, which will house Ford's research and development center for autonomous driving vehicles, with occupancy expected to start in September 2020. The project is budgeted to cost approximately $28 million, with a target yield on cost of approximately 9% and is now 100% leased, ahead of schedule.

With respect to our 500,000-square-foot Îlot Mendel retail project located on Highway 40 in Quebec City adjacent to the Quebec City IKEA store, the 57,000-square-foot Decathlon store opened in October 2019 with great success. The tramway remains confirmed to be located on our site. And as a result, we are reassessing our master plan for this site, particularly with respect to the potential for multiresidential development and other uses.

Moving on to Page 12. With regards to intensification opportunities, our portfolio has a potential of close to 10,000 residential units on 10 different sites. For each of these sites, we will assess the different options that we have: a development on our own, a development in partnership, a sale of air rights, a sale of the land. And for each project, we will make the decision that, in our view, best maximizes value in light of risk.

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 13, operating revenues of $171.5 million for the third quarter of 2019 decreased by 0.7% compared to the third quarter of 2018. The decrease of $1.1 million resulted mainly from a $6 million decrease attributable to properties sold in 2018 and 2019 and $4.9 million of growth in same-property operating revenues.

Net operating income of $91.4 million increased by 0.5% year-over-year. The increase of $0.4 million is explained by the fact that operating expenses decreased by 1.9%, while operating revenues decreased by only 0.7%. FFO for the quarter decreased by $0.9 million or 1.8% year-over-year to $51.8 million. The decrease was due mainly to a decrease in NOI related to dispositions, restructuring and debenture redemption costs, partially offset by a target Canada settlement of $1 million. On a per unit basis, FFO for the quarter decreased $0.01 to $0.28 from $0.29 for Q3 of 2018. Excluding restructuring costs of $0.9 million, debenture redemption costs of $1.1 million and the settlement with Target Canada, FFO would have been $52.7 million or $0.29 per unit, unchanged from Q3 2018.

AFFO for the quarter decreased by $2.8 million or 7% year-over-year. On a per unit basis, AFFO for the quarter decreased $0.02 to $0.21 compared to $0.23 for Q3 '18 and translates into a payout ratio of 85.7% versus 78.3% last year. Excluding the restructuring costs, debenture redemption costs and the target settlement payment, AFFO per unit would have been $0.22, which translates into an AFFO payout ratio of 81.8%.

Moving on to Page 16 and 17. For the third quarter, our same-property NOI increased by 3.8% to $92.7 million, driven by a 2.9% increase in same-property revenues and expense controls, which delivered a 1.8% increase in same-property expenses. We are pleased to have continued to accelerate our organic growth in Q3 2019 and continues to be focused on driving stronger operating performance.

Third quarter growth in same-property NOI reflected a strong 8.1% increase for the industrial portfolio, supported by a 4.1% increase for the office portfolio and by a 0.6% increase in our retail portfolio. The increase reflects an increase in same-property in-place occupancy of 220 basis points. Same-property occupancy increased for all property types, including 350 basis points for our industrial portfolio, 160 basis points for the office portfolio and 100 basis points for retail. We are pleased that our operating performance has exceeded our forecast and are increasing our same-property NOI guidance to 2.5% to 3% for 2019. We are confident that implementation of our strategic initiatives position us to continue to accelerate our organic growth and deliver strong results.

Moving on to Page 18. Our debt ratio was 53.8% at the end of the quarter, down from 55.3% at the end of 2018. Our debt-to-EBITDA ratio was 10.3x at the end of Q3, same as at year-end 2018. Our interest coverage ratio was 2.34:1, and our unencumbered asset pool stood at $2.2 billion, representing 1.5x our unsecured indebtedness. The unencumbered asset ratio was down from 1.53x at year-end 2018. And as you'll hear later, we are looking at initiatives to drive that number higher.

Moving on to Page 19. During the quarter, we closed the previously announced $400 million unsecured credit facility and the $300 million secured credit facility. As of September 30, 2019, $118 million was drawn on the unsecured credit facility, and the secured facility was fully undrawn.

On the mortgage front, we closed 4 transactions in the quarter for a total of $263 million at an average loan-to-value of 64%, an average term of 6.8 years and an average interest rate of 3.45%. Since the beginning of the year, we have closed a total of $382 million on 52 properties through 6 different financing with 5 different lenders. Adding up the credit facilities and new mortgages and the $200 million of debentures we issued last May, we have originated $1.3 billion of new debt year-to-date.

We also early repaid the $300 million Series 2 debentures due in December 2019 using a combination of cash on hand and a draw on our unsecured credit facility. At quarter end, we had liquidity of close to $600 million, with $16 million of cash on hand and an undrawn amount of $582 million on our credit facility. We are proud of the improvements we have made to our balance sheet, which provide us with enhanced flexibility to execute strategic initiatives.

Moving on to Page 20. We have no more mortgages maturing in 2019 and only $81 million of mortgages during in 2020. We have a staggered maturity profile with average of 15.8% of our debt stack, maturing annually in the next 5 years. We are also currently working on initiatives to early repay high interest rate, short-term, low LTV mortgages to improve our maturity schedule and credit metrics and also drive FFO growth.

And finally, moving on to Slide 21. For the quarter ended September 30, investments in income properties, including capital expenditures, leasing costs and leasehold improvements, totaled $31.6 million, down from $47.1 million for last year's comparable period. Including investments in development activities, capital expenditures for the quarter totaled $43.7 million, down 11.5% to $49.4 million in Q3 2018. We expect total capital expenditures in the coming quarters to rise due to investments in Sears locations, which have been leased to new tenants. However, our outlook for 2020 is for a decline in the expenditures, excluding development investments relative to 2019.

I'll 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 thank -- to take this opportunity to thank all of our employees for their great work in this exciting period of transformation as well as all of our trustees for their contribution over the last quarter. I will now turn the mic over to the operator for the question period. Sylvie?

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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 Fred Blondeau at Echelon Wealth Partners.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [2]

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Heather, just in terms of the reorg, how far will you say you are at this stage? And what is your time line from here?

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

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We definitely are looking at continuing to find sources for cost reduction. So I would say that there is more to come. We have done a bulk of it and a fair amount of it already. But I think you should expect that we should be through this process entirely by midyear next year.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [4]

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Okay. That's great. And in regards to dispositions, what would be the sector mix of your targeted dispositions this year and next?

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

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I don't think -- it's less of a -- as we mentioned at the Investor Day, I think what you're going to see from us coming forward is more strategic dispositions focused on crystallizing value. So as you know, we're doing a lot of work on CN right now and other assets. We're in the middle of the asset reviews. I'm a little reluctant to peg asset class weighting. But as we've said before, we want to make our decisions based on solid analytics. And the asset review is a really key part of that. And I think we believe that we can improve the -- clearly, we want to get off some retail, but we believe can improve the operations of these properties before we move on to disposition.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [6]

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Fred, in the Q3 held for resale, it's about 64%, retail; and 26%, office.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [7]

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Yes. No. I was just wondering for Q4 next year. But you still expect to close on $250 million in Q4, correct?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [8]

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Yes. By the end of the year, it's somewhere between $250 million, maybe a little bit higher, up to $270 million. I guess our point was just that some of the stuff that we're working on may not close by December 31, so it may lead into 2020.

And I think the other important thing to retain is we're in a very, very different position from a balance sheet perspective today versus where we were a year ago. So a part of the rationale is we don't -- we're not under pressure to sell. And part of it is just making sure that we're retaining assets where we see upside.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [9]

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Okay. But we can still expect more than $500 million dispositions within the next -- call it, within the next 15 months or so?

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

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In 1.5 years -- so I would say like at least $300 million would be our expectation for 2020. There's a lot of things that we're working on right now that could shift that number. But as it stands right now, I think $300 million is a good number to be working with.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [11]

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Plus the $250 million in Q4 and maybe Q1, a total of $300 million from here?

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

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Are we talking 2019 or 2020?

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [13]

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No. I'm just talking Q4 and Q1 '20.

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [14]

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Oh, Q4, we're going to -- okay. So we took our forecast for dispositions for 2019 from $300 million to $250 million. So maybe we'd do $50 million to $70 million total. We're not planning on selling $250 million between now and December 31.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [15]

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I got it. I got it. And proceeds will be allocated to debt, right?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [16]

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Yes, initially. If we -- over -- if 2020 ends up delivering more liquidity than expected, then we'll reevaluate the allocation of capital.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [17]

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Yes. That makes total sense. And when do you plan to be a net acquirer again?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [18]

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It's a discussion we have a lot internally, and I think by -- I would say, within the next 18 months that there's a potential for that. But again, it depends on capital recycling as well.

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

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Fred, we also have one particular asset that we're looking at and I assume certain of you will ask the question, so we'll try to field the answer right now. We are looking at value-creation opportunities around the Gare Centrale. So different configurations of what the opportunities we're looking at that could involve a potential sale. And we are working with outside or external advisers to see how we best position and create value around that asset. So that's outside the numbers. If something were to happen, that's outside the numbers which Heather was referring to.

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Operator [20]

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Next question will be from Jonathan Kelcher at TD.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [21]

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Just sticking with the Gare Centrale. So you would consider selling the entire asset? Is that one of the items on the table?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [22]

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We are looking at various alternatives. It could be the whole, partial sale, total sale. It's something we're currently working on, Jon.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [23]

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Okay. And what's -- will you currently carry that on in terms of IFRS value?

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

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A lot less than what we believe the market value is.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [25]

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Okay, fair enough.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [26]

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A great answer from a prior analyst.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [27]

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Yes. Well, how about another way? What about -- what's the annualized NOI from that property as it currently sits?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [28]

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$26 million.

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

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But before you start extrapolating value on a cap rate basis of that number, the value of that asset goes beyond its existing NOI. There's density, and there's other additional sources of revenues, which can be added to the property.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [30]

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Yes. No. For sure, just as a starting point. And then just switching over to NOI. The same-property was driven mostly by the gap closing between in-place and committed occupancy. Where do you see that gap getting to over the course of 2020?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [31]

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We don't expect there's actually going to be a big change in the gap because we're outperforming on both fronts. Our in-place occupancy, there wasn't that much -- we actually expected that number to come down more than it actually did. But it didn't because we outperformed on the in-place relative to our budget, but we've also outperformed on the committed.

So when you look at those -- that spread, I don't think that it -- for 2020 -- and to be quite honest, it's just not something we're focused on. The bottom line is we're focused on what drives cash flow. And that's the in-place number.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [32]

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Okay. Well, then, where do you see the in-place number going to over 2020?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [33]

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Give me a second here. Can I -- can you just either move on to your second question, or I'll pull it -- I'm sorry, I'm flipping through pages here.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [34]

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Yes. Well, the next one is just what you guys think you're going to do for same-property NOI next year.

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [35]

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2% to 3%. And look, we're in the budget process right now. So I apologize for not having all the 2020 numbers at the tips of my fingers, but we're just firming that up, and I think we'll be able to give you numbers that we feel much stronger standing behind at our next call.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [36]

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Okay. And then -- so the 2% to 3%, would it -- that's got to assume that in-place occupancy goes to 91%, 91.5%?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [37]

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Yes, I think that's a reasonable expectation. Yes.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [38]

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We're in that ballpark.

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Operator [39]

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Next question will be from Pammi Bir at RBC.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [40]

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Just one question with respect to the target proceeds. Can you just clarify, was any of that recorded in the retail same-property NOI? Or was it just entirely somewhere else?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [41]

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No, it's excluded from the same-property NOI numbers. Those are all clean numbers.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [42]

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Okay. And maybe just coming back to CN Station. If I remember correctly from, I guess, my Canmarc coverage days, I think that asset was valued at -- years ago at somewhere north of $300 million. How would you say that, that compares to where you think it is today?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [43]

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That's not even in the ballpark of where the value of that asset is today.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [44]

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Yes. It's a much higher number, Pammi, than that. And I don't want to give any price guidance because if we do go into a sale process, I don't think this is a call to sort of set the goalpost. But it's significantly higher. And going to Heather's point, I guess, earlier on, we are carrying it at a lower value on our books.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [45]

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Right. Okay. And then can you just maybe provide some color on what stage you're at in that process? And maybe when you may have a decision on the outcome?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [46]

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We are looking at different ways of creating value with the asset. We've hired consultants, which go beyond the Bloomberg consultants. And we expect to have greater visibility on our intentions by the beginning of 2020, Q1 2020.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [47]

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Okay. That's very helpful. And then just coming back to the Investor Day and I guess a question -- comment around asset sales. I think there was some discussion at that time around being maybe active on the NCIB again. I'm just curious how you feel about that today and how you're balancing that with your debt reduction goals.

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

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Yes. We expect that we will be active as some of this disposition activity comes in. For sure, we would like to get to 50% or below in terms of leverage. And there's a lot of moving parts there, too, in terms of clearly the unrealized value that we have, in a variety of assets within the portfolio, have a positive impact. But I think for modeling purposes, we've modeled up to $100 million of repurchases in -- through the course of 2020.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [49]

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Okay. Just one last one. Coming back to the comment around potentially $300 million of dispositions next year. Was that figure all sort of what you think of as income-producing dispositions? Or was that -- would that perhaps include some potential density sales?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [50]

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That's all IPP.

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Operator [51]

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Next question will be from Sumayya Hussain at CIBC.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [52]

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Just to confirm that the target of same-property NOI growth of 3%, that does not factor in any of the re-leasing of the Sears space?

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

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No. The Sears space was transferred to development. So you actually won't -- you don't see it in there at all.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [54]

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Okay. And then just to kind of move on to your sort of newer philosophy for CapEx and being more disciplined in noting the value-add spending will be coming down. So now how do you measure the returns on that value-add CapEx? And I guess what metrics should we be looking at?

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

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In terms of how we -- you're asking how we decide what projects we're moving forward next year? Is that what you're asking?

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [56]

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Yes. And just and then, I guess, how do you measure success in your CapEx spending and just the returns there?

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

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Well, I mean it depends on what CapEx there is. I think there's been a radical shift on many fronts in terms of the CapEx budgeting process. We also, as you noticed in some of our releases, made some changes to our construction group and consolidated 2 groups together. So there's a much more disciplined tracking of whether we're on budget and on time. So that's one of the things that we use to determine whether we're succeeding.

The other part of that is we're in the process of establishing explicit KPIs to -- which will also be tied to performance. So it's things like return on investment. Not all of the CapEx is return-generating. Some of it is just stuff that we have to invest. So we kind of -- we're bucketing it into 2 groups. We have a committee that meets. And it's basically we're bringing all of the opportunities to the table to identify which ones are the highest-return opportunities and taking a look at this on a multiyear basis.

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

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Together with the new asset management functions,Sumaya, which we added, so all this is a new group coming together.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [59]

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Okay. That's helpful. And then just on Gare Centrale. Can you go over the current state of the retail there and if there's any opportunity to add more value there at all?

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Marie-Andrée Boutin, Cominar Real Estate Investment Trust - EVP of Retail & Development [60]

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Yes. We have opportunity to add value to the retail component of the Gare Centrale. We can actually expand the CRU by at least 32,000 square feet, and it's a plan that we're currently working on, evaluating what the rents could be and what the cost will be to execute the project.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [61]

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There's also -- Marie-Andrée, we could, in the parkade, add additional retail space if we will repurpose that space. And that's about 50,000 additional. And we are working with Beauleigh, who are -- were the consultants for Union Station. So as I said, we're working with various consultants to see what we do with the asset. There's a group that we're working with. That's one of them.

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Operator [62]

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Next question will be from Jenny Ma at BMO.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [63]

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Just sticking on the topic of Gare Centrale. I'm just wondering -- I don't want to get too deep in the weeds on this. But as far as the title, is it one title for the asset or are they separate titles for the different components?

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

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Not sure I understand your question, Jenny.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [65]

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I'm just -- I'm wondering that if you are looking to potentially dispose a portion of it, if there is any complications around splitting out certain parts of the property?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [66]

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Yes. We have a path that we're working on as part of the alternatives we're looking at. Right now, look at it as one title, but we have a path to split titles.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [67]

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Okay. I mean what's the degree of complication there? Is it really -- would it be an impediment to potentially selling a portion of the asset?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [68]

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It's a -- I wouldn't call it an impediment. It just requires work and implementation.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [69]

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Okay. Are you currently advancing any zoning or entitlement initiatives at Gare Centrale concurrent with the review right now? Or is it on hold?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [70]

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We're in full zoning.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [71]

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Okay. Going back to the $300 million of potential dispositions. Does that contemplate an element of Gare Centrale? Or is that just regular IPP?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [72]

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It excludes Gare Centrale.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [73]

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Okay. On topic of SPNOI, historically, Cominar's guided to sort of the 1% to 2% range year-over-year. Just wondering if that's something that you kind of still stick with? Or should we sort of scrap that in light of the major changes you've done to the REIT?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [74]

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For 2020, we're confident we can do 2% to 3%. And I think that with everything that we're working on, I think hitting 2% regularly is what we're really striving to achieve. Clearly, if we do, we're going to have a short-term bump up because of some of the initiatives we've put in place. So it may get, as we roll forward, to be some more difficult comps. But yes, I know 1% to 2% is definitely not what we're targeting anymore.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [75]

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Okay. And then with regards to the Sears space lease-up, the 2% to 3% for next year, does that still exclude the Sears space because it's in a different bucket?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [76]

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That's correct. So that will be additive.

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Operator [77]

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(Operator Instructions) And your next question will be from Matt Kornack of National Bank Financial.

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

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Congrats on a good quarter. It's nice to see a beat. With regards to same -- sorry, NOI margins, I think it's been 5 years since you put up a year-over-year improvement in that figure. And just wondering, you're sitting at -- in 2018 a little bit over 50% NOI margins. But at the time, Cominar generated close to 60%. Do you have a sense as to where that figure could trend in time? Or what are the savings that you'd get embedded in there?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [79]

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It's a very big subject of debate. And I think there's one thing -- we did quite a bit of analysis on that this quarter. One thing I'd like to highlight is taxes, municipal taxes in Quebec are significantly higher than they are in other jurisdictions. So comparing us to peers is a little bit of a difficult comparison. But yes, we are looking to move that higher. We're very pleased to see that number move up, and we expect that to continue to trend up. I haven't quite quantified exactly where that's going to be by the end of 2020, but we'll, for sure, make sure to get back to you on that number.

Realistically, I don't see us being at 60%, but clearly, lease-up in the portfolio has a pretty material impact. I think if we get to sort of full lease-up in a more stabilized number, it's probably more realistic to think of us in the mid-50s as opposed to anything in the 60% range.

The composition of the portfolio has changed dramatically. We didn't have any closed malls back in those -- at that period of time. But I definitely think there's a lot of torque there.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [80]

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Makes sense. And arguably, the goal is to grow top line maybe at a marginally higher amount than your expenses, once you've done these sort of big moves to get you to the 55%.

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [81]

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Sorry, say that again.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [82]

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Yes. I mean the ultimate goal is to grow your revenues at a little bit more than your expenses that you generate better same-property NOI growth ultimately.

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [83]

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Yes, which is exactly what happened this quarter.

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

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Yes. Okay. And then switching to same-property NOI growth for Q4. There looks to be in the historical figures some anomalies in the prior Q4. Just that it was pretty high for office in Q4 of '18 but very low for industrial. So should we expect that there's some sort of move in the numbers? And all in all, you've comped a 1.7% number, and it goes down to 1.1% for Q4 '18. So should we expect maybe even a better quarter than 3.8% for Q4?

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [85]

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I'm not going to comment on that. But if that's your assumption, we're pleased.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [86]

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I think, Matt, we've upped the guidance. So if you look at it from that perspective, you will address part of your answer.

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Heather C. Kirk, Cominar Real Estate Investment Trust - Executive VP & CFO [87]

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Yes, I think you can back into the fact -- yes, exactly.

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

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And there's been a lot of talk on Gare Centrale. But I'm wondering, given your thoughts on that asset, how should we look at to your decision-making process with regard to Gare Centrale when we look at some of the other value-add opportunities throughout Cominar's portfolio. Is that a specific case study given its size and scale and the amount of capital that's required? Or is that an analysis that you're going through on a lot of properties that you own that there's probably significant incremental value, too?

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

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Well, the Gare Centrale, Matt, is a -- first of all, it's our most important asset. So it's one we're paying a lot of attention to. It's a unique asset. It's a tremendous asset in terms of potential. So I think that one sticks out. But we have a great portfolio as we've demonstrated at the Investor Day, the number of properties we have in proximity to what I call the grid, either being the REM or the tramway, trambus in Quebec, we have a very good portfolio in terms of potential. So we are not getting distracted from running our business and generating NOI growth. But we are -- we will be looking at assets as we can move forward.

When I look at Mail Champlain, it's an asset which Marie-Andrée, Heather and I spend a lot of time with the team on. It's a great asset. The Panama station is a key REM station in Montreal. That's another asset which has tremendous potential. So we are devoting time at the high-reward assets.

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

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Okay. Last question from me, and it's a broader one. I mean it seems like the investment community has gotten a lot more comfortable and is bidding up some assets in Montreal, in particular. The fundamentals, industrial is obviously doing exceptionally well. But it seems like cap rates are compressing in other asset classes as well, including office. Like are you starting to see in your conversations with tenants that there's just more confidence in the Quebec economy and that ultimately you'll be able to charge higher rents going forward? Is that coming through in your discussions with tenants?

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

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In industrial, clearly. In office, we're starting to see it. I think we're making progress even in the more challenged [Trois-Rivières] market, which we had, we were starting to see a change in the numbers and progress on the lease-up. The mood is extremely, extremely positive in Montreal and in Quebec City.

If you look at the revenues generated by the Quebec government announced last -- I guess 2 days ago last night, the Quebec economy is just in a great, great space. And yes, we're seeing that in our discussions on the leasing front.

And Marie-Andrée is starting to see -- she's starting to see more positive tone also in sales per square foot in retail. Marie-Andrée, what are we seeing sales per square foot trending, they're positive?

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Marie-Andrée Boutin, Cominar Real Estate Investment Trust - EVP of Retail & Development [92]

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Positive plus 0.3% in the retail portfolio comp sales.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [93]

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So that's a healthy number. We haven't been in that space before. So we're seeing positive elements throughout our portfolio.

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Operator [94]

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Next is a follow-up from Fred Blondeau.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [95]

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Marie-Andrée, just in terms of the retail portfolio, how do your in-place rents compare to market rents in your opinion?

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Marie-Andrée Boutin, Cominar Real Estate Investment Trust - EVP of Retail & Development [96]

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I believe Cominar is pretty much in line. Market rents are so volatile these days. But I really believe that Cominar is pretty much in line with the market rents when it comes to the renewals. Of course, we have other older leases that are not at market trend, and we will deal with them as they expire. But I would say there's some room to grow there. But majority is pretty much on the market line.

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

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But Fred, one of the initiatives Marie-Andrée is extremely passionate about in terms of increasing NOI is changing the client mix in our locations. Marie, go ahead.

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Marie-Andrée Boutin, Cominar Real Estate Investment Trust - EVP of Retail & Development [98]

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Right. That's a little what we discussed at Investor Day. There are some categories in the mall that we will stay away from, more and more to replace them with what the customer really wants today, which is more service-oriented, entertainment-oriented, food-oriented. So that's helping us to increase both the performance of the mall and the rental structure.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [99]

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That's great color. And then, Heather, did you make any progress on the potential JV deals that were discussed at the Investor Day?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [100]

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We are in that cycle right now because there are JV opportunities on the table, and these are ongoing discussions.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [101]

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Okay. That's great. And lastly, any comments on the Le Phare? I mean what's the scenario there? What do you think will happen? And do you see any strategic opportunities for you guys?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [102]

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Fred, it would be improper for any of us to comment. Le Phare is not a Cominar project. I mean I read about it in the paper. My sense is the project is delayed in time for a couple of years, and there's a lot of reshuffling to do about the (foreign language), the hub itself, the transportation hub in the city. But that remains -- Boulevard Laurier is a great location. That's why we like it. There's great absorption on Boulevard Laurier. It's a good location. We have landed ourselves on Boulevard Laurier, and there will be a project on that land -- or our land someday. And it's just a great place. But I doubt it will be Le Phare.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [103]

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No. I'm asking because it does affect the dynamic in your core market, but that's fair. That's good. That's it for me.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [104]

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Yes. But I mean, Fred, we -- I look at -- you said it does affect the dynamic in our core market. I look at right now, there is no building which competes with our Complexe Jules-Dallaire, full occupancy, and it's a very strong -- we're in a good configuration in our own property. The delay of Le Phare just solidifies the weight and the quality of the Complexe Jules-Dallaire in this market.

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Frederic Blondeau, Echelon Wealth Partners Inc., Research Division - MD & Head of Real Estate Research [105]

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No. That's why I'm asking if you're seeing any strategic opportunities for you to -- like to maybe capitalize on the situation there.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [106]

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Yes. Well, I mean, for example, we are occupants of this property ourselves. And I'd like to find a way to move out and capitalize on the position in the market. So these are initiatives we're looking at.

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Operator [107]

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Thank you. And at this time, Mr. Cossette, we have no other questions. Please proceed.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Non-Independent Trustee [108]

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Thank you very much, and I look forward to our call on year-end Q4. Thank you very much.

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Operator [109]

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Thank you. Ladies and gentlemen, this does indeed 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. Have yourselves a great day.