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Edited Transcript of CUF.UN.TO earnings conference call or presentation 9-Mar-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Cominar Real Estate Investment Trust Earnings Call

QUEBEC Mar 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Cominar Real Estate Investment Trust earnings conference call or presentation Thursday, March 9, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michel Dallaire

Cominar Real Estate Investment Trust - CEO

* Sylvaine Cossette

Cominar Real Estate Investment Trust - President and COO

* Gilles Hamel

Cominar Real Estate Investment Trust - EVP and CFO

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Conference Call Participants

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* Jonathan Kelcher

TD Securities - Analyst

* Mike Markidis

Desjardins Securities - Analyst

* Brad Sturges

Industrial Alliance Securities - Analyst

* Matt Kornack

National Bank Financial - Analyst

* Deborah Shannon

- Investor

* Daniel Child

TYM Capital - Analyst

* Michael Smith

RBC Capital Markets - Analyst

* Heather Kirk

BMO Capital Markets - Analyst

* Pammi Bir

Scotia Capital - Analyst

* Andre Louis

- Investor

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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 fourth-quarter results conference call.

(Operator Instructions)

Note that this call is being recorded on Thursday, March 9, 2017. I now would like to turn the conference over to Michel Dallaire. Please go ahead.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [2]

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Thank you. Good morning and welcome to today's conference call, where we will be discussing Cominar's financial results and highlights for 2016. The presentation for this call has been 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 the financial analysts, investors, the general public and the media. However, the question period will only be open to financial analysts and investors.

Before we begin, I would like to draw everyone's attention to the material concerning forward-looking statements on page 2 of the presentation. With me today to discuss our financial results and highlights are Sylvain Cossette and Gilles Hamel. Guy Charron, Michael Racine, Jean Laramee and Todd Bechard are also present with us to answer your questions.

For 2016, our main focus was marketing growth and the direction of our debt ratio to a level comparable to the debt level we maintained prior to our acquisition completed in 2014. Today we have completed our capital optimization program highlighted on page 4, which was an integral part of our debt reduction ratio strategy. Under our capital optimization program, which started in September 2015, we have sold an aggregate of 44 properties for a total proceeds of CAD309 million. 31 of these properties were sold during 2016 for a total proceed of CAD117 million. Net proceeds from these sales were used to pay down debt.

As a result of our successful capitalization optimization program, our debt pro forma ratio now stands at 51.9% [back to deliver we were operating half] prior to our acquisitions of 2014. On the organic growth front, our occupancy rate increased by 0.5% to 92.4%, while our average rental rates increased by 1.8% over renewed leases. For 2016 we signed 2.7 million square feet of new leases, which contributed to replace non-renewed leases and to increase our occupancy rate.

In part, these new leases will contribute to our AFFO over the next 6 to 15 months and have pushed the spread between committed and physically occupied space to 4.5%, which exceeds our historical spread between committed and physically occupied space in the range of 1.5%. We anticipate NOI growth to come up in this spread, settling back to our 1.5% historical level, which includes the favorable contribution of our prior Target Store-releasing efforts, which also is in part ahead of us and from other leasing as we work back to an overall occupancy label more in line with our historical 94% level.

Sylvain will now review our leasing and development activities.

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [3]

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Thank you, Michel. Moving onto page 5, we maintained our aggressive leasing policy, which has contributed to the strong 2.7 million square feet of new leases signed in 2016, and which exceeds by a significant 1 million square feet the total of new leases signed during 2015.

During the year we have covered, either through lease renewals for new leases, 109% of all of our 2016 expiries. This solid performance, coming especially from new leases, underpins further improvements we are anticipating over 2017 and 2018 as our overall occupancy rate still has room to grow.

At year end, our overall occupancy rates stood at 92.4%. Since the beginning of 2016, our occupancy rate has increased by 2.7% in the retail segment, while we experienced a slight decrease of 0.7% in the office segment. Our industrial segment remains stable at 94.3%.

Noteworthy, in the industrial segment for the year we have covered through lease renewals and expiries 111% of our 2016 expiries. This is more than 3.4 million square feet in total.

Similar to prior quarters, we are continuing to achieve strong step ups on lease renewals in the Quebec City office segment at 9.4%. In our Quebec City industrial segment we continue to experience difficulty in meeting strong demand in a mature market, which underpins step ups in the 10% range we are achieving.

On page 6, I would like to provide a quick update on our efforts with respect to the five former Target leases, which were disclaimed as part of the Target Canada insolvency proceedings. At Centre Laval, in Q2 of 2016 we signed a lease with Sportium, which is part of the [Sale Planet] (spoken in French) Group, for a 46,000 square foot store opening in Q3 of 2017. In the quarter just ended, we signed a lease with a specialty health grocer [Avril] (spoken in French) for 30,000 square feet, scheduled to open in Q2 of 2018. We are also in meaningful discussions with a national leading retailer for 41,000 square feet of the remaining space for Q4 of 2018, which would leave us with 9,000 square feet to deal with.

At (spoken in French) [Sans Vanile Rivieres] in Trois-Rivieres, in addition to the previously announced 56,000 square foot Reno Depot hardware store, which opened in Q3 of 2016, in this quarter we signed Linen Chest for a 13,900 square feet store, which is scheduled to open at the beginning of Q3 of 2017, leaving us with 7,000 square feet to deal with. At Place Longueuil, meaningful discussions are ongoing with a national leading retailer for 40,000 square feet, which would be for a 2018 store opening.

Finally, with respect to St. John's, we just signed a lease with NGA Human Resources, a global leader in HR matters, for 40,000 square feet with a Q3 of 2017 occupation. This leaves us with 67,000 square feet to go, with preliminary discussions in place.

Moving on to our development pipeline on pages 7 to 10, during 2016 we transferred 216,000 square feet of development projects into income-producing properties, of which 34,000 square feet are our joint venture properties. We are making progress at Espace Bouvier, a multi-phase office and retail joint venture in development in Quebec City, where a first standalone 65,000 square foot store was delivered in 2015, a second standalone 25,000 square foot store was delivered in 2016 to the specialty health grocer Avril and we just leased 9,000 square feet to (spoken in French) in a standalone building, which was delivered at year end 2016.

The construction of two additional retail buildings aggregating 95,000 square feet will start in the near future upon achieving pre-leasing levels. We also continue to make progress on the 83,000 square foot office component, which is now 57% leased up with another 15% in discussions. In the Quebec industrial segment, we completed the construction of a 46,000 square foot fully occupied industrial building that we delivered in Q3 of 2016.

In the Montreal industrial segment, more particularly in Laval, we completed the construction of a 130,000 square foot fully occupied industrial building that we delivered in Q4 of 2016. Staying in Laval, our 180,000 square foot office development at 3055 Saint-Martin (spoken in French) is now 75% leased, up 15% from last quarter.

During the first quarter of 2017 we started to develop a new commercial complex located on Highway 40, one of the main arteries of Quebec City, which will be developed around the new 340,000 square foot IKEA store announced in the fall of 2016. This commercial complex of approximately 415,000 square feet, excluding the IKEA store, will be comprised of eight buildings of various sizes. The first phases will be delivered in third quarter of 2018 in proximity with the opening of the IKEA store.

I will now ask Gilles to discuss our financial results in further detail.

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [4]

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Thank you, Sylvain. Good morning, everyone.

On page 11, lost revenue from disposition of income producing properties completed in 2015 and 2016 was partially compensated by the net proceeds from our settlement with Target. Compared to the corresponding quarter of 2015, operating revenues for the quarter of CAD213 million decreased by 2.8%, and net operating income of CAD116 million decreased by 6.6%. Recurring FFO for the quarter totaled CAD71 million and recurring AFFO totaled CAD60 million. Cash flows provided by operating activities for the year increased by a healthy CAD20 million to CAD284 million.

Moving on to page 12, for the year ended December 31, 2016, our same property portfolio NOI decreased by 0.5% to CAD461 million, which includes settlement proceeds received from Target. Broken down by market segment, for 2016 retail same property NOI increased by 4% while office decreased by 3.6% and industrial by 2.4%. We are thus right on our top 2016 same property portfolio NOI guidance of minus 0.5%. For 2017, we expect same property portfolio NOI growth in the 1% to 2% range, excluding the Target settlement.

On page 14 you will find a summary of our financing activities for 2016. Two significant highlights are the CAD200 million equity offering, which also formed part of our de-leveraging strategy, and the reinstatement of our DRP, which has a current participation rate of 25%.

On page 15, at quarter end our debt ratio decreased to 52.4%. I mentioned earlier on the call by Michel, including the effect of property sales completed in Q1 of 2017, our pro forma debt ratio currently stands at 51.9% as we are back to the level we operated at prior to our acquisition of 2014.

As at December 31, 2016, our interest coverage ratio was 2.65 to 1 and our unencumbered asset pool stood at CAD3.7 billion, representing 1.62 times senior unsecured indebtedness outstanding, well above our 1.3 covenant level. The increase to our unencumbered asset pool results from mortgage repayments, while we up-financed other properties in the normal course of mortgage renewals.

Moving on to page 16, you will find details of our financial position. At year end, total assets stood at CAD8.3 billion, senior unsecured debentures stood at CAD2 million and mortgages payable stood at CAD2.1 million. Our liquidity stood at CAD3.68 million.

This completes our financial overview for 2016. I will now turn the mike back to Michel.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [5]

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Thank you, Gilles. Before concluding, I wish to highlight that at year end our AFFO payout ratio stood at 105.8%. We expect that our payout ratio will improve over time as we pursue our leasing plan to get back to historical occupancy level and as the full NOI contributions from prior leasing efforts is realized.

Our DRP, reinstated in September 2016, has a current participation rate of 25%. At this level, the pro forma unrealized impact of the DRP placed our cash payout ratio in the mid-80% range. Finally, we intend to maintain our distribution at current levels as our fundamentals are improving and our cash payout ratio remains at comfortable levels.

Thank you for your participating in this call. I will now turn the mike over to the operator for the question period.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Jonathan Kelcher, TD Securities

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Jonathan Kelcher, TD Securities - Analyst [2]

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Thanks. Good morning.

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [3]

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Good morning.

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Jonathan Kelcher, TD Securities - Analyst [4]

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As we look ahead to 2017 and leases you guys have coming due, are there any large leases maturing this year that you're worried about?

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [5]

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That we are worried about, no. We have a normal turn in our industrial segment in Montreal and that market remains very, very strong. As I mentioned earlier in the call, that's where we had significant new leasing activity in 2016 and we see that trend continuing through 2017. We're seeing -- have a look at demand for our space.

We are seeing overall space demand in Montreal around 1.4 million square feet through retail office and industrial. That's up from prior quarter. We're still seeing very strong demand in Quebec City, slightly below 1 million square feet spread through the three segments, so that trend is still very consistent and we're seeing more activity through Montreal. We are experiencing also increased traffic in Ontario, in Ottawa. We seem to be turning the market in our demand in the Ottawa downtown business market.

The one area where we have softness is, like many other people, in the Calgary market. We have roughly 55,000 square feet of space which we will come -- which will be vacant for us in the beginning of Q3 in Scotia, the old Scotia Center building. That space we are currently putting on the market and entertaining leasing efforts for them.

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Jonathan Kelcher, TD Securities - Analyst [6]

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Is that 55,000 -- that's not the Scotia lease, though, right? That comes out at the end of the year?

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [7]

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That is correct, Jonathan. The Scotia lease comes -- the space comes back to us in early 2018.

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Jonathan Kelcher, TD Securities - Analyst [8]

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Okay. On the same property NOI guidance, I guess last quarter, if I have this correct, you were looking for about 1% same property NOI growth in 2017, including the settlement you got from Target. Is that similar to how you're looking at it now in the 1% to 2% that you guided for this morning?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [9]

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No. I think it was some confusion last quarter in our guidance. Our guidance last quarter was 1% excluding the Target settlement in 2016. Our revised guidance today is between 1% to 2%, also excluding the Target settlement in 2016.

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Jonathan Kelcher, TD Securities - Analyst [10]

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Okay, so you're a little bit more confident in 2017. That would be the take away there.

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [11]

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That's right.

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Jonathan Kelcher, TD Securities - Analyst [12]

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Okay. Lastly for me, your development, you have the to office properties you expect to move to income properties. I think it just says in the coming quarters. Can you maybe -- is that Q2, Q3 and what needs to happen for them to come over, or to move to income properties?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [13]

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The one in Laval we expect to roughly around Q2 and the one in Quebec will probably be more Q3 before they're going to be transferred in the income producing properties.

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Jonathan Kelcher, TD Securities - Analyst [14]

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Okay, thanks. I'll turn it back.

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Operator [15]

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Mike Markidis, Desjardins Securities.

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Mike Markidis, Desjardins Securities - Analyst [16]

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Thank you and good morning. Just with respect to the target of getting up to 94% occupancy, do you have any sort of guideline or targets in which you can share with us in terms of how long it will take you to get there?

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [17]

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We are hopeful to get there around over the next 18 months.

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Mike Markidis, Desjardins Securities - Analyst [18]

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18 months? Okay. With respect to the inclusion of the interest capitalization, or adjusting for the fact that you can't capitalize in the JVs the adjustment that we saw in Q4, would that be reflective of the amount for the entire year, Gilles?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [19]

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Yes, Michael, it is the impact of the full year that has been reflected in the last quarter because it was not material during the first quarter. For the full year it represented $0.01 per unit (multiple speakers) adjustment and it does reflect the fact the interest expense within the JVs that is not eligible for capitalization under IFRS, which is in accordance with the (inaudible) guidelines and also consistent with the disclosure of our peers.

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Mike Markidis, Desjardins Securities - Analyst [20]

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Absolutely. Do you have a sense of what the magnitude of that adjustment was in Q4?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [21]

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For what?

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Mike Markidis, Desjardins Securities - Analyst [22]

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What was the amount for the fourth quarter specifically? Do you know that amount?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [23]

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For 2017?

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Mike Markidis, Desjardins Securities - Analyst [24]

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No. In the fourth quarter of 2016. What was the amount that would be attributable to the quarter, not to the full year?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [25]

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I would say out of the CAD2 million it's CAD600,000 for Q4.

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Mike Markidis, Desjardins Securities - Analyst [26]

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Okay. Moving on to the balance sheet, it sounds like you guys have finished for the time being on your asset sales. With the pro forma leverage now at 51.9%, have you revisited talks with DBRS and does that imply that you believe you are comfortable that they will revise their negative trend rating in the next several months?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [27]

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I cannot really comment on the negative trend on the rating, but we are in discussion with them. We have a good relationship with them. In fact, as of today the indication they gave us related to the debt to capital is in line with their expectation for us. We stay in touch with them so I cannot comment for them but we try to do what we have to do to get there.

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Mike Markidis, Desjardins Securities - Analyst [28]

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Okay. With the pro forma leverage, I think you said 51.9% on debt to fair value. Do you have a number in terms of where you think you would be pro forma debt to EBITDA on a run rate basis?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [29]

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Our debt to EBITDA as at December 2016 is 9.7.

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Mike Markidis, Desjardins Securities - Analyst [30]

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Right. Adjusting for the sales, do you have a revised pro forma?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [31]

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The debt to EBITDA is calculated with the last 12 months EBITDA, so I cannot adjust for sales that are not yet completed or will get completed at year end.

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Mike Markidis, Desjardins Securities - Analyst [32]

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Okay. Last question for me would just be with respect to CapEx in terms of for a global figure for 2017 which would contemplate your development spend. Could you give us a figure in terms of total capital, including leasing cost that you expect to incur for this year?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [33]

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Total amount, including investment and CapEx investment and CI, our revitalization program in our retail sector and development of new properties amount to roughly CAD200 million.

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Mike Markidis, Desjardins Securities - Analyst [34]

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CAD200 million. Okay. That's it for me. Thank you.

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Operator [35]

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Brad Sturges, Industrial Alliance Securities.

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Brad Sturges, Industrial Alliance Securities - Analyst [36]

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Good morning. Just quickly on the occupancy stats, once again I think the committed number was 92.5% and last quarter you talked about a gap or a difference between committed and physical occupancy being about 400 basis points. Has that narrowed at all? Is that still a similar level at this stage?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [37]

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The spread was 4.4% at Q3 2016 and it remains stable since the spread is 4.5% today. We believe we reached a -- it's stabilizing. We believe we reached the inflection point and the spread will narrow, are expected to narrow progressively throughout 2017.

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [38]

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The existence of the spread, Brad, is healthy because it shows we have significant new leases.

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Brad Sturges, Industrial Alliance Securities - Analyst [39]

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Okay, sounds good. In terms of your guidance, then, it's mainly the 1% to 2%, excluding the Target settlement, that's mainly going to be gains on occupancy and rents would be, I guess, fairly flat or slightly up. How do you see that?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [40]

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The growth will come from, yes a gain in occupancy in all three sectors but it will also come from the growth in average net rent on lease renewals. The main sector -- the first sector that will be the main contributor will be the industrial sector. This is one sector where we realized the most -- the average net rent growth and is expected to continue throughout 2017. The second sector will be the office sector with a gain in the occupancy rate and also small gain in -- or small growth in average net rent. Lastly the retail sector with, I would say, quite similar small increase in occupancy rate but about flat in average net rent growth contribution.

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Brad Sturges, Industrial Alliance Securities - Analyst [41]

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Okay, great. That is great color. Thanks a lot.

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Operator [42]

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Matt Kornack, National Bank Financial.

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Matt Kornack, National Bank Financial - Analyst [43]

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Can you walk through sort of the geographic breakdown of the moves in your IFRS fair value? It did not move all that much. It sounded like there was about a CAD50 million adjustment in a stable portfolio and then the JVs were positive CAD5 million. Just wondering if you took the write-downs in Alberta and then that was offset with increases in Quebec and Ontario, or how it ultimately unfolded.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [44]

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Geographically speaking, our CAD47 million decrease in fair value, as per the financial statement, is reduced by CAD5 million in our JV so net impact is a decrease of CAD42 million, geographically speaking, CAD32 million is coming from Alberta and another portion coming from the Montreal sector, with increase in the Quebec City sector -- region, the Ontario region and the small increase in the (inaudible) Provinces.

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Matt Kornack, National Bank Financial - Analyst [45]

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Okay. I don't know if you can provide this detail, but do you know what you're running your Alberta office portfolio at on a per-square-foot basis?

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [46]

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I am not sure I understand your question, Matt.

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Matt Kornack, National Bank Financial - Analyst [47]

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Just the IFRS value divided by the square feet that you --

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [48]

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We don't have that.

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Matt Kornack, National Bank Financial - Analyst [49]

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With regard to the distribution, appreciate your comments. Just wanted to know when you look at getting back to sort of below 100% on a non-cash basis, do you have a sense as to the timeline there? Only because in the interim at 25% you are issuing CAD68 million a year at -- if your IFRS value, is the value about a 30% discount to NAV? Just wondering how you weighed that and if in the future, if things don't go as well, if you look at the distribution or if you plan on keeping it as is for an extended period?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [50]

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We need about 18 months to go through the everything we leased and as you saw and Sylvain mentioned, many leases will start to kick in, in 2018, some of the end of 2017, so we are expecting to be there roughly in the following 18 months.

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Matt Kornack, National Bank Financial - Analyst [51]

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Okay. On asset sales, you are done with the capital program just in terms of net dispositions. Do you foresee continuing to sort of sell non-core assets but invest in new properties, so keeping your book value roughly the same but churning some of the asset exposure?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [52]

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We are not expecting to sell any more, because most of the non-core has been already sold. Maybe could have one or two small, but not much in that.

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Matt Kornack, National Bank Financial - Analyst [53]

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Okay. Finally on a positive front, I mean Montreal has been very strong from a job creation standpoint. I'm wondering if you are seeing any of that at least in the early stages translate into better office leasing or retail and industrial leasing stats within the market and if -- I mean Quebec City has historically been quite strong but if Montreal is at least looking like it's turning a corner with those figures?

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [54]

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As I mentioned earlier on, we had demand, Matt, in Q3 for all three asset segments in Montreal slightly less than 1 million. We had roughly about 600,000 of that for office and industrial space. In this quarter we are currently seeing demand more in the 1.4 million range, with 1 million in the office and industrial segment by itself. When we see the type of traction and discussions were having, yes we are seeing improved fundamentals in the Montreal office segment and for us to say we have interest, I think that is positive because our downtown office segment is very, very fully well occupied, so we have a very stabilized downtown core portfolio and the interest we are seeing is all around in properties where we have lesser interest in the past.

I think were seeing positive trends that we did not certainly see a year, year and a half ago, so we feel a lot more optimistic as to how we work our way out of the Montreal office segment. I think there's -- when it comes to Montreal it's always be balance between new supply and demand. I think going forward, I know there's discussions on amongst various parties as to whether or not the PRAM program will continue. There may be instances where one can assume the PRAM program may not continue and if that occurs that obviously helps our portfolio significantly. So there's many factors over and above just the fundamentals, the demographics and the economy of Montreal, but there is all these soft issues which give us reason to believe that Montreal we can work around.

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Matt Kornack, National Bank Financial - Analyst [55]

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Okay. Great, thanks. That's it for me.

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Operator [56]

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Deborah Shannon, private investor.

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Deborah Shannon, - Investor [57]

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Good morning. I have a number of questions. Although you have increased your cash flows and are optimistic for 2017, can you explain why the operating results decreased in 2016 over in 2015?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [58]

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Let's see. Tough question to answer. The operating result decreased partly because we were in the selling mode of properties, so in selling properties we had new decrease and net operating income decreased also. At the same time, we used the net proceeds of the sale of asset to reduce our leverage, our debt to GBV ratio.

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Deborah Shannon, - Investor [59]

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Okay, so you feel as though it's really based on the selling of your properties, more so than anything else.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [60]

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If you look at our result on a global basis, yes. If you look at our result on a same property portfolio, it's another answer.

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Deborah Shannon, - Investor [61]

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Okay. With the increase in trend of online shopping, how will that affect your retail leases going forward in 2017 and onward?

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [62]

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To the increase on online shopping, that trend is stepped. It's not exponential, so it's a very small, stable trend. We have been concentrating on our role in the omni-channel. We strongly believe that there is a very vibrant position for brick and mortar in the omni-channel. What we're seeing and experiencing is twofold. It's in two different segments.

On the retail front, more and more online retailers are developing a brick-and-mortar presence because it complements their offering and when they had a brick-and-mortar presence to their offering, their sales become exponential. We're also seeing positive effects on the industrial segment and that's important. We don't miss that. There's a lot more retail logistics going through the industrial segment and that also has a very positive trend for us and we are well-positioned through our asset diversification.

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Deborah Shannon, - Investor [63]

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Okay, that the sound promising. Can you tell me whether you own any apartment complexes?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [64]

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We own an apartment in Montreal in a multi-use complex, which is (inaudible), so when we bought it there. There is three towers on that building. One of the three towers is residential apartment. We have some apartment also in the Maritime and Atlantic provinces that came with some acquisition, also. We don't own apartment on a, may I say, on a single basis, but through a multi-use complex, yes, we have.

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Deborah Shannon, - Investor [65]

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Okay. Specifically, do you still own Island Park Towers in Ottawa, Ontario.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [66]

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No, we don't.

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Deborah Shannon, - Investor [67]

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Okay. When did you sell that?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [68]

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We never owned that. We never had that building. I don't know what project it is exactly, but we never had residential property in Ottawa. We only own industrial and office and some retail.

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Deborah Shannon, - Investor [69]

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Okay, good. Thank you very much. That's all for my questions.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [70]

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Thank you

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Operator [71]

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Daniel Child, TYM Capital.

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Daniel Child, TYM Capital - Analyst [72]

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Hello. I was wondering if you could just -- I have a follow-up question to an earlier question. What is your budgeted debt to EBITDA for the end of FY17?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [73]

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Around 10.

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Daniel Child, TYM Capital - Analyst [74]

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So that is a slight increase from what it is currently at 9.7?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [75]

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Yes, because we sold the asset at the end of the year so we had the (inaudible) in 2016 and we sold the asset at the end.

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [76]

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That number will decline over time as the revenues from our leasing efforts kick in through 2017 and 2018. But as Michael mentioned, it is normal to have an escalation in the debt to EBITDA ratio because a lot of our sales were completed at year end, so you get the effect of the annualized sale impact.

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Daniel Child, TYM Capital - Analyst [77]

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Do you have a budgeted debt to EBITDA for 2018?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [78]

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No. Not yet.

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Daniel Child, TYM Capital - Analyst [79]

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Okay. What about a budgeted debt to cap for FY17?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [80]

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The debt to cap is exactly where we are now, roughly 53%, because we intend to maintain our debt level at the level we are now through 2017.

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Daniel Child, TYM Capital - Analyst [81]

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I know you know one of the criteria are that DBRS had is that the debt to EBITDA, I believe, is closer to nine times. Is that -- have you had any specific discussions with them on that?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [82]

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They had two goals they gave us last August. One was the debt to capital and the other the debt to EBITDA. Presently, the debt to capital is in line with the DBRS expectation and as I mentioned, we are in discussion with them. In August they indicated that we had to bring our debt level -- our EBITDA at the goal gave us. It's done in terms of the debt to capital and we have to work on the debt to EBITDA through the lease up of our portfolios.

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Daniel Child, TYM Capital - Analyst [83]

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And in your discussions you think that they are understanding of the timeline that, that can take.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [84]

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Yes. We have good discussion with them and we will continue to discuss with them in a short period of time. They understand our model. They understand where we are going, so we don't see any problem with DBRS at the present time, but honestly we have to go through -- or finalize those discussion with them.

Again, we achieved our debt to capital at the level they asked us to be there. They gave us 12 months. We achieved that 53% during the first six months following the press release and we are working on improving on our metrics. We are working on the improvement on our debt to EBITDA ratio through the lease up of the portfolios.

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Daniel Child, TYM Capital - Analyst [85]

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Have you look at your business model and how it would -- how viable it is in a -- if you were to be downgraded to high yield? Does your business model sustain that higher interest cost, et cetera, or if I had to ask you outright, are you committed to your investment grade rating, because that would be a pretty easy answer to be asked.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [86]

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Most of the debt we have is locked in terms of we have a fixed rate interest rate and through most of the debt will mature in the next following and the average is five years roughly. We have a lot of debt which is fixed for 10 years. So the impact on the interest rate on the short time basis, it will not have any impact if we get there. Again, we don't believe we're going to get there. Again, our business model is based on the leased up and we have to go through the target. We have many leases that are already signed. We need just some time to get the impact of the NOI from the coming to lease to the occupied lease.

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Daniel Child, TYM Capital - Analyst [87]

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Okay. But I guess my question is do you think you could continue to operate as you are if you had a high yield rating, or does that become cost prohibited from a debt point of view?

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [88]

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No. Our model works perfectly there. Mortgage rates would be lower than high yield rates by far and we have CAD3.7 million of unsecured assets and ample flexibility so there is no pressure on the model itself. To the contrary, though, we are making a serious effort to remain an investment grade issuer. If you look at it the other way, we have tremendous flexibility. We have huge flexibility in CAD3.7 billion unsecured assets and mortgage rates are significantly lower.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [89]

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At the end of the day, we were there before that rating and we were operating Cominar. It will never impact our business plan, but at the end of the day we will continue to discuss with them and we are going in the direction to work to maintain that rating in the BBB range.

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Daniel Child, TYM Capital - Analyst [90]

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Okay. Thank you for your time.

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Operator [91]

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Michael Smith, RBC Capital Markets.

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Michael Smith, RBC Capital Markets - Analyst [92]

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Thank you and good afternoon. My question is, so for your 1% to 2% same property NOI guidance, how do you see it playing out over the four quarters in 2017?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [93]

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It will be more backend loaded. Two first quarters, we will have negative organic growth and it will turn positive in Q3 and increase in Q4 to end up with our guidance of between plus 1% to 2%.

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Michael Smith, RBC Capital Markets - Analyst [94]

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Great, thank you. For the -- that CAD600,000 of capitalized interest from your joint ventures, is that a good run rate for the next four quarters?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [95]

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I would say CAD2 million a year is a good run rate.

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Michael Smith, RBC Capital Markets - Analyst [96]

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CAD2 million a year. Okay, great.

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [97]

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So roughly CAD500,000 a quarter.

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Michael Smith, RBC Capital Markets - Analyst [98]

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Okay. That rate into 2018 as well?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [99]

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We have not projected 2018 yet.

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Michael Smith, RBC Capital Markets - Analyst [100]

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Okay, fair enough. For your enclosed mall portfolio that you purchased from Ivanhoe Cambridge, how did the sales productivity or the sales per square foot do in 2016?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [101]

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Obviously, the trend was positive. I think we're in the right -- it's much stronger than it used to be. We see good sign to market. I think this is in line with ICSC's projecting right now.

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Michael Smith, RBC Capital Markets - Analyst [102]

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So up three or four percentage points?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [103]

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As you know, we have -- the center we have from the Eastern part of Quebec, downtown, obviously Montreal, the great variety of product that we have, so I would say yes.

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Michael Smith, RBC Capital Markets - Analyst [104]

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Okay, thank you. That's it for me.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [105]

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Thank you.

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Operator [106]

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Heather Kirk, BMO Capital Markets.

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Heather Kirk, BMO Capital Markets - Analyst [107]

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I am just looking for some clarification on the CapEx disclosure in your -- under additions to investment properties. You mentioned CAD110.7 million that is invested. What exactly goes into that number. Is there anything that is related to development or is that a pure addition to IPP.

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [108]

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I am not sure the amount you mentioned. You mentioned CAD110 million?

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Heather Kirk, BMO Capital Markets - Analyst [109]

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It is in the notes. There is a section below one of the tables where you referred to the revenue enhancing investment and I was just curious to know whether that is inclusive of I think there's about CAD40 million of additions to development and whether those two are separate or if they include that amount.

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [110]

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Give me one second please. The CAD110 million you are referring about is investment in our income-producing properties. There is no development properties in this amount.

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Heather Kirk, BMO Capital Markets - Analyst [111]

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Okay. As you look out to 2017, what are your thoughts in terms of how the leasing cost and the CapEx evolve? They have been higher in the last couple of years as you have sought to address the occupancy issues and just wondering what we should expect, excluding development, for 2017.

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [112]

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The overall amount is CAD200 million, including development for properties, including CapEx, throughout portfolio, including TIs, including the realization program in our retail sector.

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Heather Kirk, BMO Capital Markets - Analyst [113]

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You have a number just for the development?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [114]

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I don't have it in front of me.

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Heather Kirk, BMO Capital Markets - Analyst [115]

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Okay. I can follow-up with you later. Just touching on the Ivanhoe Cambridge portfolio again, I know the focus has been operating performance and occupancy. Do you see any opportunities for intensification or repositioning of some of those assets as some of your retail peers have sought to do?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [116]

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In terms of intensification, you said?

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Heather Kirk, BMO Capital Markets - Analyst [117]

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Yes. I am thinking of places like Rockland.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [118]

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There is some. We are working on that presently. We are going through the portfolio to identify all the intensification potential we have in our portfolio, including the old Cominar, also. It is an exercise we are -- and definitely, yes, there is potential. We are working on that through 2017 to identify what we could do and to see the opportunities of intensification on our portfolio, yes.

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Heather Kirk, BMO Capital Markets - Analyst [119]

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When do you expect to have more color available on that?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [120]

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Through 2017. Rockland is something we are working on more closely but the other one, it's going to be through the year. We are in the process to identify all the potential stuff. Regarding also the zoning, if we have to change the zoning or not in different places and (inaudible) we are working on since the last at least six months and we are to go through 2017 with that.

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Heather Kirk, BMO Capital Markets - Analyst [121]

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Thank you very much.

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [122]

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Heather, just back to your prior question regarding the amount for the allotment for the development new properties in our budget is CAD23 million for the development of new properties and CAD35 million in the revitalization program in our retail sector.

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Heather Kirk, BMO Capital Markets - Analyst [123]

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Thank you very much.

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Operator [124]

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Pammi Bir, Scotia Capital.

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Pammi Bir, Scotia Capital - Analyst [125]

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Thanks. Maybe one quick one for me. You made progress on the capital optimization program. The asset sales look like you're pretty much done. Can you talk a bit about the acquisition environment and whether that's something that maybe you accelerate again this year?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [126]

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You mean acquisition? We are not in acquisition mode. Honestly, we were concentrated on the rating. If we see an opportunity, we will look at it, but we are mainly concentrated on development. We have many projects that are ongoing and some are in the process to start. Honestly, it's the place where we have a better return, so we are more concentrated on development now and acquisition, we will see, but at (inaudible) knows where the cap rate and you knows what is the cost of our funds so it is tough to do acquisition and if we do an acquisition, it has to be accretive.

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Pammi Bir, Scotia Capital - Analyst [127]

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Going back to the CAD200 that million you referenced for in terms of total investment, that's really what the capital is really earmarked for in 2017 from a spending perspective. Is that fair to say that?

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [128]

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Yes.

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Pammi Bir, Scotia Capital - Analyst [129]

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Great. Thanks very much.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [130]

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And we have a part that comes from the DRP so we generate roughly, Gilles, CAD70 million per year from the DRP?

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [131]

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Yes, CAD70 million per year from the DRIP (inaudible) CAD140 million of project.

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Pammi Bir, Scotia Capital - Analyst [132]

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Got it. Thanks very much.

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Operator [133]

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Andre [Louis], private investor.

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Andre Louis, - Investor [134]

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(Spoken in French)

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [135]

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(Spoken in French)

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Andre Louis, - Investor [136]

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(Spoken in French)

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [137]

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(Spoken in French)

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Andre Louis, - Investor [138]

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(Spoken in French)

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [139]

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(Spoken in French)

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Andre Louis, - Investor [140]

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(Spoken in French)

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [141]

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(Spoken in French)

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Andre Louis, - Investor [142]

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(Spoken in French)

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [143]

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(Spoken in French)

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Gilles Hamel, Cominar Real Estate Investment Trust - EVP and CFO [144]

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(Spoken in French)

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Andre Louis, - Investor [145]

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(Spoken in French)

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [146]

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(Spoken in French)

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Operator [147]

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At this time, Monsieur Dallaire, we have no other questions. I would like to turn the meeting back over to you.

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Michel Dallaire, Cominar Real Estate Investment Trust - CEO [148]

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Thank you once again for taking part of this conference call and have a nice day. We will talk to you on the next quarter.

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Sylvaine Cossette, Cominar Real Estate Investment Trust - President and COO [149]

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Goodbye.

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Operator [150]

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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. Have yourselves a great day.