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Edited Transcript of CUF.UN.TO earnings conference call or presentation 9-Nov-18 4:00pm GMT

Q3 2018 Cominar REIT Earnings Call

QUEBEC Dec 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Cominar REIT earnings conference call or presentation Friday, November 9, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gilles Hamel

* Guy Charron

* Sylvain Cossette

Cominar Real Estate Investment Trust - President, CEO & Trustee

* Todd Patrick Bechard

Cominar Real Estate Investment Trust - Executive Vice-President of Acquisitions

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Conference Call Participants

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* Bradley Sturges

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

* Frederic Blondeau

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

* Jonathan Kelcher

TD Securities Equity Research - Analyst

* Matt Kornack

National Bank Financial, Inc., Research Division - Analyst

* Michael Markidis

Desjardins Securities Inc., Research Division - Real Estate Analyst

* Pammi Bir

Scotiabank Global Banking and 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 call being recorded on Friday, November 9, 2018.

I now would like to turn the conference over to Mr. Sylvain Cossette. Please go ahead, sir.

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

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Thank you, Cindy. Good morning, and welcome to today's conference call, where we will be discussing our financial results and highlights for the third quarter of 2018. 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 only be open to financial analysts and investors.

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, Gilles Hamel; members of our executive management team Alain Dallaire, Marie-Andrée Boutin, Michael Racine, Jean Laramée, Todd Bechard and Wally Commisso are also present with us.

Highlights from Q3 2018 include same-property NOI growth of 1.7%. This is our third consecutive quarter of same-property NOI growth. Driving positive same-property NOI growth remains one of our key priorities. We recorded growth in the average net renter renewed leases of 0.9% for the first 9 months, up from 0.4% for the first 6 months. Our committed occupancy rate increased to 93.3%, a 110 basis point increase year-over-year. 93.3% is the highest it has been since Q1 2015 and reflects our continuing focus on increasing occupancy.

Our recurring AFFO payout ratio stood favorably at 78.3% for the quarter compared to 104.2% in the comparable quarter of 2017. Our debt ratio declined to 51.9%, down 5.5% from the end of 2017 as a result of the redeployment of asset sale proceeds of $1.14 billion to debt reduction. Most importantly, during the quarter and after the quarter, we made important changes to our senior management team. It is with great pleasure that earlier this week, we announced that Heather Kirk was appointed Executive Vice President and Chief Financial Officer. Heather is a seasoned executive with over 20 years of experience in real estate, capital markets, investment banking and equity research. Heather has extensive real estate capital markets expertise, strategic thoughts and real estate insight and deep understanding of Cominar, our markets and our institutional unitholder base strengthens our leadership team in a very meaningful way. Heather will be stepping into the CFO position on December 3. I have known Heather for more than 20 years. This is a great addition.

During the quarter, we also announced the appointment of Marie-Andrée Boutin as Executive Vice President, Strategy and Operations, Retail. Marie-Andrée has extensive expertise in the retail industry and is well suited for the challenge. After beginning her career at Provigo, Steinberg Realty and Cadillac Fairview, Marie-Andrée spent more than 20 years at Aldo, where she successfully headed up a corporate real estate portfolio of over 850 stores in Canada, the U.S. and the U.K. In addition to these responsibilities, Marie-Andrée oversaw the Bensadoun family's significant real estate investment portfolio and brings to the table significant development expertise as we seek to surface additional value in our major shopping centers.

In mid-October, we completed the internalization of substantially all of Groupe Dallaire's construction activities in Montréal, and we continue to pursue the diversification of independent suppliers that are used in each of our 3 markets. The Montréal activities accounted for approximately 60% of our construction activities with Groupe Dallaire. The majority of the work in 2018 related to projects which commenced in prior periods.

Finally, the remainder of the transition will essentially be completed in the first quarter of 2019. During the third quarter of 2018, we acquired from Ivanhoé Cambridge for $36 million the land and superficies rights related to Place (inaudible) a mixed-use office and hotel property. Place (inaudible) was effectively an air rights structure where Ivanhoé Cambridge owned the land. Cominar leased from Ivanhoé Cambridge the air rights associated with our office component, and a third party leased from Ivanhoé Cambridge the air rights associated with the hotel component. This acquisition will enable us to realize a meaningful valuation gain of approximately $15 million.

I will now move on to an update of our leasing and development activity. Firstly, on Pages 5 through 7, our committed occupancy rate stood at 93.3%, up 110 basis points year-over-year. The industrial segment in our Québec City portfolio remains strong at 95.2% and 94.6% occupancy, respectively. We also made 130 basis points progress year-over-year in the office sector with room to grow at 90.8%. Growth needs to come from our Montréal suburban office properties in Ottawa. We are currently seeing modest improvement in our Montréal suburban office portfolio and more meaningful improvement in the Ottawa market, which increased from 86.9% to 92.5% year-over-year.

During the first 9 months of 2018, we have renewed 4.6 million square feet of expiring leases, and in addition, we signed a significant 2.7 million square feet of new leases. Taken together, we completed renewals and new leases totaling 7.3 million square feet, which represents 102.3% of our leasable area maturing in 2018 compared to 93.5% of our leasable area maturing at the same time last year. Committed leases for space not yet occupied stood at 1.6 million square feet at the end of Q3. These committed leases represent $22.4 million in annualized NOI, which will begin to contribute on a cash basis over the next 5 quarters, 55% of which in square footage will start contributing this quarter.

In addition, during the quarter, we signed new leases representing approximately 549,000 square feet. The spread between committed and in-place occupancy rates narrowed by 60 basis points from 6.6% to 6%. We expect this gap to continue decreasing as signed leases become income generating and we focus on keeping tenant retention high. During Q3, the in-place occupancy rate of the retail segment increased by 90 basis points over Q2, while industrial increased by 140 basis points and office remained flat.

Moving onto Page 8. Our average net rental rate increased by 0.9% for renewed leases in the first 9 months of 2018, led by a 4.2% increase in step-ups on renewals in the industrial segment and 0.2% in the retail segment. We recorded a decrease in step-ups on renewals of 0.3% in the office segment. Our performance in the office segment was impacted by our aggressive leasing initiatives in the Ottawa market with public works, covering approximately 636,000 square feet of renewals and 81% of our 2018 lease maturities in this market. Excluding Ottawa, lease renewal step-ups in the office segment would have been approximately 4.7%. We are experiencing improving fundamentals in our Ottawa segment.

Moving on to Page 9. I am pleased to report that Target is behind us with the most recent lease-up of the remaining Target space at Place Longueuil to Urban Planet, scheduled to open the 30,000 square foot store in May of 2019. As a result of our releasing efforts on an overall basis, we increased our annual net revenue by 38% over the previous target rent. In addition, while we had estimated CapEx in the $100 per square foot range, actual CapEx came in below forecast at approximately $86 per square foot.

On Page 10, with respect to our 7 Sears locations, 6 stores and 1 warehouse, which total approximately 670,000 square feet, including the acquisition in Q2 2018 of the Trois-Rivières store, we have signed leases for 88,000 square feet representing 13%, with another 41% under discussion. At the same time, we continue to review the best use for the locations, which present intensification opportunities, primarily at Mail Champlain and Galeries de Hull.

On Page 11, you will find details of 7 properties currently held for sale, a mix of office, retail and industrial properties aggregating 323,000 square feet, with an anticipated total sales proceeds of $44 million and a valuation gain of $13 million. We are also proactively working on further asset sales as reducing leverage remains an important long-term priority.

Moving on to Page 12. With respect to our 500,000 square feet Îlot Mendel retail project located on Highway 40 in Québec City, adjacent to the new IKEA store, we have essentially completed the infra prep work for the site and Decathlon is scheduled to open a 57,000 square foot store in the fall of 2019. The 340,000 square foot IKEA store that opened last August is doing very well, which will support our leasing efforts. Our Decathlon store at Mail Champlain is also doing very well, and we view the arrival of Decathlon at Îlot Mendel as also being an important catalyst to our leasing efforts. In addition to Decathlon, we have an approximate 116,000 square feet of retail space under discussion at the time.

I will now ask Gilles to discuss our financial results.

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Gilles Hamel, [3]

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Thank you, Sylvain, and good morning, everyone. On Page 14, compared to the corresponding quarter of 2017, operating revenues of $176.8 million decreased by 14.9% and net operating income of $93.5 million decreased by 16.7%. This decrease is the result of an increase of 1.7% in our same-property portfolio NOI, combined with a decrease of $20.3 million in NOI for the 95 properties sold in Q1 2018.

During the third quarter of 2018, administrative expenses amounted to $4.3 million compared to $5.2 million for the corresponding period in 2017. This decrease is due mainly to a $0.5 million decrease in salaries and other benefits related to the sale of the 95 noncore properties in Q1 2018. Adjusted net income decreased by $12.1 million from the corresponding quarter of 2017, while recurring FFO for the quarter decreased by $12.6 million and recurring AFFO decreased by $14.2 million. These decreases result mainly from a $20.3 million decrease of NOI for the 95 properties sold during Q1 2018, partially offset by a reduction of $5.5 million in finance charges and a $1.6 million increase in same-property net operating income.

Moving on to Pages 15 and 16. For the third quarter, our same-property portfolio NOI increased by 1.7% to $93.2 million. This is our third consecutive quarter of positive same-property NOI growth.

Broken down by market segment. For the third quarter of 2018, retail same-property NOI decreased by 0.4%, while office increased by 2.1% and industrial increased by 4.4%. The decrease of the same-property NOI for the retail portfolio is mainly attributable to the closure of the Sears stores and to our Rockland enclosed mall, where our food court redevelopment is nearly completed.

With respect to 2018 guidance, we reiterate that we currently expect to be towards the low end of 1% to 2% range for the same-property NOI growth. For 2019, we currently expect same-property NOI -- same-property portfolio NOI growth in the 1% to 2% range.

Moving on to Pages 17 and 18. As at September 30, 2018, of the $592.6 million in mortgages originally maturing in 2018, $537.9 million have already been repaid, refinanced or as shown by slide, leaving $55 million, which we intend to pay off at maturity using our line of credit. Our debt ratio decreased significantly from 57.4% at the end of 2017 to 51.9% at the end of Q3. Our interest coverage ratio stood at 2.35:1. And our unencumbered asset pool stood at $2.8 billion, representing 1.57x senior unsecured indebtedness outstanding, up from 1.43x at year-end 2017.

Moving on to Page 19. You will find details of our financial position. At quarter-end, total assets stood at $6.9 billion. Senior unsecured debentures stood at $1.7 billion and mortgages payable stood at $1.8 billion. We have no material mortgages maturing in 2019 and only $81 million of mortgages maturing in 2020. As we have $600 million of unsecured debentures maturing in 2019 and our $700 million line of credit maturing in 2019, we are currently working on an $800 million mortgage plan for 2019, together with a new reduced line of credit in the $400 million range. At quarter-end, liquidity under our unsecured operating credit facility stood at $632 million.

This completes our financial overview for the third quarter of 2018. I will now pass the mic back to Sylvain.

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

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Thank you, Gilles. I would like to take this opportunity to thank all of our employees as well as our trustees for their contribution over the last quarter.

I will now turn the mic 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) 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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Just 2 quick questions for me. First, Sylvain, you just mentioned that you were seeing improving fundamentals in Ottawa. Could you remind us what is your strategy? And what should be our expectations for 2019?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [3]

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Okay. In Ottawa, first of all, we had a considerable amount of public works renewals, which impacted us in the past. And we -- I referred to 636,000 square feet. Those we had renewed a couple of those a year or 2 ago and the balance in the year, and we needed to renew those at the aggressive rates to keep Public Works in the buildings. We have seen a shift in the market in terms of our discussions with Public Works the rental rates are picking up, and we're seeing more stability. In Ottawa, we have a -- if you go back to prior calls, I referred to our tenancy at 110 O'Connor, which was a 2019 event for us. And we are currently in discussion with Public Works for 110 O'Connor. So that will impact our outlook in Ottawa going forward. But we are also seeing, generally speaking, just a more favorable context with Public Works on rental rates. We are also seeing stronger demand in the Kanata region where we have very big properties, including at Palladium. We've done some recent transactions with forward, and we see that market as being vibrant. So that's why I'm saying Ottawa, I'm seeing a bit of a shift.

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

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Perfect. And my second question, you made a few changes to your senior team this year. Did you feel you have the right team in place at this point? Or you project to possibly make further changes in the next 12 months?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [5]

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Well, we -- as a leadership team, you continuously review your leadership team, and that's an ongoing process. So we are very happy with the additions of Heather and Marie-Andrée, and we will continue to look at the leadership team and to see what other changes we think we need to make.

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Operator [6]

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Next question is from Jonathan Kelcher at TD Securities.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [7]

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On the 1.6 million of leases that you have coming on next year, how many of those properties are in your same-property bucket?

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Gilles Hamel, [8]

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They are all in the same-property bucket.

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

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Okay. So how can we -- how should we think about the rental coming on over the next 5 quarters?

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Gilles Hamel, [10]

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You mean...

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

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In terms of the income or NOI.

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Gilles Hamel, [12]

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Yes, the $22.4 million incremental NOI over the next 5 quarter, the internal square footage, I will give it to you in term of square footage and not in term of dollar. In term of square footage, 55% of this 1.6 million signed lease will be beginning paying rent in this quarter. And 84% of the square footage will be beginning paying rent in Q1 '19. So it's front ended.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [13]

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Okay. So I'm just trying to square that. So $22 million annualized on -- and you're sort of $93 million this quarter. Sounds like it -- you should have a same-property NOI number next year that's well above 1% to 2%.

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Gilles Hamel, [14]

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But keep in mind, Jonathan, that the $22.4 million annualized, it's only one side of the known. It is the positive sign. It is a known fact. We have signed leases supporting this amount. At the same time, during this period, the next 5 quarter, our -- historically, our renewal rate of tenants is around 75%. So we will not renew all the lease at maturity. At the same time, there is always some bankruptcy, tenants leaving during the term of the lease and that type of negative stuff. So it will reduce -- you have the increase, I mean from the lease already signed but there will be downside for other headwinds.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [15]

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That being said, Jonathan, we are budgeting 75% retention rate for 2018 and slightly above that for 2019.

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

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Right. And presumably, you'll do some new leasing on the 25% that doesn't renew, correct?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [17]

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Correct.

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Gilles Hamel, [18]

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Correct, yes.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [19]

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Okay. And then just switching over to, Sylvain, I think you mentioned further asset sales. Do you have a rough dollar amount that you're targeting on that?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [20]

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We -- I am currently looking at selling at assets in the -- primarily in the retail and office sector. We are conducting discussions right now with potential buyers at our values, and values which meet our expectations. So these discussions are happening in lot right now, so I can't commit to the amount, but I'm trying to complete asset sales in the range of about $300 million over 2019.

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

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$300 million over 2019? Okay. So that's in addition to the $40 million that you have sold.

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

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Right, right.

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Operator [23]

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Next question is from Brad Sturges at Industrial Alliance.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [24]

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Just to follow up on the same-property NOI guidance. What -- at the end of 2019, what was your 1% to 2% guidance assume in terms of physical occupancy by the end of next year?

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Gilles Hamel, [25]

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We stated that physical in-place occupancy at the end of 2019 would be 89.9%.

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

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Okay. And that's assuming that on any renewals that you complete that you're getting fairly stable rental rates on renewals?

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Gilles Hamel, [27]

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In term of average net rent growth and average net rent, actually we are -- after 9 months in '18, we are at 0.9% average net rent growth. It is forecasted in our 2019 budget to be at 1.2% for the year.

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

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Yes. And Sylvain, just on the Sears Kanata, given that some of your development costs came in a little bit lighter on Target, are you still assuming about $100 a foot for your Sears space and development?

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

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Yes, I am. Because I go back when I mentioned on previous calls, the Target space was in great, great condition. And it was easier to play with. The Sears space is older space, and I think it's prudent for us to -- and run 2 floors. So it's pretty for us to maintain $100 CapEx per square foot number. And we're trying to be below that, of course, but just for purposes of higher budgeting estimate, we prefer keeping it at $100.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [30]

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Okay. In terms of the discussions you're having, is it really for looking at 2020 now for potential occupancy? Or could you see that some of that be for occupancy in 2019?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [31]

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Guy?

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Guy Charron, [32]

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Yes. There is already 1 tenant in place right now that is paying rent. Obviously, there is a second one that will pay rent during the second quarter of 2019. It's correct to say that the big ballpark figure will happen in 2020.

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Operator [33]

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Next question will be from Pammi Bir of Scotia Capital.

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Pammi Bir, Scotiabank Global Banking and Markets, Research Division - Analyst [34]

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Just maybe coming back to the $22 million of annualized NOI. Can you maybe just clarify, is that a cash number or is that a GAAP number?

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Gilles Hamel, [35]

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It is the cash number.

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Pammi Bir, Scotiabank Global Banking and Markets, Research Division - Analyst [36]

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Okay. So there's -- like there's no free rent periods or -- in those -- in that figure?

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Gilles Hamel, [37]

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No, no.

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Pammi Bir, Scotiabank Global Banking and Markets, Research Division - Analyst [38]

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Okay. And then maybe just switching gears. If I look at retail for a minute, can you comment on whether you've seen any exposure in any of the recently announced closures or bankruptcies and how you're thinking about retail for next year?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [39]

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In terms of RONA, we're not impacted by it, and we have the affected RONA stores, so it doesn't impact us. We have 2 RONA locations, and they're good stores. The other, I guess announcement that happened this week, they're not material. We have maybe 15,000 square feet, and they were paying percentage rent, so it's a nonmaterial event for us. In terms of retail going forward, we don't have anything very particular in our radar in terms of bad debts or retailers that we're extremely worried about on a cash basis. So at the current time, I have no visibility on something that none of us have seen so far.

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Pammi Bir, Scotiabank Global Banking and Markets, Research Division - Analyst [40]

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Okay, that's helpful. And maybe just when you look at your overall geographic exposure, is the Ottawa market that you want to be in for the long term, either at office or retail? Or is that a market that you could see that exposure decline over time?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [41]

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In the Ottawa market, we go back, as I mentioned, we have a rental rate decline with the Public Work. So we'd like to try to work those rental rates back up. And so we -- in the normal course, it's a market we -- like any other market, we look at the arbitrage position and see if there's value we can realize and mature assets, we will seek to realize upon it. So in Ottawa market, for us, it's really getting the rental rates back up, and then in the right capital recycling decisions we get the right point on the asset in our eyes. That's for the central business district market. We have a property, for example, also there are other properties like 110 O'Connor that I mentioned we're in discussion with Public Works. But that also a property, which is well located off of the LRT. And it's a property where there's potential to revitalize that property and to increase rental rates differently. So it's a different type of asset management configuration. And in Kanata, we are seeing demand for our properties, especially at Palladium. So we're -- we feel comfortable on an increasing rental rate environment at that location.

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Pammi Bir, Scotiabank Global Banking and Markets, Research Division - Analyst [42]

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That's good color. Maybe one last one for me. Just when you think about your guidance for next year and you look at the balance sheet, what are you targeting in terms of leverage by the end of 2019? And how do you see yourselves kind of getting there?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [43]

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Well, we -- right now, what I'm focused on is managing our debt renewals. We -- as Gilles mentioned, we have $600 million of unsecured debentures we need to deal with. We have our banking facility, which is currently unsecured at $700 million, which I see reducing to approximately $400 million. So my focus right now is on dealing on those maturities. And we also have creeping up on us in 2020 another $400 million of debentures. Debt reduction is a priority. I cannot comment on the precise number, but it's -- debt reduction is a priority for us. And the additional asset sales, if and when we conduct in 2019, for the time being will go to debt reduction. So I see debt reduction going down. In combination, we're also trying to reduce our CapEx expenditures.

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Operator [44]

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Next question will be from Mike Markidis at Desjardins.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [45]

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Just with respect to the $800 million mortgage plan that you have and the reduction of your credit facility, just noticed that some of other Canadian REITs over the past several years have been able to get term financing on an unsecured basis from a financial institution or institutions. Is that something that you guys have looked at? Is that available to you? Or is mortgage debt the more appropriate way to go?

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

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We are looking at mortgage debt as the most appropriate way for us in the nature of where we're at. But we're -- with respect to our bank line, we're also discussing see an unsecured line.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [47]

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Okay. Just with respect to -- not to beat a dead horse, but the 1% to 2% same-property growth guidance for next year. Is there any large known vacancies that's embedded in that assumption?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [48]

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No. The one we have to nail is 110 O'Connor. Otherwise, we have some known vacancies in the office sector, but we -- for example, we have 30,000 to 40,000 square feet at 2001 McGill College, which we know we have a vacancy on coming up and that space is being rerented. So it's not a question it'll show up in the occupancy rates, going to be maybe some breakage on the NOI for the period where there'll be a transition amongst the occupancy base. But there's nothing else I have on my radar which I suspect for 2019.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [49]

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I have to apologize. I actually missed the commentary with 110 O'Connor earlier. So can you just refresh me on what's happening there? Is it something...

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [50]

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Yes. 110 O'Connor, as I mentioned on previous calls, we have a lease expiring in 2019. They originally had signaled to us that they were wanting to leave the property at expiry because they were going as part of a DND. And we are -- they changed their mind, and then we're currently in discussion on a renewal. So we have ongoing discussions with Public Works around 110 O'Connor.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [51]

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And would the -- you mentioned that the rent's starting to look a little bit better there, but should we be expecting that to roll down?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [52]

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On 110 O'Connor? No.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [53]

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Yes. No, Okay. And then on the $44 million of assets for sale, could you give us a broad range of what the expected economics or cap rate looks like on that?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [54]

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Todd? We're realizing...

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Todd Patrick Bechard, Cominar Real Estate Investment Trust - Executive Vice-President of Acquisitions [55]

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It's hard because one of us...

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [56]

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Well, just blended, what are we at?

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Todd Patrick Bechard, Cominar Real Estate Investment Trust - Executive Vice-President of Acquisitions [57]

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Blended, it's a low cap rate, on that $44 million it's probably below 6%. But that -- it's -- part of that is because we're...

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

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Different kinds of...

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Todd Patrick Bechard, Cominar Real Estate Investment Trust - Executive Vice-President of Acquisitions [59]

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Selling land with blend that may not have any income with it and stuff like that, so.

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

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Blended cap rate, we're about 6%.

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Todd Patrick Bechard, Cominar Real Estate Investment Trust - Executive Vice-President of Acquisitions [61]

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5.9%, I think, yes.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [62]

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Okay. And are those assets -- do you have any vacancy? Or are they fully occupied?

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Todd Patrick Bechard, Cominar Real Estate Investment Trust - Executive Vice-President of Acquisitions [63]

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One of -- a very small building was vacant -- a 4,000 square foot building with a pad was vacant and one building is now occupied, 100% occupied, it was vacant, but it's now occupied before we sell it, so.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [64]

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Okay. So it doesn't sound like any material. It's good. Okay. And then just last question, Sylvain. I know the debt reduction seems to be the focus in 2019 in addition to refinancing the unsecureds that are coming due. But just with respect to the -- I don't know, I think it's obviously more long term, but all the development opportunities that you put in that one slide. Is there anything that we should be thinking about that might be relatively close to fruition? Or is this all stuff that's several, several years away?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [65]

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In that slide, it's more medium to long term. There's nothing in there which is short term. The only assets we're really looking at more in realtime is the development opportunities at the Gale Centrale.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [66]

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At GM Central, okay.

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

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Yes, that's a big project and that requires a lot of front-end thought and analysis. So we're obviously -- we're front ending all the analysis around it, but we don't have shovel in the ground in the short term.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [68]

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And I know you've talked about partnering in the past, but would you also consider just selling -- I mean, I guess you're keeping the asset. Would selling the air rights outright 100% wouldn't be an option for you?

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

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We will make -- we are looking at that particular question, and we will make the determination which makes the most sense for us in terms of return on the sale or the investment. So that's exactly part of the analysis we're going through.

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Operator [70]

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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 [71]

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Just firstly on your disposition strategy. Is it safe to assume we likely won't see any more portfolio sales? And that going forward, you're likely to sell in kind of small but steady increments?

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

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Yes and no. We have portfolio sales, there'll be portfolio sales of smaller portfolios. But generally speaking, the scene you're putting forward is correct.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [73]

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And on that, do you have a sense of what's the appetite like for the kinds of assets that you're looking to sell and how that's changed? If it's changed from, say, about a year ago?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [74]

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Currently, the asset we're conducting discussions on are assets where -- which are within our -- we feel very comfortable in terms of market reception and buyer interest in them. So I think the tone is good. And -- however, as I mentioned on the prior call, when you go to enclosed malls, there's a lot of enclosed malls on the market or coming to market, and that does impact buyer interest and buyer mood. So with the types of assets we've been looking and are looking to sell are ones where we feel comfortable with the buyer interest and are within our price matrix.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [75]

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Fair. And then just lastly, in terms of fair value of assets, I think typically you guys make all your fair value updates with your Q4 reporting versus on a quarterly basis, which is more of the norm. Is that something you would consider revisiting? And in marking-to-market your portfolio every quarter, are you kind of okay with it being an annual update?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [76]

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Okay. That is a question -- one of the matters I have on my list when Heather comes on board. So I will be discussing that and a couple of other issues with Heather.

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Operator [77]

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

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

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Just wondering, with regards to the 670 basis points of vacancy that's neither -- that's not committed at this point, is that stuff that you're actively marketing? Or would you consider that to be chronic vacancy?

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

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No, we're actively marketing it.

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

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So presumably, I'm just thinking in terms of your guidance for next year, presumably there's the ability to pick up some of that vacancy to offset the 25% that you're not renewing potentially and you're not...

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

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Yes, there's a good -- there's a chunk of that which is Sears. So it depends on how fast we can move in move out of Sears. And, yes, the other ones we have -- in terms of vacancy, we have 200,000 square feet at Place Laval, and that's an asset, which I managed to -- which I explained to you in prior quarters is a challenging asset for us. So how we manage to lease-up Place Laval will have an impact on that. We have roughly another 100,000 square feet of vacancy in Laval and other assets, which have an easier leasing profile. And the Montréal suburban office portfolio, we are seeing, as I mentioned earlier, favorable movement in the market today. But it's just small incremental gains, but we're keeping our foot to the pedal on leasing up that portfolio. So that's where the vacancies are. And Ottawa, we have some vacancies and that still has room to grow, and that's a market which we see is a stronger market today. So that's where it's going to come from.

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

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Okay. So presumably, the 1% to 2% is sort of a base case, assuming none of that positive comes online. And you've got the negative of bankruptcies and 25% of your 4.8 million square feet that comes due in 2019.

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

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Yes, correct. Well, I'll explain it to you this way. In our budget for 2019, we don't have a lease-up assumption for Place Laval. So for successful leasing of Place Laval, that's incremental.

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

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Okay, fair. With regards to the purchase that you did in the quarter, there is an income component to that. Could you let us know, I know it's not necessarily cap rate, but what the yield on the cost would be in terms of the income you're getting and that it goes off?

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

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There's about a $1.1 million swing on NOI through -- on the one hand, what we received from the air rights. And there's -- the other part is the -- what we don't pay on the ground lease, call it that way. So there's about a $1.1 million swing.

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Todd Patrick Bechard, Cominar Real Estate Investment Trust - Executive Vice-President of Acquisitions [86]

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And that's indexed each year? So that would be incremental.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [87]

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Had inflation?

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Todd Patrick Bechard, Cominar Real Estate Investment Trust - Executive Vice-President of Acquisitions [88]

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Yes.

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

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Yes. When we pushed out the hotel the air rights for 50 years? So we pushed out the hotel air rights so we have a higher income stream coming our way. We don't have a -- any hotel coming back at us under the ground lease.

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

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Okay, fair. And then what was the timing of that transaction in the quarter?

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

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Oh...

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Todd Patrick Bechard, Cominar Real Estate Investment Trust - Executive Vice-President of Acquisitions [92]

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Very end.

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

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Very end. It was more quarter-end.

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

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There's no benefits in the quarter?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [95]

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No, no, no. Nope.

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Todd Patrick Bechard, Cominar Real Estate Investment Trust - Executive Vice-President of Acquisitions [96]

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No.

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Gilles Hamel, [97]

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None.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [98]

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With regards to interest expense, it was up -- your debt level stayed reasonably similar, but it was up $700,000 or so. And it looked like it was mostly in the credit line. Was there -- are there standby fees or something else in there that would have driven that? Or any onetime items there?

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Gilles Hamel, [99]

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There's no onetime item, Matt. But effectively, we are paying standby fees on the portion not used on our line of credit.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [100]

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Okay. So if that comes down in size, then the fees would be reduced as a result?

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Gilles Hamel, [101]

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The fees will be reduced. Yes, we will have saving on the fees.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [102]

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Okay. And the G&A, the $4.3 million, should we assume in the $4 million to $4.3 million range as a run rate going forward?

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Gilles Hamel, [103]

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We projected our G&A to be $19 million for the year 2018 and we -- in our budget for 2019, there's a slight reduction of 5% in the G&A.

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

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For the time being, working on trying to reduce it further.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [105]

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Okay. On CapEx, it was a little bit less this quarter than last quarter. But I know at the board level and obviously, with Heather coming in as CFO, there's the focus on sort of making sure that all dollars spent are the best use of the capital. So do you have a sense at this point as to where your CapEx budget's heading as you head into 2019? Or is that something that we'll wait for the Q4 final report?

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Gilles Hamel, [106]

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Yes, Matt. If we split the CapEx in 2 broad categories, in term of TIs and brokerage fee based on the assumption -- using assumption that we have in our budget 2019, we see the TI and brokerage fees to be down by roughly 50% compared to 2018. The other bucket of CapEx, excluding redevelopment, let's say regular CapEx, we had in our number in 2018 large amount of regular CapEx, which are not recurring. So for 2019, regular CapEx are down by roughly 50% also. So 2019 will be a lower -- much lower year for investment and CapEx and TI.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [107]

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Sorry, do you have an aggregate figure? I can apply those, but do you know what the total number is, value-wise?

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Gilles Hamel, [108]

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We are talking about -- if you express it in the provision, in the -- for the AFFO calculation, we're talking about provision actually of $45 million in 2018 and $50 million in 2019. Because even if we reduce our investment in TI, we amortize our TI over the term of the lease. And this amortization will keep on growing, increasing.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [109]

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Right, okay. It sounds good. With regards to your existing rent step do you have a sense as to what the -- trying to get an organic growth number for the existing stuff that's not coming up for renewal. Do you know, what is your average rent step across the portfolio?

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Gilles Hamel, [110]

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Average net rent for the period of 9 months in 2018 is 0.9% and in our budget 2019, it's 1.2%.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [111]

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No, sorry, not increases on renewal, but just what you would be getting on a standard lease. If you have a 5-year lease, how much is the...

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Gilles Hamel, [112]

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Okay, okay, sorry.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [113]

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No, we don't have that number. We have to get that number to you, Matt. I don't have that number handy.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [114]

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Okay. That's fine. And with the proceeds from the $40 million of dispositions, would you entertain any NCIB purchases with that? Or will it go for debt reduction?

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [115]

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Right now, it is earmarked to go to debt reduction.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [116]

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Okay. I think that's it for me. And I'm still trying to figure out the same-property NOI growth for 2019, but I think that's what everybody's trying to do on this call, and we'll wait for Q4 to get a better sense.

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Operator [117]

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Next is a follow-up from Mike Markidis.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [118]

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I just wanted to follow up on Matt's question with regards to the CapEx. So Gilles, I understand, 50% reduction in TIs and leasing cost next year. But then when you asked about CapEx, excluding -- I think you said excluding development or redevelopment, but then we're talking about AFFO provision and what's value-add versus non-value-add. If we just look at it a little bit more simplistically and say, okay there's -- I think year-to-date, you guys are running at $118 million on CapEx whether you want to call that maintenance or not, that's fine. So annualize that out, maybe you're thinking about something closer to $150 million for the year. Is that the number you think will reduce by 50%? So should we be thinking $75 million next year or...

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Gilles Hamel, [119]

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Okay, let me put it differently. We are talking about a pool of $135 million for 2019, including redevelopment. Regular CapEx redevelopment, TI and brokerage fees total or budgeted for 2019 is $135 million.

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Operator [120]

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And at this time, Mr. Cossette, we have no other questions registered.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [121]

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Thank you very much.

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Guy Charron, [122]

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Thank you.

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Sylvain Cossette, Cominar Real Estate Investment Trust - President, CEO & Trustee [123]

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

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Operator [124]

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Thank you, sir. 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.