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Edited Transcript of MRT.UN.TO earnings conference call or presentation 31-Oct-19 8:00pm GMT

Q3 2019 Morguard Real Estate Investment Trust Earnings Call

Mississauga Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Morguard Real Estate Investment Trust earnings conference call or presentation Thursday, October 31, 2019 at 8:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Tamlin

Morguard Real Estate Investment Trust - CFO

* John Ginis

Morguard Real Estate Investment Trust - Director of Asset Management - Retail

* Kuldip Rai Sahi

Morguard Real Estate Investment Trust - Chairman, President & CEO

* Tom Johnston

Morguard Investments Limited - VP of Property Management

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Conference Call Participants

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* Jonathan Kelcher

TD Securities Equity Research - Analyst

* Pammi Bir

RBC Capital Markets, Research Division - Analyst

* Sumayya Hussain

CIBC Capital Markets, Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Morguard Real Estate Investment Trust Third Quarter Results Conference Call. (Operator Instructions) Also note that this call is being recorded on Thursday, October 31, 2019.

I now would like to turn the call over to Andrew Tamlin. Please go ahead, sir.

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [2]

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Thank you. Just as a point of introduction, my name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. I am joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management; Tom Johnston, Vice President of Western Asset Management; and along with Rai Sahi, Chief Executive Officer and Chairman of the Board. Thank you all for taking the time to join the call.

Before we jump into the call, I would like to point out that our comments will mostly refer to the third quarter MD&A and financial statements, which have been posted to our website. I refer you specifically to the cautionary language at the front of the MD&A, which would also apply to any comments that we make on this call.

Morguard REIT is a diversified commercial REIT and has a diversified portfolio of 48 retail, office and industrial properties, consisting of approximately 8.4 million square feet of gross leasable area in 6 provinces. The trust asset management team is focused on continually improving the returns from the assets currently owned and making quality investments that are accretive in the long term.

The third quarter of 2019 was a relatively quiet quarter, with results slightly down against last year.

Occupancy rates have decreased slightly year-over-year, 93% at the end of Q3 2019 as compared to 94% at the end of Q3 2018. This decrease is primarily due to some new retail CRUs from development projects that have come on stream in the last 9 months, along with continued softness in the Alberta office market.

Net operating income for the second quarter -- for the third quarter decreased 2% year-over-year to $36.387 million from $37.200 million, primarily due to lower lease cancellation fees and lower same asset income in both our office and enclosed mall markets. Contributing to the decrease in the office same asset metric is the impact of the Alberta office market.

Earlier this year, the trust commenced the redevelopment of the former Sears premises at Pine Centre Mall in Prince George, British Columbia. The new wing will consist of approximately 76,000 square feet of redeveloped GLA and will be re-anchored by Winners/HomeSense slated to open in 2020. It will also feature an additional retailer, complemented by small bay CRU, situated along a common area mall corridor. Approximately 65% of the space under redevelopment is committed, and the total cost of this project would be approximately $17 million.

Management is also actively working on a plan for the St. Laurent Mall in Ottawa, which will be shared when finalized.

Interest expense has increased 3.9% for the quarter due to a small increase in borrowings and higher short-term rates on our variable borrowings on a year-over-year basis.

Both basic FFO and AFFO per unit decreased slightly compared to 2018.

The debt-to-asset ratio remains relatively unchanged at 45% as compared to 44.7% from the year ago and 45.1% at year-end.

The trust continues to be active from a redevelopment standpoint, recycling our capital into development projects in our existing properties that are accretive. Since January 1, 2019, the trust has delivered 50,400 square feet of new or remerchandised area. Included in this area is 6,800 square feet of new leasable area at Pine Centre in Prince George, British Columbia. This is currently 100% leased and is based around a restaurant, Browns Socialhouse. Further, another 43,600 square feet of remerchandised former Safeway space at Parkland Mall in Red Deer, Alberta was brought on stream in the second quarter. This space is 54% leased and is focused around the new winners.

The trust has other active retail development projects on the go, all at Centre Mall in Saskatoon, Saskatchewan. The first one that is expected to be completed is 30,000 in gross -- in GLA for our new freestanding pad for Cineplex, which is now complete. The trust is also working on a major redevelopment of the mall with modernization of both the interior and exterior of the mall, including the food court. This is going well and is expected to be completed later in 2020.

The trust revalues its properties every quarter in accordance with IFRS. Fair value adjustments for the third quarter of 2019 was a loss of $14.9 million. This was primarily due to adjustments in the trust's office portfolio.

During the first 9 months of 2019, there have been $19.5 million spent on development capital, down from $34.2 million in 2018, due to less development projects that are on the books. The trust continues to use a sustainable reserve for maintenance capital and leasing. This amounts to $25 million for the year or $6.250 million for the quarter. This is based on a review of the 3-year forecasted leasing and maintenance capital needs.

Actual expenditures were $5.6 million for the quarter.

Lastly, the trust closed on the sale of a small, nonstrategic single-tenant industrial property near Montréal during the quarter. Proceeds were $15.9 million.

Wrapping up, we continue to be positive about our business and the objective of building value for our unitholders. Our strong pipeline of redevelopments in recent years have been very well received, and we are looking at similar projects in the future. We look forward to continuing to execute our strategy, and thank you for your continued support.

We will now open the floor to questions.

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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 Jonathan Kelcher at TD.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [2]

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First, just on the enclosed retail. The renewals were down -- the renewal rates were down roughly 30%. Can you maybe give a little bit of color, is there one big lease or something? Or is there some timing issues in there?

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [3]

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Jonathan, it's John. So retention was lower. In some cases, it was because of some vacancy that ensued as a result of tenants going bankrupt. In other situations, it was planned vacancy in preparation for future commitments. In other cases, we just saw a relatively weak quarter with our expected renewals. But is it something that we expect on go-forward basis? No. Unplanned, I should say.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [4]

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Okay. What are you planning, sort of, for the balance of this year and for 2020 on that metric?

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [5]

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So 2020 in terms of lease rollover exposure, at least with respect to the retail, I think we have in excess of 600,000 square feet of space rolling, some of which we've accounted for, for budgeting for next year in terms of tenants that we expect to renew. For the most part, historical metric of retention has been north of 75%. We don't statistically deviate that much from historical norms.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [6]

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Okay. And you think you'll get uplifts on renewals on the majority of that 75%?

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [7]

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So it all varies depending on the shopping center. Some centers are weaker than others. The ones that are exhibiting growth in our portfolio, we're seeing some positive spreads on renewal rates as part of re-leasing and/or renewals. On the weaker ones, we're seeing a little bit of regression still on small bay commercial retail unit.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [8]

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Okay. Just switching gears, maybe for Andrew here. I guess on the developments that you have, $50 million total, you've spent $14 million, give or take. And then you still have 2 others that are, I guess, unfunded, or you haven't given an amount on what you expect to spend. How do you look at funding the balance of that development spend?

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [9]

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We have some of our financing opportunities coming through over the next year or so. So we've looked at that for our budgets, and it would be primarily funded through situations like those.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [10]

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And then, I guess, the Montréal asset that you sold would go towards that as well?

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [11]

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Yes.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [12]

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Okay. And would you look at selling your -- I believe there is just one industrial asset left?

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [13]

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We'll be looking at all opportunities. There is nothing really in the -- else in the plan for recycling capital. But you never know.

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

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Okay. And then just lastly, on the IFRS, you guys have a stabilized number in the MD&As, around $171 million. How is that determined? And how long you thought -- you guys think it'll be until you get to a run rate that's close to that?

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [15]

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Well, there is different assumptions into that number. It's difficult to say. It's -- I would say, on average, it might be a 2- to 3-year time line.

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

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Okay. So it would be based on, like, 97% occupancy or something like that and market rents, I would guess?

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [17]

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Yes.

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Operator [18]

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Next question will be from [Charles Zion] at [Charles Investment].

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Unidentified Analyst, [19]

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(inaudible), guys, for the great quarter. And I had some very few questions. My first question is the IFRS book value of the company. What is your current book value per shares for the company, please? I think it's around $26. Is that correct?

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [20]

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Yes.

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Unidentified Analyst, [21]

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Okay. And what is the current market value for the past, I would say, for a while now? It's around $11.40, right?

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [22]

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Give or take, yes.

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Unidentified Analyst, [23]

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Okay. So if you look at that ratio that means this company, the market is actually discounting this company by more than 55% of its book value. Does that worry you guys?

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [24]

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Sorry. Can you repeat that?

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Unidentified Analyst, [25]

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I said, the market is currently discounting the value of this company by more than 55%. So my question is, does this valuation, does it bother you guys at all?

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Kuldip Rai Sahi, Morguard Real Estate Investment Trust - Chairman, President & CEO [26]

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Well, it's not a -- this is Rai Sahi. It's not a question of the bother yourself. I mean, we don't dictate the market. Market dictates what they want to do. It looks like the retail assets are out of fashion. So it's not something we control. We're not happy about it. There is not -- we don't really have a control over the market. The people think -- the valuation, we don't have a control over the valuation, too. I mean these are...

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Unidentified Analyst, [27]

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Okay, okay, okay. Yes, yes. That's a fair point. But this has been going on for so many years now with this rate. And I guess my second question is this, why is this still a public company? Why don't you sell it? Why don't you sell all the -- I mean if you believed in the book value of this company, it is selling at more than 55% less the book value for so many years, why don't you just go private? Just sell REIT? Why are you a public company? Why don't you just sell the company and that's better for the shareholders?

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Kuldip Rai Sahi, Morguard Real Estate Investment Trust - Chairman, President & CEO [28]

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This is not as simple every time we just go in the market saying something that we've got to sell the company. That is not the long-term plan of the -- this company. Now then you have to figure out, what would people pay. It's not a commodity that you can go and sell it tomorrow. So you're not going to be able sell at a so-called great value.

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Unidentified Analyst, [29]

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Why don't you sell some of your properties? I mean because my concern here is that I have...

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Kuldip Rai Sahi, Morguard Real Estate Investment Trust - Chairman, President & CEO [30]

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Listen, hold on. Can I ask you a question? How many shares do you own?

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Unidentified Analyst, [31]

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I own a lot of shares on this company, quite a lot, okay? And...

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Kuldip Rai Sahi, Morguard Real Estate Investment Trust - Chairman, President & CEO [32]

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Could you tell the company?

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Unidentified Analyst, [33]

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Well, it's confidential because I'm on phone call, okay? But I do own quite a lot, okay? And that's not a -- that's not the case here. I think all of you should be fired, okay? I'm sorry to say this. Because this company has served me very well. And it needs a new set of people to run this company. Now if new set of people with bright ideas run this company, this company would do better, okay? I don't know why this company is grossly discounted like this. It makes no sense.

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Kuldip Rai Sahi, Morguard Real Estate Investment Trust - Chairman, President & CEO [34]

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Well, there are a lot of companies discounted like that. But the question I asked you -- hold on. Come on guy. Listen, if you want to -- don't want to disclose, I can disclose you how much Morguard Board owns.

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Unidentified Analyst, [35]

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I don't need to know how many shares you own, okay? But that's not the issue here, okay? The issue here is that this company has been discounted a lot for so many years. And you guys are doing nothing about it. And it is time that a new set of management steps in. Because you guys don't know what you are doing.

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Kuldip Rai Sahi, Morguard Real Estate Investment Trust - Chairman, President & CEO [36]

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How long you've owned the stock?

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Unidentified Analyst, [37]

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That's not the issue here. I have owned the stock for so many years. But that's not the issue.

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Kuldip Rai Sahi, Morguard Real Estate Investment Trust - Chairman, President & CEO [38]

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Okay. Hold on, hold on, hold on...

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Unidentified Analyst, [39]

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I wanted to give you -- you see, that's not the issue here. The issue here is that, I want ideas. I want what are you going to do to fix this, okay? This has been going on for so many years. You know that asset is lot more than $26 in shares. And this is selling at $11.40. I mean, it makes no sense. So I think I will advise you guys that if you don't know what you are doing, just sell the properties. Sell it off at the fair market value, okay? If you sell it off at the fair market value, you're going to return more than 50% to your shareholders.

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Kuldip Rai Sahi, Morguard Real Estate Investment Trust - Chairman, President & CEO [40]

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Okay. I'm not here to debate with you. Listen, we also own 50% of the company. We manage as well as we can. It's a long-term hold. If you believe that it's undervalued, you can buy more stock. If you don't like what the management is doing, you can sell your stock. We cannot just get people to dictate us to -- in a given time, that you can just go and sell it. That assume that people are willing to buy it at a fair market value. That is not also true. So...

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Unidentified Analyst, [41]

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Well, okay. So if you believe in the book value, why don't you sell some of the properties then? Like, sell some of the properties, and then return some money back to your shareholders.

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [42]

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Charles, I think we can take this conversation off-line. If -- I think that would be more appropriate.

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Unidentified Analyst, [43]

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Okay. Well, that's fine. I'll call you guys later on. But I will advise you guys to step up, okay? You guys are not doing a good job, okay?

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Operator [44]

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Next question will be from Sumayya Syed at CIBC.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [45]

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Just going back to the quarter, any update on the level of leasing the Target space at the Centre?

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [46]

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Sumayya, John Ginis here. I will respond to your question. The Target box was roughly 100,000 square feet. To date, we've leased 32,000 of the 100,000 square feet. And we're actively soliciting interest on the remnant space. So the answer is, nothing has materialized as of yet, but we're canvassing the market for opportunities.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [47]

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Okay. And then in terms of lease maturities, can you outline or quantify what's maturing in terms of Alberta office in 2020 and kind of your expectations for renewal there?

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [48]

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Tom, do you want to -- do you mind taking that question?

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Tom Johnston, Morguard Investments Limited - VP of Property Management [49]

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Yes. In Alberta, there is -- in 2021, actually, there is no real significant rollovers in the portfolio of scale. We have smaller office tenants renewing in -- throughout the province. But no large significant renewals.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [50]

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And for 2020?

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Tom Johnston, Morguard Investments Limited - VP of Property Management [51]

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That is for 2020.

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

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Okay. Sorry, I thought you said 2021.

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Tom Johnston, Morguard Investments Limited - VP of Property Management [53]

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Yes. Sorry. Yes. No, really nothing significant in 2020. We completed a renewal in Calgary with the federal government, RCMP, but it's a 2024 renewal in the Duncan building, that's done in advance.

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

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Okay. And then probably this is the last question for Rai. Just speaking broadly, we've seen a lot of joint ventures between multifamily and retail REITs, just in terms of developing excess density. So have there been any conversations between mortgage residential and mortgage REIT? Or is there any potential that a joint venture-type situation could happen?

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Kuldip Rai Sahi, Morguard Real Estate Investment Trust - Chairman, President & CEO [55]

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No, there are no the -- if you're talking about the Morguard residential REIT, no. There are no conversations between the 2. And there is no -- we are looking at whether there is any opportunity at any of the shopping center. But it's pretty preliminary at this stage.

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Operator [56]

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(Operator Instructions) And your next question will be from Pammi Bir at RBC Capital Markets.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [57]

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Maybe just sticking to the internal growth outlook or maybe going back to it, when you layer in your comments around retail retention and some of the office commentary, what -- how does 2020 shape up at the Morguard in terms of what you might expect or what sort of trend you expect to see in terms of overall same-property NOI growth?

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [58]

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We really haven't given direction like that in the past. So I'm -- I probably would refrain from commenting on that.

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

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Does it -- maybe taking another -- looking at it another way, does it feel like the pace of erosion that we've seen over the last few years, does it feel like we're kind of bottoming out now and that perhaps may not get any worse?

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [60]

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Is -- which segment, in particular? I think each segment has its own...

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [61]

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I guess either. In terms of retail on the enclosed mall segment, I guess, it did pick up a little bit in terms of Q2 -- Q3 versus Q2, but office, you mentioned, the Alberta pressure. So I guess both segments, really.

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [62]

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Well, I think, the -- we've already -- the Alberta office market is quite well-known. John, do you want to give a couple of comments on the retail?

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [63]

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Yes. Pammi, it's John. So I mean, we don't speculate here on terms of a go forward. However, I mean, the operating results do show that in some of our enclosed mall portfolio, we're starting to see some growth through management's efforts on intensification and redevelopment of some of the large anchor vacancy we -- that have befallen us over the course of last 3 years. But it varies from market to market.

On the strip center side, I mean, there's always been a steady growth for the REIT over the course of time. So we don't see much issue there. It's nominal growth going forward as it relates to that segment within the retail asset class. So -- but every market has -- every mall is different across the country, depending on where it is.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [64]

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Okay. In terms of the 2020 expiries in retail, how much of that would be in the enclosed mall space?

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [65]

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In the enclosed mall space, well, we have a total of 639,000 square feet rolling in 2020. That's total retail. I don't have the split in terms of enclosed mall and strip. But that represents our exposure in 2020.

And I mentioned this earlier on the call when Jonathan asked the question, we don't expect massive deviation in terms of retention for -- at least on historical norms. Some cases, we are going to get space back, if we know in advance. And we are actively marketing it, as we speak.

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [66]

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Okay. And then just to clarify, was the 15% drop in the multitenant office portfolio for same-property NOI, was that the Alberta, I guess, tenant, or in Alberta?

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [67]

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Can you be more specific on that? Sorry, I missed your..

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Pammi Bir, RBC Capital Markets, Research Division - Analyst [68]

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Sure. The -- I'm just going to pull it up here. But I think -- yes, your multitenant office portfolio, same-property NOI was down about 14.5%, year-over-year in Q3. I just want to clarify that, that was the Alberta exposure that you were talking about? Or -- it's Alberta.

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [69]

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Yes. It's primarily coming from Alberta. It's also [bunding] in all of our office properties across the country. But the bulk of that variance is coming from Alberta.

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Operator [70]

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(Operator Instructions) And at this time, Mr. Tamlin, we have no other questions registered. So I would like to turn the call back over to you.

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [71]

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Okay. Thanks, everybody, for joining. And have a happy Halloween.

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Operator [72]

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