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Edited Transcript of SOT.UN.TO earnings conference call or presentation 4-Nov-19 2:00pm GMT

Q3 2019 Slate Office REIT Earnings Call

Richmond Hill Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Slate Office REIT earnings conference call or presentation Monday, November 4, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Madeline Sarracini

Slate Retail REIT - Analyst, Business Development & IR

* Robert Armstrong

Slate Office REIT - CFO

* Scott Raymond Antoniak

Slate Office REIT - CEO

* Steve Hodgson

Slate Office REIT - COO

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Conference Call Participants

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* Bradley Sturges

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

* Brendon Abrams

Canaccord Genuity Corp., Research Division - Analyst of Real Estate

* Chris Couprie

CIBC World Markets Corp. - Analyst

* Jenny Ma

BMO Capital Markets Equity Research - Analyst

* Jonathan Kelcher

TD Securities Equity Research - Analyst

* Matt Kornack

National Bank Financial, Inc., Research Division - Analyst

* Stephan Boire

Echelon Wealth Partners Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Slate Office REIT Third Quarter 2019 Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Madeline Sarracini, Investor Relations. Please go ahead.

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Madeline Sarracini, Slate Retail REIT - Analyst, Business Development & IR [2]

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Thank you, operator, and good morning, everyone. Welcome to the Third Quarter 2019 Conference Call for Slate Office REIT. I'm joined this morning by Scott Antoniak, Chief Executive Officer; Robert Armstrong, Chief Financial Officer; and Steve Hodgson, Chief Operating Officer of Slate Office REIT.

Before getting started, I'd like to remind participants that our discussion today may contain forward-looking statements, and therefore ask you to familiarize yourself with the disclaimers regarding forward-looking statements as well as non-IFRS financial measures, both of which can be found in management's discussion and analysis. You can visit slate office REIT's website to access all of the REIT's financial disclosure, including our Q3 2019 investor update, which is available now.

I will now hand over the call to Scott Antoniak.

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Scott Raymond Antoniak, Slate Office REIT - CEO [3]

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Thank you, Maddie. Good morning, everyone, and thank you for joining the call. Slate Office REIT remains focused on owning and operating a portfolio of well-located quality office assets that deliver meaningful total returns to unitholders through an attractive monthly yield and continued growth in net asset value. Our track record of value creation is predicated on a simple and consistent investment thesis, to acquire well-located quality assets at a discount to replacement cost and apply an aggressive and tailored approach to asset management to create value for unitholders.

The REIT maintained positive momentum in the third quarter as demonstrated by the team's ability to generate strong operating results that continue to build value. During the third quarter, we completed over 124,000 square feet of leasing at an attractive average leasing spread of 25.4%, highlighting the strong demand across our core leasing markets. With in-place rent across the portfolio at a 12% discount to market rent, the REIT is well positioned to generate strong organic growth going forward.

On a per-unit basis, FFO, core FFO and AFFO each increased by $0.01 quarter-over-quarter to $0.19, $0.20 and $0.17, respectively. The REIT's AFFO payout ratio for the quarter was a healthy 59%. Combined with the fact that 62% of the REIT's income is generated from government and investment-grade tenancies, our current distribution yield is both secure and very attractive relative to our peers.

Loans to -- the REIT's loan-to-value ratio further decreased in the quarter to 59.7%. Over the midterm, we expect loan-to-value to decline to a target ratio of 55%, providing the REIT with enhanced balance sheet flexibility for future growth. The REIT's net asset value per unit increased to $8.86, up 3.5% from the second quarter of 2019 and 5% year-over-year. Including our recent U.S. acquisitions in the Wafra 25% joint venture investment in our GTA office portfolio, more than half of the REIT's assets have been effectively marked-to-market over the past year, providing third-party validation of the REIT's net asset value.

While the units are currently trading at a significant discount-to-net-asset value, we believe this presents unitholders with a compelling total return investment opportunity for the following reasons: completion of capital recycling plan enhances liquidity and provides the REIT with capital to invest in existing assets and new acquisition opportunities; an established track record of buying well and applying best-in-class asset management to create value; significant growth and value creation opportunities exist within the portfolio and through a substantial pipeline of accretive acquisition opportunities in Chicago and other key markets in the Midwest and Southeastern United States; recent transactions provide third-party market validation of the current net asset value of the REIT; with the current distribution and an AFFO payout ratio of 59%, unitholders are being rewarded with an attractive and stable income stream.

Embedded organic growth across the portfolio will be driven by increased occupancy and moving in-place rental rates to market. At present, in-place rents are on average 12% below market. With consistent operating performance in FFO and AFFO and the strengthening balance sheet, Slate Office REIT offers a compelling investment opportunity and is well positioned for the future. We look forward to continuing to execute on our strategy, and we thank you for your continued support.

With that, I'll open up the call to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Brad Sturges with IA Securities.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [2]

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Just looking at your lease maturity schedule, I think in the MD&A, you noted 64,000 square feet vacating in Q4. Just can you elaborate on what that is or what's driving that vacancy?

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Steve Hodgson, Slate Office REIT - COO [3]

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Yes. Brad, it's Steve. The 64,000 that's vacating in Q4 is a number of small tenants, some in the U.S. where we either weren't able to accommodate their growth or the tenant was not willing to pay the rents that we're asking as we move the -- move the buildings up market. And then some was just regular churn in the portfolio in Atlantic Canada and in Toronto, nothing major.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [4]

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And on the last call, I think you were looking at -- by the end of the year, like an 89% occupancy rate. What would be the target based on what leasing activity you've seen so far to date?

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Steve Hodgson, Slate Office REIT - COO [5]

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Yes. It's always difficult to predict, Brad, because there's a few larger transactions that may or may not happen at this juncture. However, we probably are mostly in line with what we've messaged in the past, but we're probably scaling it back slightly to about 88%.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [6]

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Yes. And for 2020, in terms of the lease maturities, can you just remind us of what are the expected vacancies right now?

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Steve Hodgson, Slate Office REIT - COO [7]

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Sure. So in Atlantic Canada, we've got about -- in April of 2020, Exxon is vacating, and that's 96,000 square feet. And in -- also in St. John's, another tenant at TD Place is vacating at the end of April for 30,000 square feet. And in Halifax, at the end of this year, a 30,000 square foot tenant is vacating.

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Operator [8]

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Your next question comes from Stephan Boire with Echelon Wealth Partners.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [9]

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I'll just -- first, I'll start off with a very general question, but in light of the -- of most recent economic announcement, has your base scenario changed in terms of the macroeconomic environment, and ultimately, on the demand for office space in the U.S.

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Scott Raymond Antoniak, Slate Office REIT - CEO [10]

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Sorry, Stephan, can you repeat the announcement? Probably lost you.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [11]

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Yes. In light of the -- of most recent economic announcements, especially in the U.S., has your base scenario changed in terms of the macroeconomic environment? I mean what's your scenario in -- for 2020 in terms of organic and external growth, I guess?

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Scott Raymond Antoniak, Slate Office REIT - CEO [12]

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Right. So a couple of things there, Stephan. So I mean, as you know, we did a significant amount of diligence, et cetera, in Chicago, and it wasn't just predicated on a near-term thesis. So in terms of in-migration into Chicago, job growth, et cetera, burgeoning, if you will, to use that word, tech market (inaudible) Chicago, I think not all individual markets are created equally, but were continued -- we continue to be optimistic about the central loop in downtown Chicago and increasing occupancy and having rents move. And given the fact that we own the real estate at $230 a foot and in-place rents on a gross basis for the space that we have are 50% to 60% of what some of the competition in that space. I think we see continued upside there and we've spent some time in the last few months, looking at other markets in the Midwest and the Southeast, and I think we're picking our spots. But there are significant opportunities in various markets in the U.S., like in Jacksonville, for example, or Orlando or Tampa Bay, where there's real economic activity. There is an increasing younger workforce who are choosing to look at markets that have lower taxes, a better cost of living, and not to be trite about it, but a better climate. That's a real thesis that is emerging, and we're seeing, and so we're looking at that. But I think we look at each market individually, but there's nothing about the broader economic situation in North America that would change our outlook for 2020 or beyond.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [13]

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Do you still see the Chicago market as being, I guess, the most attractive of your -- of the markets you're looking at?

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Scott Raymond Antoniak, Slate Office REIT - CEO [14]

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Among the most attractive, for sure. I mean there are a number of opportunities there that we continue to evaluate. There's a significant pipeline of opportunity in Chicago, but also in other markets in the U.S. And I think it's about -- it's back to the investment thesis (inaudible). So buying the right assets at the right cost base, where we can create value, whether that's through just migrating in-place occupancy to the mean where it should be or increasing rents are doing something that's more involved on an amenity or capital program where we can drive outsized returns. And it's not -- for sure, there's a focus on the overall market, but it's also very specific to the individual asset, because as you know, there are good and bad assets in every market, and it's incumbent on us as management to find those opportunities.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [15]

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Right. Okay. Okay. And can you tell us what was the cap rate at which you sold the 5500 North Service Road in Burlington?

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Steve Hodgson, Slate Office REIT - COO [16]

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Yes. So it's a little bit skewed, depending on how you're looking at it because we have a committed lease deal with a large accounting firm. So the in-place occupancy is about 63%, but the committed occupancy is 88%. So on a committed basis, the cap rate was in the mid-6s. But obviously, on an in-place income, it was in the 4 percents.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [17]

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You said on an in-place income, it was in the 4%?

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Steve Hodgson, Slate Office REIT - COO [18]

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That's right. Yes, because there was a contractual committed lease deal with a large accounting firm that takes the occupancy from 63% to 88%. So there was a contractual growth in the NOI. In other words, that's not reflected in our Q3 results. So if you're trying to extrapolate what the impact would be at the NOI, it's more so at a 4% cap.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [19]

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Okay. Okay. And finally, I understand that most of the same-store NOI decrease was due to the decrease in occupancy for the Brunswick Square asset and also the Young Street in Toronto. Can you give us a bit more color on your expectations in terms of occupancy of those properties by year-end and your expected time frame before seeing improvement there?

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Steve Hodgson, Slate Office REIT - COO [20]

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Sure. 4211 Yonge Street, since we've took over the REIT in 2014, that asset has been between 95% to 99% occupied. So it's a very strong market. It's walking distance to the subway in the North Yonge corridor, a node in Toronto that's benefited greatly from the supply [constraint] downtown. So we're really not concerned about re-leasing that space, and the time frame to do so would be this year or early next year. Brunswick Square is an asset in the Saint John market. We lost Irving Oil from our building and that was because they built a new building, a headquarters for themselves in Saint John. And so they vacated our building and a handful of other buildings in the market. It'll take some time for that space to absorb. We have some -- we've been quite pleased with the pipeline of activity that we do have. But I would say that it would be in the later part of 2020 where we really start to get some traction on that.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [21]

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Okay. Can you just -- sorry, if I missed it, but can you just remind me, what's the space that they vacated, the size?

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Steve Hodgson, Slate Office REIT - COO [22]

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Yes. They vacated 90? 70 -- I believe it's 70,000 square feet. Yes, approximately 70,000 square feet.

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Operator [23]

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Your next question comes from Chris Couprie with CIBC.

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Chris Couprie, CIBC World Markets Corp. - Analyst [24]

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I just want to stick with the leasing environment a little bit. Kind of looking at the properties that show sequential changes quarter-over-quarter. It looks like, I think, as you highlighted on a prior call that you're expecting vacancies in Atlantic Canada. So just maybe beyond Brunswick Square, can you comment among the leasing environment for the rest of the properties in New Brunswick and Halifax? And then looking at Chicago, it looks like you had some success at 20 South Clark, offset by -- I think you talked about the tenant departures at 120 South LaSalle. Just maybe overall, how's the Chicago leasing experience tracking versus your expectations?

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Steve Hodgson, Slate Office REIT - COO [25]

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Yes. So just to clarify on the U.S. comment, the tenant departures were not at 120 South LaSalle. We did have one tenant relocate within building and downsize, but the intent of that was to free up some space for another tenant to expand, which will -- is not yet reflected in the occupancy. So there's really not a -- there's -- it's a timing issue more so there. At 20 South Clark, we did have some tenants -- or we do have some tenants expected to vacate the balance of the year, and that's perhaps the comment that you were referring to. In Atlantic Canada, St. John's, we continue to be well occupied. We're having quite a bit of traction on the upcoming vacancy that we have, both at TD Place and Cabot Place.

Again, those are currently occupied spaces, but we have been touring them actively in anticipation of those tenants vacating. The market there -- I mean, there's been a lot of good news on the offshore development side highlighted at the most recent oil and gas conference out there. There's been some announcements from Statoil and Husky and the larger players out there that are all positive and moving in the right direction. There's a demand from tenants that had previously been in the suburbs and are looking at opportunities to consolidate in space downtown because it was a market that was historically difficult to get into. In New Brunswick, aside from Saint John, which we spoke to, Fredericton, we're practically fully occupied. It's still a very tight market there, 5% vacancy, and it's really -- we're just focused on some key renewals to stabilize our portfolio there. In Moncton, we have Blue Cross Centre, which is the best asset in the market, and 81 Albert. Both buildings are 100% occupied with a long weighted average lease term. So we're -- and it's -- overall, it's a good market for us.

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Chris Couprie, CIBC World Markets Corp. - Analyst [26]

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And then so just clarifying the Chicago comments you made. So the occupancy at 120 South LaSalle was temporarily down sequentially, but you expect that to kind of pick back up by -- as the tenant expands?

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Steve Hodgson, Slate Office REIT - COO [27]

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Yes.

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Chris Couprie, CIBC World Markets Corp. - Analyst [28]

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Okay. And then just on the acquisition comments you were making. Should we be -- in terms of thinking about how you guys plan to allocate capital and acquisitions, is it -- do you think Chicago will be a focus before you start looking at some of these other Midwest and Southeastern U.S. markets?

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Scott Raymond Antoniak, Slate Office REIT - CEO [29]

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Well, I think we would look at all of that. I mean as you know, Chris, a big part of the thesis is our belief in the clustering of assets, and 20 South Clark and the 120 are in close proximity to each other. So I think the ability to add within the central core with the positive news on an economic and leasing front is interesting to us if we can continue to acquire those at the kind of pricing where we think we can generate the returns that we want to. But we're not going to -- we'll continue to evaluate all the opportunities. It's not dissimilar to SRT. I think the Midwest and Southeast are both interesting, and we'll look to deploy capital in the coming months. Chicago is certainly at or near the top of that list, but we wouldn't be doing our job if we were just looking there. So we're going to continue to look at it in other markets that -- where we can do similar deals to the ones that we have done in Chicago in terms of cost basis and upside.

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Operator [30]

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Our next question comes from Jonathan Kelcher with TD Securities.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [31]

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Just sticking with Chicago. Where -- when you underwrote that, where did you think you could get the occupancy up to?

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Steve Hodgson, Slate Office REIT - COO [32]

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Between 90% and 92%.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [33]

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And that would still be your goal?

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Steve Hodgson, Slate Office REIT - COO [34]

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Yes. Absolutely.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [35]

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Okay. And how long do you think it'll be until you guys are somewhere close to that level?

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Steve Hodgson, Slate Office REIT - COO [36]

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I think we'll probably hit those numbers in 2020.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [37]

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Okay. And then just on North Service Road, when does that deal close?

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Steve Hodgson, Slate Office REIT - COO [38]

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It closes tomorrow.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [39]

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Okay. That's good. And then for -- on the leasing that you guys did, what -- approximately how much were the TIs to get the Deloitte deal done?

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Steve Hodgson, Slate Office REIT - COO [40]

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The TI on the Deloitte deal was $60, I believe.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [41]

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Okay. And then for next year...

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Steve Hodgson, Slate Office REIT - COO [42]

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Yes, just to be clear, on a 15-year term as well.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [43]

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Yes. Yes, for sure. And then for next year, what are your expectations on leasing costs or what are you budgeting right now?

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Steve Hodgson, Slate Office REIT - COO [44]

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I think we can provide some more guidance on that. We have not yet finalized our budget for 2020. We can certainly provide some more guidance on that on the next call or next conversation. But I think nothing's really changed in our regard. It would just be how -- what part of the portfolio constructs that because different assets have different leasing costs. So depending on what the weighted average is, I can't speak to that at this point.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [45]

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Okay. And then just lastly, on the known vacancies you have, I guess, particularly the Exxon One. How's the expiring rent compared to market rents and what do you guys think you can get when you get it re-leased?

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Steve Hodgson, Slate Office REIT - COO [46]

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That's a very good question. It's at or below where we think we can lease even in today's market.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [47]

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Okay. And then just lastly, any more capital recycling this year versus North Service Road? That's sort of last.

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Robert Armstrong, Slate Office REIT - CFO [48]

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There's potentially a couple more deals that we have out in the market right now where we have active conversations in. That'll be the end of it. There won't be any more dispositions going into 2020. We're looking to continue to buy in the markets we sold to. We're practically done our disposition plan almost at this point.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [49]

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Okay. So no dispositions in -- well, other than North Service Road in Q4. And then I guess we shouldn't really model any for next year at this point. That'd be fair?

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Robert Armstrong, Slate Office REIT - CFO [50]

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Yes. We have some stuff we're working on right now that would likely close in 2019 that we haven't announced yet. But yes, in 2020, there will be -- we don't foresee any dispositions unless it was completely opportunistic. We expect to be buyers in 2020.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [51]

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Okay. And roughly, how much are you working on right now for 2019 ballpark?

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Robert Armstrong, Slate Office REIT - CFO [52]

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Call it, $60 million to $70 million.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [53]

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$60 million to $70 million.

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Robert Armstrong, Slate Office REIT - CFO [54]

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Yes. And then our kind of pro forma target for acquisitions going into next year would be $100 million to $150 million.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [55]

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And that would all be on your current balance sheet or?

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Robert Armstrong, Slate Office REIT - CFO [56]

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Yes, we think so. And unless the markets improve -- but we see a lot of great opportunities in the market Scott spoke to. We think there's a lot of great assets out there that would fit within our portfolio were either out in Chicago or potentially a new market in the U.S.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [57]

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Okay. And then how do you think of north of $100 million of acquisitions with trying to get to a 55% leverage ratio?

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Scott Raymond Antoniak, Slate Office REIT - CEO [58]

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Yes, we -- like, leverage is down, I guess, 340 basis points since the beginning of the year. So it's definitely going in the right direction. The further asset sales plus North Service Road definitely helps. But realistically, we're -- there's probably about 300 to 400 basis points of natural push in that direction every year for a couple of factors. One, we are retaining a fair amount of capital. Like, right now, our core FFO payout ratio's 50%. So all of that capital that we're retaining is either going to be invested in our properties or to repay debt. Either way that lowers LTV. Plus, if you just kind of assume that we're growing NOI at 2%, 3% a year, and you're just keeping cap rates the same, again, we're growing value and that's pushing in the right direction as well.

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Operator [59]

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Your next question comes from Brendon Abrams with Canaccord.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [60]

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Most of my questions have already been asked, but just following up on maybe Jonathan's expiring rents versus market. You provided some color on, I guess, the Exxon lease. What about the Irving Oil lease in Saint John?

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Steve Hodgson, Slate Office REIT - COO [61]

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There -- yes, Irving was paying a below-market rent as well. Having said that, with the vacancy in that market right now, we're going to be very competitive. So I guess, in short, I don't expect downside in rent, but I don't expect much upside either in that particular market. Yes.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [62]

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And then just with some of these more near-term vacancies, should we expect capital expenditures to increase in 2020 relative to prior years?

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Steve Hodgson, Slate Office REIT - COO [63]

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Yes. I don't think so. Because at the same time, we also have some fairly large -- I mean if you put Maritime Centre redevelopment aside, we just completed some very large projects such as the parking garage redevelopment in -- at Brunswick Square. So year-over-year, we're not anticipating an increase in capital expenditures overall, but perhaps some of that leans more towards leasing costs than building CapEx.

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Robert Armstrong, Slate Office REIT - CFO [64]

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Okay. And just maybe a comment on the leasing as well is, we continue to be very happy with the way the team's performing from a leasing front. We do think we're creating tremendous value. Even some of the clients, say, in the U.S. market, are totally strategic to be able to create space for bigger deals that we have in process right now. And I think a great example of where we're creating value is with 5500 North Service Road, being able to get a 15-year term with someone like Deloitte, who's an outstanding credit, to be able to turn that asset around under 2 years and sell it at something 20% in excess of where we bought it, that's the type of value that we're creating with leasing. We're continuing to do that through the portfolio. We did have a couple of losses in St. John's, but overall, we see that being eclipsed by what we expect to have happen in the U.S. market, plus we've got a really good track record of continuing to do exceptional leasing spread. So again, 25% leasing spread this quarter. We've had a really good history of doing that quarter-over-quarter-over-quarter. So we continue to be, if anything, as positive as ever on the leasing front.

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [65]

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Okay. And then just last question for me. I think in the press release, you kind of referenced how implied -- the implied cap rate of your other properties, I guess, outside of the Wafra, JV and U.S. acquisitions are, I guess, inconsistent with the current market. But on the other hand, the bulk of your dispositions have been in Ontario. How would you characterize the disposition environment, maybe for you guys, specifically for your Atlantic -- some of your Atlantic Canada assets?

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Steve Hodgson, Slate Office REIT - COO [66]

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Just -- can you just make that a little more clear for me, Brendon, in terms of like, were you asking about cap rates in Atlantic Canada?

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Brendon Abrams, Canaccord Genuity Corp., Research Division - Analyst of Real Estate [67]

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Well, I'm just thinking about the bulk of your dispositions have been in Ontario, yet what you guys are saying is the implied cap rate of your other properties, most of which are in Atlantic Canada, are inconsistent with the current market, so meaning implied cap rate is too high relative to the market. So I'm just thinking about, if that is the case, how do you see the disposition environment? Like why not sell more assets in Atlantic Canada in order to kind of continue to narrow that gap?

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Scott Raymond Antoniak, Slate Office REIT - CEO [68]

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Yes. So I think -- I mean first of all, it's not just the Atlantic Canada assets that are in that, if you want to call it that disconnect in terms of where the market is valuing the balance of the portfolio at a mid-8 cap rate, and we have it at a 6.5 cap rate. That's the rest of the GTA assets. And what's -- I mean it's a data center in Winnipeg with a 14-year lease term with Bell Canada, where we simply collect checks. It's Blue Cross, which is 100% leased, effectively, the Blue Cross and the law firms in Moncton. It's RSA on a credit for 85% of the building in downtown Saint John. So they need to be cognizant of what is in that bucket. And then there haven't been 8.5 cap trades for office products in North America in the last 10 years for assets of this quality with tenants like this. So I think -- I mean that's how we look at it. And I think it's pretty straightforward in terms of the value of the tenancies, the credit and the quality of those buildings. In terms of liquidity in Atlantic Canada, I think, over time, that we'll look at our portfolio in Atlantic Canada. We may be opportunistic there at some point in the future. But I think with what we wanted to accomplish in 2019, we're pleased.

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Robert Armstrong, Slate Office REIT - CFO [69]

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Yes. I would say as well that even though, certainly the dispositions we've had being in the GTA, it's really being focused on areas that we're not necessarily committed to. So as an example, with 5500 North Service Road, being able to turn that asset under 2 years at a 20% premium to our purchase price, we'll do because with a singular asset we had in Burlington. So that makes a ton of sense for us to get rid of. Again, Duncan Mill, effectively that was vacant, and we turned that and made a 50% return in under 1.5 years. Again, not where we had a concentration from a known perspective. So even though it was in the GTA, it made sense for us to sell. And we were selling Winnipeg as well last year, but it was all very strategic as to where we want to continue to focus the portfolio. We're focused and have a large presence in Atlantic Canada, but it makes sense to continue to prune -- or it made sense to continue to prune throughout the year in the GTA selectively, but we were thoughtful about where we wanted to do that. I think where we're focused now is being able to grow the portfolio and take that capital and make additional acquisitions into 2020.

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Operator [70]

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Your next question comes from Matt Kornack with the National Bank Financial.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [71]

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I guess, quickly, would you strategically or are there strategic assets that you'd necessarily want to buy to round out your portfolio in Atlantic Canada, maybe in Halifax or elsewhere? Or are you happy with where you are at this point?

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Scott Raymond Antoniak, Slate Office REIT - CEO [72]

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No. I think we're happy with where we are.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [73]

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Okay. Fair enough. Your lease renewal spreads continue to be impressive the last 2 quarters on both the renewal and new leases. You've identified a 12% mark-to-market opportunity, but you're getting well in advance of that. Is that where you're doing the leases? Or what is the component of that outperformance?

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Steve Hodgson, Slate Office REIT - COO [74]

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Yes, it's where we're doing the leases, Matt. It's GTA.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [75]

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And where -- okay, so that's the GTA primarily?

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Steve Hodgson, Slate Office REIT - COO [76]

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GTA in Chicago.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [77]

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Okay. And if you had to break down that sort of 12% mark-to-market across the portfolio, just in the buckets of Chicago, GTA, Atlantic and Western, where would you place those?

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Steve Hodgson, Slate Office REIT - COO [78]

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Again, heavily weighted to the GTA in Chicago.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [79]

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So are we talking 20-plus percent mark-to-markets in the GTA and Chicago and the others that are flat or even maybe marginally down? Or how would you look at it?

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Steve Hodgson, Slate Office REIT - COO [80]

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No. I think it would be a much narrower standard deviation than that.

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Scott Raymond Antoniak, Slate Office REIT - CEO [81]

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Yes. Like, I think it's like just [I'm thinking] through Atlantic Canada, like with the exception of Saint John, which is probably flattish to market, like, I think of Maritime Centre, there's significant upside in those rents. I think where the leases are coming off in St. John's, there is -- there continues to be upside. So I think it's not -- it's not kind of 30 in Chicago and Toronto and 2 or 1 in another place, I think it's -- to Steve's point, it's a little bit closer than that with the one outlier being Saint John, to a certain extent, but the rest of Atlantic Canada, I think, there's still room to move those leases to market.

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

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Okay. That makes sense. On 2599 Speakman, I think it was originally destined to be a single-tenant building, but it looks like you're doing it in multiple tenancies. How do you see the leasing taking place now with that asset?

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Steve Hodgson, Slate Office REIT - COO [83]

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Yes. I mean there's a logical demise devise to do it into 4 units, Matt. So the initial tenant for 15% of the building is on the main floor in one of those demised units. We have a tenant looking at the balance of the main floor, which would bring occupancy to 50%. And then the market would sort of dictate whether the top floor gets filled by a single tenant or we could fill it logically with 2 tenants as well.

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

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Okay. And by, I guess, going for 4 tenants, does that expedite the process in terms of lease-up of the asset?

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Steve Hodgson, Slate Office REIT - COO [85]

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Yes. Yes. Having said that, I mean, we've never not had that approach. We've always had flexibility with this asset. But once we have tenants in, it does help the sales story.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [86]

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Okay. And then on 4211 Yonge is -- I think, all the other mark-to-market on rents have been addressed with regards to vacancies. But for that one, was the tenant expiring at market or below market, similar to what your comments were on being below market generally across the GTA?

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Steve Hodgson, Slate Office REIT - COO [87]

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Yes, below market.

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Operator [88]

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(Operator Instructions) Your next question comes from Jenny Ma with BMO Capital Markets.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [89]

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Just one more question on 5500 North Service Road. What was the LTV on that one?

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Steve Hodgson, Slate Office REIT - COO [90]

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65%.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [91]

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65%. Okay. Great. So when you're talking about the capital allocation you plan for 2020, how are you thinking about unit buybacks against acquisitions, particularly when we consider the acquisition volume that you're looking for next year?

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Robert Armstrong, Slate Office REIT - CFO [92]

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Yes. So in 2019 so far, we've done $12 million worth of buybacks. There's obvious value in that. It's immediately accretive. But the only thing with the buybacks is that it continues to be hard to accomplish in scale. So it is an attractive opportunity. I think we'd be opportunistic in that potentially going forward. But we're really just focused on continuing to grow and that routine -- or that will continue to be where we're spending most of our capital going forward into 2020.

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Scott Raymond Antoniak, Slate Office REIT - CEO [93]

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Look, I think, Jenny, if you compare the -- obviously, there's a positive economic impact or just a mathematical impact of the buyback. But if you compare what we've been able to do through the track record of dispositions and recycling, there's not too much of a difference between the economic impact of those 2 options, be it the buyback or acquiring new assets, and we want to continue to do what we've shown that we are capable of doing in terms of generating returns. I think having a larger, more diverse portfolio in terms of geography, tenants, credit, et cetera, is a better long-term strategy for unitholders. I totally -- like, I understand your question and we spent a lot of time thinking about this. I think the kind of returns that we've been able to show and the kind of value creation that we've been able to show in a number of different markets over the past 5 years, I think we want to continue to roll that out going forward.

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Robert Armstrong, Slate Office REIT - CFO [94]

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We do think that the units, like just even from, like an investment standpoint, are continuing to be highly attractive. We're in a 30% discount to NAV. I think that's been proven out by what we've included within our investor report over the last 1.5 years on our dispositions we've sold, basically everything at or above IFRS, again, proving out our NAV. And we're yielding 6.6% with a 55%, 60% payout ratio. The case can be made that it's a great opportunity, but to grow this business, we'd like to be back in looking at acquisitions and executing on that. We think there's a lot of great opportunities out there. But I don't disagree with the sentiment that the units are an attractive position as well.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [95]

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So I guess, it's fair to say that an SIB would not be considered at this point?

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Robert Armstrong, Slate Office REIT - CFO [96]

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No. We're not -- we don't have any considerations for that.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [97]

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Okay. And then when you're looking at the acquisition pipeline, I think you didn't say this explicitly, but it seems like it's mostly focused on the U.S. Are there any Canadian opportunities you're looking at? Or are the opportunities more attractive south of the border?

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Scott Raymond Antoniak, Slate Office REIT - CEO [98]

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Sure. I think, Jenny, the Canadian opportunities that we continue to evaluate would be not dissimilar to what we've done in the past. So I think marketed individual asset transactions are extremely competitive up here right now in the markets that we're in, GTA specifically. So I think in terms of being able to roll out our investment thesis in those kind of opportunities, it's a little bit more challenging. That said, one of the great benefits of the SLAM relationship at the top level in terms of the asset managers, the ability to source off-market transactions that may be a little bit more complicated than things other groups are willing to take on. So we're never going to ignore any markets, and we're never going to ignore Canada. I think that from our perspective, as of right now, the more compelling opportunities are in the U.S., but we're -- we continue to look everywhere, and we'll put the right deal with the right capital, and that's the biggest part of what we do.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [99]

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Can you comment from your current pipeline that you're seeing what the proportion of Canadian versus U.S. opportunities are?

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Scott Raymond Antoniak, Slate Office REIT - CEO [100]

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I would say, it's like 75% U.S., 25% Canada.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [101]

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Okay. I know this is -- you can't answer this directly, but is there anything in the SLAM portfolio that is sort of disposition-ready into a REIT that you guys would be considering?

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Scott Raymond Antoniak, Slate Office REIT - CEO [102]

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There's nothing we're considering at the present.

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Operator [103]

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There are no further questions queued up at this time. I'll turn the call back over to Madeline Sarracini.

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Madeline Sarracini, Slate Retail REIT - Analyst, Business Development & IR [104]

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Thanks, everyone, for joining the Third Quarter 2019 Conference Call for Slate Office REIT. Have a great day.

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Operator [105]

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This concludes today's conference call. You may now disconnect.