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Edited Transcript of SOT.UN.TO earnings conference call or presentation 2-Aug-19 1:00pm GMT

Q2 2019 Slate Office REIT Earnings Call

Richmond Hill Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Slate Office REIT earnings conference call or presentation Friday, August 2, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Blair Welch

Slate Retail REIT - Trustee

* 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

* Chris Couprie

CIBC World Markets Corp. - Analyst

* Himanshu Gupta

GMP Securities L.P., Research Division - VP & Equity Research Analyst

* Jonathan Kelcher

TD Securities Equity Research - Analyst

* Matt Kornack

National Bank Financial, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Slate Office REIT Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) Thank you. Madeline Sarracini, Investor Relations, you may begin your conference.

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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 Second 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 & Analysis. You can visit Slate Office REIT's website to access all of the REIT's financial disclosure, including our Q2 2019 investor update, which is available now.

I will now hand over the call over to Scott Antoniak.

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

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Thanks, Maddie, and good morning, everyone. Slate Office REIT remains focused on our mission of owning and operating a portfolio of well located, quality office assets that deliver meaningful total returns to unitholders through an attractive monthly yield and growth in net asset value.

Our strategy is simple. We acquire a high-quality office assets at a discount to replacement cost, apply best-in-class asset management to create value and dispose the fully-valued assets to crystalize value, reinvesting proceeds into our existing core portfolio and accretive new opportunities.

The REIT maintained a positive momentum in the second quarter as demonstrated by the team's ability to generate strong operating results that continue to build value for unitholders. During the second quarter, we completed over 149,000 square feet of leasing, an attractive leasing spreads of 23%, highlighting the strong demand across our core leasing markets. As a result of the strong leasing and positive leasing spread, the REIT achieved a 1.6% increase in same-property net operating income when compared to the same period in the previous year.

Of particular note, this is the sixth consecutive quarter of positive same-property NOI growth for SOT, with a quarterly average of 8.5%. On a per unit basis, FFO, core FFO and AFFO remained stable quarter-over-quarter, while the REIT's payout ratio -- AFFO payout ratio decreased from 101% in the first quarter to a healthy 60.4% in Q2.

With a weighted average in-place lease term of 5.5 years and 61% of the REIT's income being generated by government and investment-grade tenants, the REIT's current yield of 6.8% is both sustainable and attractive relative to our peers. The REIT's loan-to-value ratio decreased in the quarter to 61.2%, a decrease of approximately 200 basis points. Over the midterm, we expect loan-to-value to decline to our target ratio of 55%, providing further balance sheet flexibility for future growth.

We continue to make progress on our strategic capital recycling program. Since announcing the program in 2018, we have completed 7 transactions. These transactions were completed at 6% premium to the REIT's IFRS net asset value and delivered a weighted average levered return of 13%.

In 2019, we have completed 3 transactions at a 5% premium to the REIT's IFRS net asset value, delivering a weighted average levered return of 24%. These market transactions provide empirical third-party validation of the REIT's net asset value of $8.53 per unit and generate capital to be redeployed into value-creating initiatives in our existing portfolio and accretive new investment opportunities.

We believe our ability to consistently transact at values above our IFRS NAV is a significant differentiator from our peers who continue to write-down their portfolio values as they execute asset sales. Specifically, during the quarter, we completed the previously announced sale of the 25% interest in 6 office properties located in the Greater Toronto Area to an investment fund advised by Wafra, a sophisticated global private equity and alternative asset investor. This transaction valued the assets at $527 million on 100% basis and represented a levered return -- internal rate of return to unitholders of 19%. The joint venture arrangement provided the REIT with increased liquidity to fund future accretive investment opportunities and provided third-party validation for the net asset value of 28% of the REIT's portfolio.

Including the recent U.S. acquisitions, more than half of the REIT's assets have been effectively mark-to-market over the past year, providing significant confidence in the net asset value of $8.53.

The REIT's units continue to trade a significant discount to our net asset value. We believe this presents unitholders with a compelling total return investment opportunity due to the following reasons. Recent acquisitions, along with the completion of the Wafra joint venture, validate the current net asset value of the REIT. With an annual yield of 6.8% and a current AFFO payout ratio of 60%, the unitholders are being rewarded with an attractive and very stable income stream, particularly in comparison to our peers.

The REIT has 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 pipeline of accretive acquisition opportunities, it will continue to drive value creation.

Finally, with strong organic growth driven by leasing and market rental rate upside, consistent operating performance in AFFO and FFO and a strengthening balance sheet, Slate Office REIT is very well positioned for future growth. There has never been a better time to invest in Slate Office REIT. We look forward to continuing to execute on our strategy, and thank you for your continued support.

With that, I'll now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Brad Sturges from IA Securities.

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

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It's -- starting with the same-property metrics, 1.6% in the quarter, it's been a little bit stronger previous to that. And I think, last quarter, you were talking about more like 2% to 3% growth. Just curious if that's still the range you're expecting going forward? And should we view this quarter as more like a trough given some of the strong leasing spreads and potential for further occupancy improvements?

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

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What we're coming off of, this is our sixth straight NOI increase, as you mentioned. It's also coming off the back of a double-digit Q2 in 2018 growth rating of which we did in Q3, Q4 as well. So we think it's more just a reflection of the fact that last year has had extremely strong growth. I think 2% to 3% is still a good target, but it's going to isolate. We're really happy with that in what we've been able to achieve. We've done some great leasing this quarter, which should continue to drive that going forward. But by no means do we think that's a trough. We're actually quite happy with the double-digit growth. We've done over the last year in that respect.

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Steve Hodgson, Slate Office REIT - COO [4]

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And I'd add, Brad, even though with the 23% or 24% of rental rate increases over in place, I think when we look at the entire portfolio, going forward, we still see a number that's kind of 6% to 8% across the board in all the markets. So I think that would continue to drive. And Bobby said, it may be a little bit lumpy, but we'll continue to drive overall consistency in property numbers for the next few quarters.

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Scott Raymond Antoniak, Slate Office REIT - CEO [5]

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Yes. And that number too excludes 120 South LaSalle from the same store number, where we're doing some great leasing. We've had some really strong success on our U.S. strategy in Chicago. So that's still contributing additional NOI through the portfolio, but we're hitting as far as we're concerned about where we're budgeting and expectations, both in NOI and leasing.

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

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From an occupancy perspective, you're still targeting over 90% by the end of the year?

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Scott Raymond Antoniak, Slate Office REIT - CEO [7]

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We think maybe we are at 89%.

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Robert Armstrong, Slate Office REIT - CFO [8]

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Yes.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [9]

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Okay. In terms of 2599 Speakman Drive signed an 80,000 square foot lease there, I think in the last call, you were talking about activity for potentially half the building. Just wanted to get an update on what activity you're seeing at the property right now?

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Steve Hodgson, Slate Office REIT - COO [10]

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Yes, Brad, it's Steve. This activity, we've had tours over the last few weeks from some larger prospective tenants having done that first deal with engineering company. It's known in the market that we're open to business and that repositions the building as not just a vacant building, but a tenanted building. So we've had some success recently. We still expect the same lease-up timing we've messaged in the past.

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Operator [11]

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Our next question comes from the line of Jonathan Kelcher from TD Securities.

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

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First question, you had about $800,000 of lease termination income in the quarter. Did you have -- was there any in Q2 2018?

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Scott Raymond Antoniak, Slate Office REIT - CEO [13]

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Yes, there was. It was just under $500,000.

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

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Okay. And secondly, what is the -- what does it relate to?

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Steve Hodgson, Slate Office REIT - COO [15]

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It relates to a tenant at 191 The West Mall. And we had expected that, a, when we acquire the assets, and we have a plan to backfill some space. It actually allows us to consolidate a larger block of availability and attract some of the larger tenants that are in the market in that node.

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

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Okay. Is there more lease term coming from there? You said you expected that one, do you expect any more?

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Scott Raymond Antoniak, Slate Office REIT - CEO [17]

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No. So I think the important node on those assets where the termination came from, that was something where we wanted in large part just because the availability of contiguous space and be able to deal with a large user in that node, actually puts us in an even better position. So we're hopeful that certain of the subluxed space in the market, plus our space coming out all around the market, Kings has put into the space off the market that, you know having some additional capacity to go to make some moves would allow us to put a bigger user in with a better credit.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [18]

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Okay, makes sense. And then just secondly, on the -- I guess, post the Duncan Mill sale, what would your pro forma leverage be?

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Scott Raymond Antoniak, Slate Office REIT - CEO [19]

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It should be 59 or so.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [20]

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Okay. Expect that to sort of stick there for -- through Q3 or to be active on the NCIB again?

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Steve Hodgson, Slate Office REIT - COO [21]

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I think the way we look at leverage and be able to move down to see an absent asset sales, even with, call it, 2% to 3% NOI growth in the portfolio, if you just take that growth at the same cap rate we're applying to the valuation, you get a natural 300 to 350 basis points a year of LTV creep downwards, plus we've got debt in continue to push that down. And then additionally, with the distribution revision, we'll retain the additional $25 million of capital, which is all going to pay down debt. So we think we're in a really good spot structurally that continue to have that number pushed down. We don't need to sell assets in order to get that number down. It's just giving me a natural flow in that direction.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [22]

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Okay. And then just lastly, what were the cap rates on the Waverley and the Duncan Mill transactions?

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Robert Armstrong, Slate Office REIT - CFO [23]

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Waverley was a low 6 cap and at about $225 a foot, which is interestingly similar metrics to what we were buying in downtown Chicago.

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Scott Raymond Antoniak, Slate Office REIT - CEO [24]

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We like that trade, Jonathan. That we can trade suburban location at 6.25% and $225. What we're buying in downtown Chicago has exactly the same metrics.

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Robert Armstrong, Slate Office REIT - CFO [25]

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Yes. And then at Duncan Mill, the head lease would be burning off at the end of June. So it had burned off at the end of June. So we didn't look at that from a cap rate perspective necessarily, Jonathan.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [26]

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Okay. But if I'm looking at it, I'm looking at it more how much NOI to take out for Q3?

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Robert Armstrong, Slate Office REIT - CFO [27]

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Sure. So would have attributed...

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Scott Raymond Antoniak, Slate Office REIT - CEO [28]

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Nothing in Q3.

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Robert Armstrong, Slate Office REIT - CFO [29]

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0.

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Scott Raymond Antoniak, Slate Office REIT - CEO [30]

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Asset burn off will be 0, Jonathan, on the go forward.

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

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Okay. Well, and another way to ask is, how much NOI did it give you in Q2?

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Robert Armstrong, Slate Office REIT - CFO [32]

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Yes. The head lease was not included in the NOI.

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Steve Hodgson, Slate Office REIT - COO [33]

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And I think that, Jonathan, with the sales and just on the cap rate, I think the things are important to us with the sales we've executed in the last 6 months, a couple of points. One, we've averaged a 25% IRR on all the sales we've done for the year-to-date, so the Duncan Mill, the Waverleys and the sale to Wafra. Secondly, all those were at or above in excess of IFRS and that's been a consistent track record for the last 3 years as we've been selling selectively assets and recycling capital into new opportunities.

So I think that's really compelling from our perspective. And it keeps coming back in the message Scott talked about in his conversation before the Q&A is that we think that's really compelling and is a good source of proof. It is a huge differentiator to what our competitors have been doing.

We're selling assets at or above IFRS. We're validating our NAVs. And the large majority of the rest of the REIT market has a consistent track record of selling assets significantly below NAV consistently and not taking breakdowns in the rest of the portfolio. We've been selling at NAV or above NAV in each and every case and taking those opportunities -- taking the capital recycling opportunities. And we haven't been reading up the rest of our portfolio. And that's, we think, a huge differentiator from where we stand relative to others in the market.

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Scott Raymond Antoniak, Slate Office REIT - CEO [34]

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Yes. And I'd add even, Jonathan, like we've got another $75 million to $100 million of potential dispositions to kind of culminate here with the recycling plan. And that trend will continue. I mean we're going to see the same kind of returns and the same kind of premium to IFRS value. And I think it's incredibly important to us that, that message gets out because it's consistent and it's been repeatable and it's how everything we've done over the last 2 years and then the next 6 months going forward. So it's a big part of what we're doing.

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Operator [35]

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Our next question comes from the line of Chris Couprie from CIBC.

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Chris Couprie, CIBC World Markets Corp. - Analyst [36]

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Sorry, I had the line muted. Just wanted a clarification with respect to the lease termination income. In the MD&A, you talked about tenants representing 172,000 square feet will be vacating in the remainder of 2019. So is that already -- is that what this is relating to? Or is this something else?

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Scott Raymond Antoniak, Slate Office REIT - CEO [37]

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No. That would be the number that we referenced in the MD&A in reference to the balance of the year. And then this was trans at 191 and it was somewhat related to the acquisition by Air Canada. And that would -- it's not in the balance of the year. It's separate to that.

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Chris Couprie, CIBC World Markets Corp. - Analyst [38]

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Okay. So then in terms of the vacancies for the balance of the year, what markets will those be? I know you've kind of progress on backfilling in that vacancy.

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Scott Raymond Antoniak, Slate Office REIT - CEO [39]

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Yes. So the vacancy hasn't come online yet. So we've had some progress on backfilling the vacancy, but not a lot, mostly in Toronto and then 1 vacancy in Halifax.

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Robert Armstrong, Slate Office REIT - CFO [40]

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And, Chris, I'd add -- I mean, the number I can remember because Brad had asked the question earlier, it's 89% to 90% occupancy number for end of year includes that. So that space coming back, plus what we view either leasing that we've done or incremental leasing we expect to do over the next 2 quarters. We still think would be between 89% and pushing 90% occupancy.

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Scott Raymond Antoniak, Slate Office REIT - CEO [41]

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Yes, so I can describe it this way. Chris, I think this is the best way to look at it. As Bobby mentioned, we expect to be at 89% by the end of the year. What that includes is we're at 87.2% today. With the sale of Duncan Mill, that will decrease occupancy by 0.2%. Expected vacancies represent 2.3% of the GLA and then we've completed new leases that have not -- that are already complete, but have not yet commenced, that represent 1.7% of the GLA. And then the balance, 2.5% of the GLA are deals that we expect to do throughout the balance of the year, new leasing.

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Chris Couprie, CIBC World Markets Corp. - Analyst [42]

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Okay. Great. And just one final clarification with respect to the question Jonathan asked. So is it in the -- in your calculation of AFFO, you have a guaranteed income supplement. So is that essentially going away with the sale of Duncan Mills?

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Robert Armstrong, Slate Office REIT - CFO [43]

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No. That's correct.

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Chris Couprie, CIBC World Markets Corp. - Analyst [44]

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Okay. Switching gears, looking at Chicago, looks as though the state is undergoing a property reassessment cycle. And just in terms of how you're thinking about that impact on property taxes. Leasing and the fundamentals for the market appear to be very strong at the moment. The investment -- so the investment market less so at least kind of 6 to 9 months. Just kind of what's your outlook for the Chicago market, call it, over the next year or 2?

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Blair Welch, Slate Retail REIT - Trustee [45]

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It's Blair. Chicago is one of the major cities in North America. It's had 0.5 million square feet of positive absorption. And I don't know too many cities in North America that aren't going through a property tax REIT valuation and taxes aren't going up, so I appreciate the color on Chicago, but you can show me a talent that has taxes going down. Let's all move there tomorrow. I think that its diverse economy has people going into the core of Chicago. Because of its proximity to transit, it's hard to recreate. We believe that tax increases, unfortunately, are borne by the consumer and the businesses that are our tenants.

So taxes going up, yes, impact, but we feel in Chicago, we're still where we bought those buildings, mid-30 gross rents, which we were thinking are high teens or already low 20 net rents. So yes, taxes will go up in Chicago. Yes, taxes are going up everywhere. I'd like to point out that Toronto downtown A-Class office had a $25 square foot taxes. Chicago isn't there yet. So we feel confident that we can pass this to businesses. We still think Chicago is a vibrant market. We'll keep an eye on it, but we don't think looking at the taxes in Chicago in isolation is necessarily different to any other market where we see taxes going up and of burden to anything.

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Chris Couprie, CIBC World Markets Corp. - Analyst [46]

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Yes. So it's fair enough. It definitely is an attractive value market in the U.S. given the talent pool available.

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Operator [47]

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Our next question comes from the line of Himanshu Gupta from GMP Securities.

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Himanshu Gupta, GMP Securities L.P., Research Division - VP & Equity Research Analyst [48]

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Just a follow-up to Chris' question on the leasing side. So 172,000 square foot will be vacating for the balance of the year. And so just to clarify, this is out of the 350,000 square foot, which is expiring for the balance of the year. And on the same lines, what are your expectations for 800,000 square foot, which is expiring next year? Any early indications of any expected vacancies? I mean I know you mentioned Exxon previously. Any other indications?

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Scott Raymond Antoniak, Slate Office REIT - CEO [49]

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Sure. That is correct that the vacancies I mentioned are out of the expiries for the balance of the year. Next year, in 2020, we do expect a couple of vacancies in New Finland at TD Place about 30,000 square feet. And then the previously mentioned Exxon departure from Cabot Place for 96,000 square feet, both of those will occur at the end of April 2020. The transact termination that where we received the penalty this quarter, there's 12 months’ notice on that. So there's -- they will expire at the end of June 2020 for 15,000 square feet.

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Himanshu Gupta, GMP Securities L.P., Research Division - VP & Equity Research Analyst [50]

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Sure. And then the follow-up on 2599 Speakman Drive, I think 18,000 was leased to Hatch. What are the rents there? And what was the leasing cost?

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Robert Armstrong, Slate Office REIT - CFO [51]

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Yes. Like, I'll speak generally about that, Himanshu, because it's for privacy reasons with respect to tenants' economics, but we're doing deals like, if you recall, when we did the SNC redevelopment, we spent a lot of capital, and we did rents that were in the $17 to $19 range. We are achieving rents in that range at $25.99 without having to incur significant leasing cost. The leasing cost we'll incur will be in line with the market at probably $40 to $60 a foot on 7- to 10-year deals.

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Himanshu Gupta, GMP Securities L.P., Research Division - VP & Equity Research Analyst [52]

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Okay, okay. And then just switching gears on the NAV calculation. And thanks for the additional disclosure on Page 6. So question is, so you recorded fair value of vacant and redevelopment properties of $47 million. So which properties are you including in this calculation for $47 million?

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Scott Raymond Antoniak, Slate Office REIT - CEO [53]

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It's probably 2599 Speakman.

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Himanshu Gupta, GMP Securities L.P., Research Division - VP & Equity Research Analyst [54]

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Okay. And that's recorded at $47 million?

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Scott Raymond Antoniak, Slate Office REIT - CEO [55]

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No. There's some other things in there as well.

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Himanshu Gupta, GMP Securities L.P., Research Division - VP & Equity Research Analyst [56]

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Okay, okay. And then for the calculation of NAV there, I think you cap -- you use $100.4 million and cap it by, I think, 6.28%. So is this $100 million in-place NOI? Or is it normalized NOI? I mean do you do any occupancy adjustment for this calculation for your NOI of $100.4 million?

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Scott Raymond Antoniak, Slate Office REIT - CEO [57]

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It's on a -- we would think a very conservative 1 year forward. We've been very, very happy. And to step back from the calculation and, Himanshu, we've highlighted it before and I know you do believe this. But when we look at the NAV, there's a calculation to get there. But with Wafra coming in and giving us a trade for $525 million of our portfolio for minority interest, noncontrolling position, they're a very sophisticated global investor. We think that provides a good benchmark for effectively 1/3 of our portfolio, plus the U.S. acquisitions. And then you sold every single -- every asset we've sold over the last 2, 3 years has been at or above IFRS. And as mentioned before, that's in contrast to a number of peers. We think that's a pretty good benchmark for there to believe in our NAV of $8.50. We're really happy with that. We think that's even actually probably conservative given our continued ability to sell above IFRS.

But notwithstanding that in the calculation, we've been consistently fairly conservative in the way we've done that. We think that's kind of shown in the results. But effectively, to answer your question directly, it's simply a 1-year forward-looking NOI.

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Robert Armstrong, Slate Office REIT - CFO [58]

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Right. And it always has been an occupancy.

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Himanshu Gupta, GMP Securities L.P., Research Division - VP & Equity Research Analyst [59]

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In-place occupancy -- sorry, Bob, is it at the in-place occupancy? Or are you assuming any upside to your occupancy as well for this number?

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Robert Armstrong, Slate Office REIT - CFO [60]

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Just no leasing.

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Himanshu Gupta, GMP Securities L.P., Research Division - VP & Equity Research Analyst [61]

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No leasing. Okay.

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Scott Raymond Antoniak, Slate Office REIT - CEO [62]

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It's in-place, Himanshu. So there's upside if we continue to outperform and increase occupancy, there's upside.

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Himanshu Gupta, GMP Securities L.P., Research Division - VP & Equity Research Analyst [63]

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Okay, okay. Sure. And probably, the final question is on Duncan Mill disposition. And obviously, 20% higher than the purchase price last year. Has the overall market also moved or also moving? Or is it very probably specific where you are able to achieve that kind of upside?

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Steve Hodgson, Slate Office REIT - COO [64]

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Himanshu, it's Steve. I think it's reflective of where we were able to buy through the Cominar -- the larger Cominar transaction that Slate asset management completed. And SOT has the option to purchase certain assets that it wanted to own that fit its strategy at what we thought was a wholesale price, and that's reflective of what we were able to sell it to an individual who is eager to own an asset in a value-add scenario. And we just felt we were comfortable owning it. We had an action plan to deliver returns and the price that we were able to execute on opportunistically and unsolicited, though was compelling enough to allow us to sell it sooner than we anticipated at a 50% levered IRR.

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Scott Raymond Antoniak, Slate Office REIT - CEO [65]

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So, Himanshu, let me just run with this a little bit. I think, like, it's not a universal phenomenon, like, I think, across all nodes, et cetera, in (inaudible). I think that's the part of the full SOT story. Like, I mean, whether it's through portfolio acquisitions or off-market deals or, et cetera. I mean we've been able to buy a certain kind of office real estate where we think we can generate outsized returns. Like I'd point you to the 427. I mean, yes, we sold 25% of its Wafra. It's important to note, I think, we wanted to keep 75% of this because we think there's continued upside there. And as you know, like, I've sold those buildings 3 different times to different public entities over the last 20 years. And we saw an opportunity there. I think, for the first time in that 20-year period, rents have really moved. We're starting to see downtown tenants who either can't find space or don't like the cost of space downtown moving up there. So we're trying to acquire assets, and the story might always be a little bit different. But what it is consistent about is that we can create value. So I think maybe it's unique to our portfolio, but we think we do a really good job on the buy and then adding value through asset management. And that's the whole story, right, that gives the ability to create this. And not just to tell you that we're doing up. It's actually proved that we're doing with every time we sell and transact, et cetera.

So whether it's a kind of wholesale to retail trade like Duncan Mill was or something it's a more 427 market-specific phenomenon, I think we've been shown to be pretty good at identifying those opportunities. And I think we look for more of that across the portfolio.

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Himanshu Gupta, GMP Securities L.P., Research Division - VP & Equity Research Analyst [66]

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Sure. Maybe just one last question. I mean top 10 in the SNC-Lavalin, have you heard anything from them as you look to right size your business?

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Scott Raymond Antoniak, Slate Office REIT - CEO [67]

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No, we haven't. And I'll take 2 things here. Our 2 exposures are Winston Park in the 427 and Sheridan. The Sheridan, as Bobby showed to you before, I mean we've spent a lot of capital in there. They've got their research facility for the nuclear division there. That's kind of mission-critical. And whether that's called SNC-Lavalin or Atomic Energy Canada, et cetera, that business is not going away. So we're highly insulated there from the build form of the product, the length of the lease term and the thought they're sticky because of the research facility, so that's A.

B, the second big exposure would be 427 so and 195 West Mall. That's more project-based engineering folks. As you know, that's like incredibly overbuilt space. It was Nortel's space. That's downtown quality, kind of AA office space in the suburban location with tons of parking. So it's good. We haven't heard anything from them. But I'd say, if we did hear something from them, it wouldn't be necessarily about in there. Their in-place rent is probably 20% to 25% below market. And our biggest challenge right now in the 427 is availability of space. So there's lots of tenant demand. And that upside came to us. I think that, that would be a positive thing. But today, we haven't heard anything from them.

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Operator [68]

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Our next question comes from the line of Matt Kornack from National Bank.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [69]

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(technical difficulty)

and have been consistently achieving. Is there a geographic split in terms of where you're getting those rents? And can you speak to what are these are on spaces that you've invested significant capital in? Or is it just the market has moved favorably versus what in place was there?

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Scott Raymond Antoniak, Slate Office REIT - CEO [70]

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Sorry, Matt, I think we didn't hear the first part of your question.

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

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Oh, sorry. Just with regards to the new and renewal leasing, the spreads that you've been able to achieve? And whether or not that's been a function of the market moving capital invested? And I mean, what geographic regions you're seeing those type of spreads in?

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Robert Armstrong, Slate Office REIT - CFO [72]

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Yes, it continues to be Toronto and Chicago where we're seeing it most. And then I would add, Halifax, specific to Maritime Center.

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Scott Raymond Antoniak, Slate Office REIT - CEO [73]

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Also everywhere.

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Robert Armstrong, Slate Office REIT - CFO [74]

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Yes.

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Blair Welch, Slate Retail REIT - Trustee [75]

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I think, Matt, it's Blair. I think that we have seen it everywhere. I mean we're fundamental basis buyers. And when we buy an asset, we look at what we're paying per square foot compared to in-place market rent, we -- don't get me wrong. Cap rates are extremely important. But it's really someone else's rent. Like, it went back 5 or 10 years in a totally different market. It's important, and you need to judge yourself on a cap rate. We feel it's more important what I'm paying for a hard asset under current market rents and what can it be in the future. I think we're very disciplined at that, and I think the team has done a great job. And that's why we've been able to create double-digit IRRs.

I think when we look at selling an asset, we don't need to sell assets. But if we've marked an asset at our NAV and someone comes in and says, "I'm going to pay you more." It's our responsibility to go to the Board, which represents the unitholders and say, "Look, someone is going to pay more, why don't we recycle that money if we give the investor a 20% return, let's go do it again." And I think that starts with what's our basis, what are market rents and let's go do it. So yes, the market rents go up and down, but we feel very confident that we're basis buyers and our in-place rents have room for growth across the portfolio, we're seeing, Matt.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [76]

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That's fair point. On that note, with regards to capital recycling, it was mentioned, I guess, $100 million of potential further dispositions. As we look at that, is that -- are you going to be a net seller of assets from this point on? Or is the view that you'd take that capital and put it in Chicago or elsewhere?

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Scott Raymond Antoniak, Slate Office REIT - CEO [77]

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The latter.

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

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Okay. And is there a timing sort of on the dispositions versus acquisitions?

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Scott Raymond Antoniak, Slate Office REIT - CEO [79]

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Yes. I think, Matt, the disposition is kind of the third and fourth quarter this year. Let me, like, leak into the first, but I think principally done by the end of this year and then turned to start doing what we're best at. We're just finding opportunistic office with a story where we can do it again to Blair's point, right? If you can show double digit, 20% levered IRR's unitholders and sell assets at a premium to NAV. And all the while, kind of up tier the location, quality, tenant quality, lease term, et cetera, that's a pretty good story for unitholders. So that's the plan.

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

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And as much as you're basis buyers, it sounds like from a cap rate standpoint as well, you can sell sort of secondary candidate by primary U.S. at relatively similarly going in yields?

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Robert Armstrong, Slate Office REIT - CFO [81]

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Yes, that's been our experience.

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Scott Raymond Antoniak, Slate Office REIT - CEO [82]

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Yes.

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Robert Armstrong, Slate Office REIT - CFO [83]

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And just I'd add on the pipeline side. Matt, I know we talked about this whole ratio. I mean the -- we see that there is a significant amount of opportunity in assets and markets that we like, whether that's added to Chicago. I think we've had significant success, whether it's 427, whether it's downtown Chicago or whether Woodbine or even St. John's, for that matter, where we're clustering assets where we can take advantage of those economies of scale and the ability to move tenants and offer varying solutions in the specific market.

So shift from that perspective, Chicago makes sense and then we'll be opportunistic. I think doing brokered, let's call them, retail-ish office trades in Canada is maybe not best execution for us right now, but that said, there's a track record of being creative here as well. So who knows what happens on the bigger front, whether it's M&A, et cetera, but we'll be looking to kind of rental repeat into 2020, so to speak.

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

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Fair enough. And then you spoke about some of the vacancies in 2020. But I mean, you're gaining 200 basis points or so of occupancy in the back half of this year, potentially. I mean is your view that this should be low 90s in-place occupancy portfolio? Or what is stabilized ideally in the future?

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Robert Armstrong, Slate Office REIT - CFO [85]

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I think stabilized is 90% to 92%, and that's going to be subject to adding to the portfolio. And if you look at the kind of stuff we bought and where we bought, et cetera, I think you probably and further that's what it would look like going forward. But on a -- once we're stabilized on a run rate basis, it's like 90% to 92%, I think, for this kind of office products.

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

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Okay. And last -- sorry, go ahead.

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Scott Raymond Antoniak, Slate Office REIT - CEO [87]

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And on the occupancy, I think we're getting there. If you look at the last 3 years, we've had a very consistent basis of quarter-over-quarter, either keeping leasing or occupancy stable or growing it. So we just think it takes time, but we have full confidence that we'll get to the low 90s and just continue the track record from that perspective we've had for the last 3 years.

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

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And then the last question for me on the buyback. I know it was opportunistic -- share price is still opportunistic when you look at an implied cap rate. If you're selling assets, is that also going to be a potential destination for some of those funds as well?

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Scott Raymond Antoniak, Slate Office REIT - CEO [89]

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Yes, absolutely. We think it's -- we think NCIB is still a very compelling opportunity. We don't underwrite any of these assets. It's instantly accretive to unitholders. We've already spent $12 million doing it this year. But at the same time, to balance that, our position pipeline is well over $1 billion of assets that we're looking at in underwriting currently. So we've got lots of opportunities. And to the point we made earlier, we've got great capital allocation choices at this point. Our units are trading at a discounted NAV, that's very much attractive. But if we've got a ton of opportunities where we can just take our capital and recycle back into '20 IRR deals, we'll continue to do that to the extent we can and continue to grow NAV for unitholders.

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Operator [90]

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(Operator Instructions) And we have no further questions in queue. I'll turn the call back over to Ms. Sarracini for closing remarks.

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Madeline Sarracini, Slate Retail REIT - Analyst, Business Development & IR [91]

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Thank you, everyone, for joining the second quarter 2019 conference call for Slate Office REIT. Have a great day.

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Operator [92]

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