Cominar Real Estate Investment Trust (OTCPK:CMLEF) Q2 2020 Results Earnings Conference Call August 7, 2020 11:00 AM ET

Company Participants

Sylvain Cossette – President and CEO

Antoine Tronquoy – Interim Chief Financial Officer

Marie-Andree Boutin – Executive Vice President, Retail and Development

Michael Racine – Executive Vice President, Leasing Office and Industrial

Conference Call Participants

Jonathan Kelcher – TD Securities

Mike Markidis – Desjardins

Matt Kornack – National Bank Financial

Jenny Ma – BMO Capital Markets

Mario Saric – Scotiabank

Operator

Good morning, ladies and gentlemen. And welcome to the Cominar Second Quarter 2020 Earnings. At this time, all lines are in a listen-mode only. But following the presentation, we will conduct a question-and-answer session. [Operator Instructions]

Also note that the call is being recorded on Friday, August 07, 2020. And I would like to turn the conference over to Mr. Sylvain Cossette. Please go ahead.

Sylvain Cossette

Thank you, Suzie. Good morning. And welcome to today’s conference call where we will be discussing our financial results and highlights for the second quarter of 2020. The presentation for this call is posted in both English and French in the Conference Calls section of our website. In line with our disclosure principles, access to this call is open to financial analysts, investors, the public and the media. The question period will be open to financial analysts.

Before I begin, I would like to draw everyone’s attention to the notice concerning forward-looking statements on page two of the presentation.

With me today is our Interim CFO, Antoine Tronquoy. I am also joined by Marie-Andree Boutin, EVP, Retail and Development; and Michael Racine, EVP, Leasing Office and Industrial.

As you know, we had made noticeable progress in prior quarters fueled by the contribution of many of our transformation efforts and initiatives, and 2020 started with a strong first quarter. For Q2 there is no doubt that the impact of COVID-19 was strongly felt.

On page three, please let me run you through our Q2 2020 highlights. For Q2 we experienced an organic decrease of 14.8% in same property NOI and registered a $331 million negative fair value adjustment on the back of COVID-19, reflecting a 4.9% negative change in our IFRS values, a decrease of 12% with respect to our enclosed malls. This negative fair value adjustment brought our leverage to 54.5%, up from 51.3% for Q1. Despite this turmoil, we enjoyed a 12.7% increase in rental rates on renewals and our liquidity remains healthy at $434 million when compared to upcoming maturity.

Moving on to page four, a rapid timeline overview provides useful additional color. In Québec, the pandemic was declared mid-March and office workers shifted to work-from-home mode at the same time.

Shopping centers, which weighed heavily at Cominar were closed from March 22nd until June 1, except for the Montreal and Laval regions, where malls only reopened on June 19th. Mid-July the Québec Government clarified that private sector employees whose — employers whose employees were working from home can have up to 25% of their staff returned to work, while stating that the government continues to encourage work-from-home.

From the get go, we deployed significant efforts to analyze the impacts of COVID-19 on our operations, including an assessment of the impacts on our clients and their risk profile through our asset segments and geographies.

Throughout the period constant communication with our tenants and government authorities was also very much at the heart of our efforts. While seeking to maximize collections, we evaluated rent deferral requests on a case-by-case basis.

We also chose to participate in the Canada Emergency Commercial Rent Assistance Program CECRA, which taking into account the federal and provincial government contributions totaling 62.5% of gross rent, have reduced eligible tenants rent contribution 25% and are lost at 12.5% of gross rent.

Moving on to page five, we have collected to-date 75% of the total invoice rent for Q2, another 9% has to come from the federal and Québec Government under CECRA. Tenants with whom we entered into an agreement owe us 7%, which can be split into 3% coming from rent deferrals, 3% amounting to the portion payable on reduced rents and 1% pertaining to the 25% portion of the rent that CECRA eligible tenants still have to pay.

In total, 90% of total invoiced rent is contractually expected to be received. As the economy finds its footing, our collections today for August are ahead of July as of same day. The trend is clearly improving.

To-date, we have identified credit losses for 6% of total invoice rent or $11.4 million. We have taken an additional provision for credit losses of 5% of total invoice rent or $6.8 million, bringing the total expected credit loss including provisions to 11% of total invoice rent or $18.2 million. This amount evidences our conservative approach but also sheds light on some weaker or less resilient tenants that we expect to replace with stronger covenants at higher rent levels, especially in the Industrial segment.

In the Retail segment, our continuing focus is on increasing the component of essential service tenants and other performing Retail segments, and decreasing our exposure to fashion as we had commenced last year as part of our strategic plan initiatives.

On page six, you will find further color on our Q2 collections by segment, 94% of total invoice rent was collected in the Office segment, 46% in Retail and 89% in Industrial. The Retail segment has the highest proportion of CECRA eligible tenants at 33%, followed by Industrial at 7% and Office at 3%. In essence, we are talking about approximately 1,000 applications, of which approximately 800 are in Retail.

Turning to page seven, more specifically, with respect to the 30% — 46% collection rate in Retail, our collection rate was 43% for enclosed malls and 55% for the rest of the Retail portfolio.

On page eight, the same property NOI decreased a 14.8% was largely driven by the 41.8% decline in same property NOI in Retail, which came from a combination of reduced revenues 9.5% and increased expenses due to COVID-19 21.1%, including $17 million of expected credit losses.

Office same property NOI increased by 0.4% as a consequence of a 3.9% reduction in revenues mitigated by an 8.1% decrease in expenses. Industrial same property NOI declined by 1.3%, further to a 2.3% decline in revenues, only partially offset by a 3.6% decline in expenses.

Year-to-date, the adverse impacts of COVID-19 on our Retail assets drove same property NOI to a 5.7% decrease for our overall portfolio, while the Retail segment was negative by 21.6% year-to-date, it is worth mentioning that our Office and Industrial segments experienced positive same property NOI growth of 3.5% and 2.3%, respectively.

Moving on to page nine, our committed occupancy and in-place occupancy rates are respectively slightly above and at our historical average and the recent decline of in-place occupancy comes from the Retail and the Industrial segment, which declined by 2% and 10.7%, respectively, since Q4 2019, while the Office segment increased by 1.1% over the same period. The Industrial market remains strong in Montreal and we see opportunities here on a go-forward basis and we fully intend to emphasize this asset class.

On page 10, we continue to experience positive momentum in leasing activities in all of our assets segments. We use leases over the first six months of the year average the net increase of 12.7% when compared to in-place rents prior to renewals.

All of our segments had positive leasing spreads, led by the Industrial segment at 22.3%, evidencing the strong momentum of the Industrial market, followed by the Office segment at 7.9% and the Retail segment at 1.8%.

The Office segment performed well in multiple fronts. Firstly, same property NOI was up by 10.9% for the first half of the year for the Montreal Suburbs. In addition, the in-place occupancy rate grew by 2.4% for the Montreal Office sector and by 2.9% for the Montreal Suburban Office sector. Close to 110% of our Montreal Office leasable area maturing since the beginning of 2020 has been renewed or is covered by a new lease. Lastly, approximately 700,000 square feet or 44% of the leasable area maturing in 2021, with federal or provincial governments are already renewed are well advanced.

In Retail, noteworthy post-quarter, as malls reopened, may not open with great success and fanfare, a 40,000 square foot grocery store at Mail Champlain and IGA recently opened its long awaited 35,000 square foot grocery store at Rockland. In addition as quickly as we lost our 50,000 square foot plus fortunate store at South Laval, we are at least with a desirable tenant for the totality of the space.

With respect to our Sears efforts COVID-19 has brought some additional delays, I expect two quarters. But so far the key elements of our backfill pipeline remain intact. Our recent efforts to rebalance our tenant mix has resulted in an increase in essential services which now stands at 28% and a decrease in fashion exposure, which now stands at 32% for enclosed malls, declining by approximately 5% over the last two years.

Obvious to say, although, Retail is far from easing, there are some good things happening. At certain of our larger Retail centers, we continue to work on creating additional value through densification initiatives and discussions with municipal authorities. The most advanced project [inaudible] Laval followed by Mail Champlain in Rockland. With respect to guest on time, we will be setting and formalizing our path as quickly as possible as post-COVID market conditions evolve.

As we looked at our three asset segments going forward, we foresee emphasizing the Industrial segment which remains solid with the very favorable outlook and reducing our Retail exposure over time and as rapidly as possible that there is a window.

With respect to our Retail segment, we are looking at all options for each of our Retail assets, and as we have previously mentioned, there is an unsurfaced value in potential densification opportunities, which raises the profile and interests for certain properties on the South Shore of Montreal and in Laval. And as mentioned, we are working for zoning variance in Rockland.

Moving on to page 11, in order to maintain our financial flexibility, withstand volatility associated with the pandemic, which is lingering and to better enable us to invest in development projects, we have decided to reduce the distribution by 50% down $0.03 per unit on a monthly basis or $0.36 per unit on an annual basis. This distribution cut translates into an annual cash savings of $66 million, which is roughly equivalent to 1% of debt-to-gross book value. This financial flexibility will put less pressure on our leverage and will also be mean to finance development projects including in the Industrial sector.

On page 12, we have $245 million of properties held for sale as at June 30. This includes a major Office property located in Downtown Montreal which is currently under contract. This transaction is expected to close by the end of the third quarter at a net sales price, net of transaction costs and yield maintenance slightly higher than our IFRS values.

Antoine will now discuss our financials.

Antoine Tronquoy

Thank you, Sylvain. Good morning, everyone. On page 14, if we look at numbers on a per unit basis, FFO adjusted for the quarter was $0.20, a decrease of 28.3% over Q2 2019. AFFO adjusted for the quarter was $0.13, a decrease of 36.6% for Q2 2019. As a result, here the AFFO adjusted payout ratio significantly increased 138.5%, compared to 90% in Q2 2019. This is obviously due to the current COVID-19 we are going through.

Moving on to page 15, we have said that the pandemic had a negative impact on our FFO of $17 million for the quarter. Our revenues were hampered by $11 million due to the pandemic. $3 million is attributable to the decrease in rents, essentially due to percentage rents and the lack of temporary rentals. Another $3 million is attributable to the declining parking revenues. And finally, $5 million is attributable to the decline in operating cost that are charging back to the tenants.

Additional expenses of $17 million mostly composed of expected credit losses were partially offset by $11 million of savings consisting of maintenance savings for $8 million and an energy savings for $3 million related to the inoccupation of our properties due to the pandemic. Ultimately, our NOI and FFO experienced a $17 million or $0.09 per unit decrease due to the pandemic.

Moving on to page 16. Year-to-date, we have written-down cad 329 million of the value of our assets due to new prevailing apparently and market assumption impacting value. This amount to 4.9% of our Q4 2019 value.

Our Retail assets were most affected with $252 million write-down or 11% of the Q4 2019 value. Office assets were written down by cad 44 million and Industrial assets were written-down by $33 million. About half of the overall write-down are $165 million came from our enclosed malls portfolio representing the 12% decrease with respect to their year-end 2019 value.

Moving on to page 17. During the quarter, we up financed $22 million of mortgages. We also completely $150 million of unsecure debenture offering, which proceeds were used jointly with cash on hand for the early repayment of the $300 million sales force senior unsecured debentures that were due in July 2020.

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Finally, we secured $120 million secured credit line. As a reminder, our liquidity at Q2 stood at $434 million, of which $34 million in cash and $400 million available under our unsecured credit facility. We feel comfortable with that level of liquidity available given our debt maturity.

Moving on to page 18. Our total commitment for the rest of the year totaled $181 million, of which $81 million of mortgages that are in the process of being refinanced as we speak for a seven-year term. Worthy of mention is the fact that our 2021 mortgage maturities include [inaudible] Montreal mortgage for $240 million, which is being extended for another year until 2022.

Moving on to page 19. During Q2 2020, our debt ratio increased to 54.5% as the consequence of negative fair value adjustment on our investment properties. The pending sale of the property in Montreal CBD, that is part of our properties held for sale will subsequently novelist to reduce our overall leverage.

Our debt-to-EBITDA ratio experienced a slight increase at 11 times. Our unencumbered asset pool stood at $2 billion, representing 1.77 times, our unsecured indebtedness stable from last quarter.

Moving on to page 20. Investments in Q2 2020, in capital expenditures, leasing costs and leasehold improvements totaled $19.4 million, down 38.6% from the same period last year. The year-to-date CapEx stands at $53.2 million, down 16.4% from the same period last year. Including investments in development activities capital expenditures in Q2 2020 totaled $26 million, down to 34% from Q2 2019.

For the year-to-date period, total CapEx stand at $67 million, down 8% from the same period last year. Target for the year remains at around $150 million, which implies a remaining $80 million to $85 million to be spent by the end of the year.

I will now pass it back to Sylvain for the concluding remarks.

Sylvain Cossette

Thank you, Antoine. Based on our estimates, we expect continued headwinds in the Retail segment in Q3, as the effect the tenant support initiatives on our part and greater percentage wherein dependency will be felt. However, we expect mortgage to wrap up in the following quarters.

On the positive side, in our enclosed mall, in an urban environment we estimate foot traffic to be essentially at 70% of pre-COVID numbers, with sales being estimated at 15% off. Our foot traffic is closer to pre-COVID at regions and sales are doing better at 8% off. The performance in region is attributable to our centers being the dominant place for shopping and in older community, that’s use towards e-commerce.

In Retail, we are also seeing very strong sales in essential services, sports and leisure, and value Retail. Once again, we have been working closely with and supporting our Retail clients constructively and in an open dialog. And we firmly believe that our partnership approach will be rewarded and result in a stronger tenancy base in the mid- to long-term.

In Industrial and Office, we estimate that we have essentially bottomed up that. In the Industrial segment, we continue to predict protect strong growth going forward. Once again this market remains very, very strong especially in Montréal and we really like this segment, which we intent to fully emphasize going forward.

On behalf of management, I would like to take this opportunity to thank all of our employees, as well as our trustees for their contribution in the context of this more special environment.

I will now turn the mic over to the Operator for the question period. Thank you once again for taking part in this conference call and wish you all a nice day.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And the first question will be from Jonathan Kelcher at TD Securities. Please go ahead.

Jonathan Kelcher

Thanks. Good morning.

Sylvain Cossette

Good morning, Jon.

Jonathan Kelcher

First question, just on the committed occupancy of 93.9%, is that net of any store closures that you are aware of are coming or are recently closed?

Sylvain Cossette

That would have been the committed as of June 30. So we do have some store closures coming post quarter, maybe I think, maybe if you — maybe — generally speaking, we have a group of retailers who have made CCAA filing.

Jonathan Kelcher

Okay.

Sylvain Cossette

We do have some stores which are going to go dark and we have conducted sort of rent discussions with the monitor in many cases for a new rental stream going forward. Perhaps many aren’t leasing here just shut from later store steward you see the number of square footage overall coming off first quarter.

Marie-Andree Boutin

Yes. Jonathan, most of the closings will take place in or have taken place in Q3 and the majority of it will take place in Q4. So when we look at the number of stores that we have closing 25 stores for about 150,000 square feet, probably we are going to have three quarters of it will close in Q3 and a quarter in Q4. So the numbers you have are for Q2 committed occupancy. So it does include the stores that have closed in Q2 but there’s very few, I think, there’s only two.

Jonathan Kelcher

Okay.

Sylvain Cossette

This portion was recorded in Q2 or…

Marie-Andree Boutin

Q3.

Sylvain Cossette

Q3 and that store Jonathan…

Marie-Andree Boutin

It’s released.

Sylvain Cossette

It’s already released, so…

Marie-Andree Boutin

For Q4 opening.

Sylvain Cossette

Yeah. Okay.

Jonathan Kelcher

Okay. So where do you see occupancy trending by the end of the year?

Sylvain Cossette

Give me one sec. On an overall basis, let me just find that for you, Jon. I think, overall, we will be down — that’s one we have that in the sheet.

Jonathan Kelcher

Okay. While you are grabbing that, I will go my second question. The credit loss is $18 million and I think you might have covered this in your presentation, but I just want to sort of make sure I am correct on this. So how much of that is either rent abatement or CECRA funds. And how much of that is revenue that’s now vacancy that where you don’t expect the NOI to come back for the quarter?

Sylvain Cossette

Okay. So out of the 11% total of expected credit losses, which is the amount we took into account in our financial statements, that includes two portion, I would say, 6%, which is already identified credit losses in the sense that that includes the 12.5% that we will not receive for those tenants eligible for CECRA, okay, which is the known expected — known loss and also it comprises the rents — the rent abatement that we will not receive. So the 11% credit losses is a 5% provision and 6% coming from a combination of CECRA and rent reduction.

Jonathan Kelcher

Okay. And the CECRA stuff will continue in July and August, correct?

Sylvain Cossette

That was confirmed by the federal government.

Jonathan Kelcher

Okay. And was that sort of after…

Sylvain Cossette

Yeah. July…

Jonathan Kelcher

…assets.

Sylvain Cossette

Yeah. July and August, federal government confirmed and the Québec Government has a decree, which they intend, we understand to publish mid-August, which will deal with July and August, right? So I want to…

Jonathan Kelcher

Okay. And then just…

Sylvain Cossette

Just three-fourth and I — they need another half, but the decree is mid-August.

Jonathan Kelcher

Okay.

Antoine Tronquoy

And to build it more granular, Jonathan, to what you just asked, I mean, the split, when I said it’s — we have 6% of identified losses. I would say that out of this 6% to a bit less, yeah, around 2% is for — a bit less than 2% is for related to the CECRA portion and a bit more than 4% accounts for the amount — pertains to the rent reduction.

Jonathan Kelcher

Okay. And how much of that would be related to the bankrupt tenants, where there is going be a permanent impairment of the rent, firm or permanent, but permanent until your release, I guess?

Antoine Tronquoy

Well, during the quarter, I mean, the impact on the — of bankruptcies was quite low at this stage as in total we are talking about a bit more than $1 point — around $1.5 billion that was — that’s the impact. And for the year, that could, I mean, those bankruptcies would represent a bit less than $5 million on the, I would say, on an annual basis.

Marie-Andree Boutin

So little less than $5 million so far which is a combination of the revenue we lost, the bad debt and the rent deduction we negotiated to keep some tenants. In fact, we had 93 stores effective by bankruptcy and we managed to return 68 tenants out of those, so.

Sylvain Cossette

Okay. And Jonathan going back to your occupancy question and I’d be careful with the answer, because we are going through the CCAA filings to participate on what we can serve, see and project. We expect that our rate to go towards the 86.5%, okay, on the Retail side, so down from 91.8% to 86.5%.

And to give you some color, just we were seeing the interesting things, as we look at on these renewals. We recorded on — at June 30th a lot of this sort of the pre-COVID type of negotiations. But if we are trying to isolate our discussions, our trend as at April 1 going forward, we are seeing some pretty interesting things, like, on Office lease renewal our step-ups are at the range of 5%, Industrial 20% and Retail in a more limited sampling of about 150,000 square feet, where, like, a here below 5%. So, there is a little bit of slippage on the committed occupancy side, but on these lease renewal rates, there’s still a healthy backdrop. So we find that very, very interesting.

Jonathan Kelcher

Okay. That’s helpful. I will turn it back. Thank you.

Sylvain Cossette

Thank you.

Operator

Thank you. Next question will be from Mike Markidis at Desjardins. Please go ahead.

Mike Markidis

Hi, there. Thank you. Could you please identify us for the Office asset in which you have — you are under contract?

Sylvain Cossette

We are unfortunately under a confidentiality agreement for that asset. But we will be able to — it’s going to close in a couple of months, so we will be able to disclose it in Q3. But it’s a good asset and it’s an asset for which we commenced discussions pre-COVID and our price stood up during COVID. So we think it’s a very big price for the asset. So I think you will be pleasantly pleased when you get full details of it.

Mike Markidis

Okay. It’s good to hear. And then, I guess, maybe hopefully this can get around the confidentiality. But the $245 million, do you have offhand with that equates to price per square foot basis and roughly what the, I guess, undisturbed cap rate would be?

Sylvain Cossette

Slightly above 400.

Mike Markidis

Okay. And the cap rate range, would that be?

Sylvain Cossette

No. I am not going to go that — with that.

Mike Markidis

Okay.

Sylvain Cossette

You will get me in trouble, okay.

Mike Markidis

No.

Sylvain Cossette

Okay. I have given you a path.

Mike Markidis

Not my intention, Sylvain. Well, thank you for that. Okay.

Sylvain Cossette

[Inaudible]

Mike Markidis

Just — so that was a, I think, previously you guys have talked about really selling Retail assets. It sounds like this was a pre-COVID discussion. So just curious as to was this an unsolicited offer on a particular asset or why you guys would be shifting out or looking at your Office portfolio?

Sylvain Cossette

It was a non-solicited offer.

Mike Markidis

Okay. Okay. Great. And then, finally for me, just wondering if you could update us with respect to where you are in your CFO process and when you think that may conclude?

Sylvain Cossette

We are more than in the middle of it and it’s my intention to go back to the Board in early September around this — around the process.

Mike Markidis

Great. That’s it from me. Thank you.

Operator

Thank you. Next question will be from Matt Kornack at National Bank Financial. Please go ahead.

Matt Kornack

Hi, guys. Just trying to get through all the noise around CECRA and the deferrals, et cetera. In your view, is this likely a low watermark quarter with regards to the FFO per unit and presumably if we annualize the figure for this quarter, we may be understating things, but it still looks like the payout ratio on that FFO would be pretty conservative, so just give us your thoughts there?

Sylvain Cossette

Okay. We still have, Matt, we still have, as I mentioned, some headwinds coming our way on Retail in Q3. So even thought that we see reopening of the malls being positive, we have been supporting our good retailers who went through sort of a credit analysis and a business analysis in our part so we did some discount and those retailers that we are supporting, they pretty good feel the brunt of that in Q3.

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So that could be percentage rent. For example, there was originally supposed to be a large tenant type of relief program and that program would have been a lot more lining-up rents with percentages and so we have been trying to help certain of our retailers in that sense.

So Q3 will also be favorably impacted, however, by the 12.5% of Provincial Government, we are expecting a favorably decree come mid-August. So there is some pull and takes. I expect Q3 to be — look a bit like a Q2 or could be a bit — little bit underneath Q2 on the Retail and also we are trying to work our way through all the CCAA filings.

What’s good about these filings is we — and the Québec Government has been very, very close to aid us market banks to certain Québec retailers. We are confident that a lot of these retailers will emerge with a better balance sheet and as long as we are satisfied in our end with their merchandising strategy that forms part of the analysis we did and that’s why it’s great to have Marie-Andree as part of the team. She understands retailing. So we — Q3 will be a little bit headwind oriented, but we will wrap up quickly going out into Q4 and into the New Year.

Marie-Andree Boutin

One of the advantage that coming our hand, Matt, especially when it comes to the fashion retailer, if that compared to our peer in enclosed mall, our occupancy ratio is much, much more reasonable.

So that’s one of the reason why we were able to retain so many out of the 93 we faced and really not sustain that much into reduced — in reduced rent to keep that with us. When your retailer has a GROC of 14% to 15%, then has the 30%, 35% GROCs in other mall, their main focus is to deal with the higher one.

Antoine Tronquoy

And if I may add a word on, when you mention CECRA, what does that represent on an annual basis. Well, the impact for us is less than 2%, because we have approximately 14% of our tenants eligible for CECRA and if we apply a 12.5% less through that that leads to 1.8% of annual CECRA cost, I would say.

Matt Kornack

But so including provisioning, do you think Q3 is going to worse than Q2? And then just quickly can you give an update as to what rent collections have been, I think, it was 46% on average for the Retail portfolio in Q2, but have you started to see those tick up in July and into August?

Sylvain Cossette

Yeah. Matt, I am really telling I will be very careful and not give guidance, because we are working through it and I understand we do have the same type of headwinds going forward in Retail.

And in Industrial, we — if we — we may be doing something deliberately on our side, we are going to try to knockout some of our lower default paying tenants, because we have an opportunity to create value in rental rate. So that becomes part not of a COVID reaction but more of a leasing strategy.

And on the Office side, what I can tell you is that we have — so far in discussions we have very limited space seen — seen limited space now coming back to us or in a sublease market, so we are in manageable numbers.

So — and I think we — as we exit COVID, there’s good things we can do in the Industrial segment. The Industrial market in Montreal remains very, very strong, okay. If you go through the data and you can see from CBRE and alike, it’s a very good market and our numbers are lined up with what they are saying. So we feel good about that. And we have some real value opportunities we can do in that.

That rental base I am talking about, these are tenants coming off of 5.55 a quarter, five, three quarters rent and market rent upwards of 7. So we can migrate and create value here. Our problem is not the asset, it — we have got to be very careful and the government in Québec has draft anti-eviction legislation on the table, it got eight, the national assembly closed down, because they made that legislation part of the construction bill, the infrastructure construction bill, but I expect that legislation to come back in the fall. So we try to move as efficiently as we can through that segment.

And when we look at the step-up, I mentioned to you, while we are heading on renewals, so we are seeing good indicators. So I will be very cautious how we migrate from Q3 to Q4. But our approach this time is try to maximize rents collections, at the same time work with our partners to make sure that we are doing the right thing for us in the short-, medium- and long-term. Squeezing someone in the short-term and putting the company at risk in medium- to long-term we got to be mindful of that. So we have been very, very careful on how we manage.

Matt Kornack

Okay. And just quickly a follow-up on the Retail side, I think with regards to the enclosed mall, some of the entities have seen sort of 90% resumption of the existing tenants in terms of reopening in their space. Again, I don’t know how that’s translating in terms of rent collections and when it will translate. But how do you see sort of that 46% rent collection figure within the Retail portfolios move?

Sylvain Cossette

Well, first of all, Marie-Andree to shed light, perhaps she can just — what was the sequence for reopening and what percent of our Retail…

Marie-Andree Boutin

Is reopen?

Sylvain Cossette

Yeah.

Marie-Andree Boutin

So today, Matt, 97% of our Retail reopened. What is still close is a few food court units or very small tenants, it’s really not material. We do have a percentage of that that are like the CECRA tenants, so those who have paid their 25% that they owed or are about to.

And the rest don’t forget that, yes, we collected 46% in the Retail, but we have negotiated for about 35% of deferral and repayment for the month of April, May and June and all of those credits are getting documented now. So we expect this number to move up over the course of the next few months, as deals get documented and tenants are paying what they owe for those months.

So there is many, for example, there’s many tenants, which whom we have negotiated, let’s say, a certain percentage for April, a certain percentage May and call it, a much higher percentage for June and we still expect to receive those and it represents about 35% or so.

Sylvain Cossette

I will try not to confuse you on that. But our collections for May, which is outside of CECRA hard collections at May were — that’s the lower watermark and that was 37%.

Matt Kornack

Yeah.

Sylvain Cossette

And in June we ramped up to 45%, so that’s a month end number. When I look at July, if I compare August to July to-date, we are currently at August 7th we are at 48%, while at the same time on July 7th we were at 24%.

So you will see the acceleration in the…

Marie-Andree Boutin

Correct.

Sylvain Cossette

Okay. So and we are — and the collections for July were more around 55%, okay? So you are seeing the trending in the right direction as we emerge out of this.

Matt Kornack

And I guess, those deferrals would have captured some of this period of time as well, so you won’t collect that rent because you have already agreed to defer it.

Sylvain Cossette

Correct.

Matt Kornack

Okay. That will make sense. Okay. So we won’t really know until Q4, I guess, what our real collection figures are like?

Sylvain Cossette

But maybe, I know like a lot of these one-on-ones or the calls that we have had in the last couple of months with various stakeholders, maybe Marie-Andree could shed some color because there — everyone comes back saying, what are the sales per square foot at Retail, who is out there performing.

And when we mention that our sales were increasing and doing well, there’s just some very apparent volatility, I mean, fashion is suffering. But you are seeing — maybe Marie can give the shocking numbers about what we are seeing in terms of sports and leisure in certain segments, how over their sales are compared to year-over-year.

Marie-Andree Boutin

Yeah. I mean, you have the sector of sports and leisure, value retail, essential services, electronics, accessories, where retailers are doing substantially more than the same — I am talking about doing same month, last month with — what I will give the percentages.

Well, sports is up in the 25%,essential services are up 16%,we have value retail, which is up 41%, where we get the sale 20% over same period last year. So if you recorded the portfolio, there’s a lot of volatility just like Sylvain said. But there’s part of the portfolio, which in our case is close to 50% of our Retail, which is doing well as far as what we can see in the June sales in the regions.

Sylvain Cossette

And for the men on the line there’s another category doing well, which is jewelry and confectionary, which means a lot of people trying to get [inaudible].

Matt Kornack

Last question, switching over and I don’t want to hog the mic here, but CapEx, you did a good job at constraining expenses, how long can you sort of do that without impeding or impacting the quality of the offering to your tenants, and I mean, how much of that was just related to shutdowns as opposed to your proactive approach to reducing CapEx?

Sylvain Cossette

Yeah. I will let Antoine…

Antoine Tronquoy

Yeah.

Sylvain Cossette

…give the details, but know the strat plan that we initiated, we had set out a target at deliberately, I mean, as we put in the investor deck, we are trying to plateau, the spend around $150 million of which $25 million was like more maintenance type and the — in that number you also have a run rate of sort of redevelopment and repositioning, we had Sears in there, we had Palladium and so on.

So, I think, we are trying to live within that envelope and a large part of what we have going forward is already recorded in our DCS for the June 30 values. So we are not expecting any movement going forward attributable to that, but I will let Antoine give you more color.

Antoine Tronquoy

Yeah. I can give a bit more detail as well. So far we spent $67 million and as previously mentioned, I mean, the target for the end of the year is still around $150 million slightly a couple of million dollars, maybe higher than that, but in that range. So it means that there remains $80 million to $85 million to be paid.

Well, the impact of COVID was that we didn’t spend — we didn’t — we spent less maintenance CapEx during that period, because things — everything was closed, but those amounts will be spent by the end of the year and maintenance will total about $25 million for the year, which is reflected by also the reserves that we took into account in our AFFO calculation, which on a yearly rate is also in the $25-million range.

And if we look to 2021, this amount of CapEx is expected to increase slightly, but not necessarily for major works or stuff like that but mostly due to an increase in development projects.

Sylvain Cossette

Yeah. For example, in 2020, we were carrying Palladium, which is coming onstream at year-end and we are sitting on a very good development side in Industrial, so we carrying the balance — carry that bag with us, so we may slip value into that segment in Industrial, so we are going to try to roll and create value.

Matt Kornack

Okay. Great. Thanks, guys.

Sylvain Cossette

Thank you.

Operator

Thank you. Next question will be from Jenny Ma at BMO Capital Markets. Please go ahead.

Sylvain Cossette

Good morning, Jenny.

Jenny Ma

Thanks. Good morning. Good morning. On the list on new leasing, congrats for the positive numbers across the Board, just wanted to dig into the Retail number a little bit, it was just a smidge positive. But can you give us color on what drove that, is it the non-enclosed mall Retail portion, I am not sure how much leasing went on with enclosed mall tenants during the quarter.

Marie-Andree Boutin

During Q2, as far as new leases are concerned, there’s been a negotiation, I would say, on maybe 150,000 square feet of our portfolio. Some of those leases are completed, like, the one in [inaudible] in South Laval, which is a large space and we have a few other retailers that are in categories that we are looking for. One example is the extension of drug stores that are going on.

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So the new leases are going on with categories that are not or have not been really affected by COVID. The ones that have been are basically looking at their business right now, monitoring their recovery rate and assessing what they are going to be able to spend in CapEx on new venues.

But I have to say that I was surprised on how positive some categories are about releasing space, but of course, what’s going on, so they can also be very opportunistic. So it’s a balance we have to play. We don’t want to give the house away, because it’s a difficult time. So we are balancing all of this.

Jenny Ma

So, is it in the non-enclosed mall retail then for the most part?

Marie-Andree Boutin

No. It is in both.

Sylvain Cossette

No. In both.

Jenny Ma

It is in both. Okay.

Marie-Andree Boutin

Yeah.

Sylvain Cossette

Yeah.

Jenny Ma

Okay.

Sylvain Cossette

And enclosed malls have a lot of good activity as well, leasing activities, so we are seeing it in both.

Marie-Andree Boutin

I mean, in enclosed mall, like, Gare [ph], I don’t want to get too specific here, but we are talking to clinics, we are working with different use, which are much wider use of — type of use of Retail at Cominar now, so it’s opening the doors to new opportunities.

Jenny Ma

Okay. That’s good to hear. But would it be fair to say that you would expect that spread to compress in the coming quarters just given the broader headwinds for Retail in general?

Marie-Andree Boutin

Well, we will not maintain the 4.9% that we were able to do in Q2. But we are looking for the quarter of Q3 and Q4, and what we have under negotiations. I think we are going to end up being flat or slightly under, but not materially under.

Jenny Ma

Okay. With regards to the $8.4 million of rent reductions in the total of the $18 million, are those rent reductions a lot like abatements you have given for Q2 and Q3 maybe or are these permanent rent abatements that have been…

Marie-Andree Boutin

No.

Jenny Ma

…on to paper?

Marie-Andree Boutin

No. We have not given any permanent rent reductions except in very, very few cases. And in fact, with most of retailers were not even addressing Q4 resisting to the pressure that they are putting on us in wanting to settle the deal for the rest of the year.

So it’s Q2 and allowing and supporting the recovery in Q3and we are monitoring the sales of our retailers very, very, very closely. So the negotiation is easier now because we have quite a few that are doing really well. So, I mean, the — we are more aware of what’s going on right now and it guides us in our negotiations.

Of course, some are very vulnerable and may continue to be, like, the men’s wear use is very vulnerable. So those are areas where we may need to support a little more in Q4, but it’s not — definitely not the majority of our retailers.

Jenny Ma

Okay. And I think early on the call you said that you expect the provision to be somewhat similar in Q3 for the Retail segment. Did I hear that correctly or should it improve a little inQ3?

Marie-Andree Boutin

No. I…

Antoine Tronquoy

Yeah. We expect it, Jenny, actually to be slightly — slight lower. We feel that we have been extremely conservative in the way we set our provisions and not necessarily only for Retail but throughout the portfolio.

We have taken the view that Q2 definitely was — will be a bad quarter and we don’t want to take any change about further bad surprises regarding that quarter. So that’s why we think we believe we had a conservative approach when setting our provisions.

Sylvain Cossette

I mean looked otherwise, I think, Jenny, when we look at Office and Industrial, we took more of a — what we consider to be a realistic read of the market and on Retail we took a more conservative view of the environment.

Jenny Ma

Okay. And then moving on to the…

Sylvain Cossette

Things could actually trend up for us in the region.

Jenny Ma

Okay. Moving to the IFRS fair value write-downs, were there any changes in value on Gare Centrale?

Antoine Tronquoy

No.

Sylvain Cossette

No.

Antoine Tronquoy

No.

Jenny Ma

Nothing.

Sylvain Cossette

No. We have not added them yet.

Jenny Ma

Okay.

Antoine Tronquoy

No. Not on the upside, nor on the downside.

Jenny Ma

Right. Right. Okay. And then I know you can’t disclose much about the Office asset held for sale, but can you tell us a little bit about the profile of the buyer who…

Sylvain Cossette

No. I am sorry, I cannot. I will tell you the profile. I’d say it’s…

Jenny Ma

Can you tell us…

Sylvain Cossette

Yeah.

Jenny Ma

Can you tell us if they are domestic or foreign?

Sylvain Cossette

They are domestic.

Jenny Ma

Domestic. Okay. I tried.

Sylvain Cossette

It’s a buyer without a strategic reason to buy the asset.

Jenny Ma

With a strategic reason?

Sylvain Cossette

Yeah.

Jenny Ma

Okay. Well, we are trying our best…

Sylvain Cossette

Not an opportunity to take buyers, strategic buyers.

Jenny Ma

Okay.

Sylvain Cossette

Please don’t put me in trouble. Yeah.

Jenny Ma

Okay. And then my last question is, with regards to your Office properties, what is the percentage of employees you estimate who have returned to the Office in your assets and if there’s any difference amongst the market or the B markets that you have?

Sylvain Cossette

No. We are — we think around our — in the Office sector we are probably around 80% of our employees of our clients who are starting to repopulate their offices. And the occupancy varies from 10% to the 20% — the max 25% and unfortunately in certain cases people are exceeding the 25% and that’s their issue. But it’s — you are seeing a gradual return.

I think the properties, which are the hardest hit — we have smaller properties, but the properties which are harder hit are 12, 15 are banks, PBMs of the world, but the smaller suburban properties, people are coming back.

And when I speak to other business leaders, I think, we are all — there’s couple of gating matters which have to happen. I think that disclose a very important gate when come September that families still have kids at home.

The vaccine for larger institutions like banks and the likes is going to be important. But for the bulk of the community is, the people are coming back to their offices and are — even in our Delta [ph] Cominar, we are — in both offices, we are close to the 25% as we speak.

Jenny Ma

Okay. Great.

Sylvain Cossette

It’s evolving favorably. It’s not — I know it’s weird, if you walk through Downtown Montreal, looks like a ghost-town, but it’s — people are coming back, but it’s slow.

Jenny Ma

Thank you very much.

Operator

Thank you. [Operator Instructions] And your next question will be from Mario Saric at Scotiabank. Please go ahead.

Sylvain Cossette

Hi, Mario.

Mario Saric

Hi. Thank you. Good morning.

Sylvain Cossette

Good morning.

Mario Saric

Just — more of a higher level question, slide 13 in your presentation, you talk about your asset class emphasis, which is something they are talking about a lot now in terms of increasing Industrial exposure and reducing Retail. I would suspect if there’s a lot of investors out there that are probably looking to do the same, so that will be reflected in kind of the required rate of return and differential between the asset classes. So the distribution reduction, like, we hope in that regard, in terms of introducing financial flexibility. But when we think about where the balance sheet is today, how do you, kind of longer term go about executing on this repositioning while at the same time reducing leverage?

Sylvain Cossette

Yeah. The answer to your question Mario lies to the speed at which you can and the price at which you would be exiting assets, okay? So right now that it’s going through. When I look at the financial flexibility that we have going forward through the distribution cut, our leverage still remains high and it will be $66 million if you would have to equate, it’s about 1% of debt reduction if you put nothing spent elsewhere.

And in terms of the Retail exposure, as I mentioned, we are going to keep all options open. We have been doing a lot of work around improving the densification profile of an asset and there’s value there and that increases or enhances the buyer interest in the profile of the asset. But as we speak today, the market as you know is shutdown.

So the path to your question really comes from a sequence at which the market reopens and we are not going to destroy value and just do fire sales, but we are going to try to do this in a very structured and appropriate manner, and also measure what the cost of selling an asset is versus retaining it.

So these are all the matters we are going through, but it all hinges upon buyer interest. And we think that we are — there’s things we can do to move that process along. But that’s the best answer I can give at the present time, but yes, we would like to bring our leverage down.

Mario Saric

Okay. Okay. I appreciate the color. The COVID impact or the experience, would you say that it has been through a greater willingness or likelihood of taking advantage of the intensification upside for various properties via sales as opposed to kind going through and doing longer-term redevelopments at Cominar?

Sylvain Cossette

Well, first of all, our discussions today around pre during and post-COVID on densification opportunities, the market still remains very tough, the properties we have are good, our locations are good locations for that type of activity and the issue is, lot of these developments can be multi-phased over many years.

So part of the arbitrage we have to make is we participant in the development or do we move off the asset and you are right, generate cash and redeploy the cash quicker. So these types of analyses we are going through. But what’s good for us is the backdrop of the development activity at least to develop our interest but the assets remain strong.

Marie-Andree Boutin

Correct.

Mario Saric

Okay. That makes sense. And then, I guess, maybe my last question, just going to slide 16 of the presentation where you highlight the change in property values across various asset classes including a breakdown within Retail. A little bit surprised to see the relatively narrow range in decline between enclosed malls and other types of Retail given the variance that we are seeing out in the market in terms of enclosed malls being really more impacted than other types of Retail. So is that a measure of perhaps being overly conservative in terms of the collection on the other types of Retail or do you foresee potentially seeing additional downward pressure on the enclosed mall valuation portfolio?

Antoine Tronquoy

Well, as you can see also, I mean, we say on page seven, because I mean, you — we are talking about changes in fair value, comparing enclosed malls to others and by mentioning collections on that page seven, we show that in enclosed malls the rent collection was 43%, in others it was 55%, but the gap is not that huge between both buckets actually. And then, I mean, the way those fair value were determined was by applying, I would say, stressed conditions to the operating assumptions increase in vacancy, increased…

Marie-Andree Boutin

Bad debt.

Antoine Tronquoy

…increase in bad debt provision, taking into account no rental increase and also applying a cap rate — exit cap rate increases ranging from 25 bps to 75 bps.

But also I think that, I mean, those are rounded numbers and actually, I think, we have a 11.4%, compared to the 8.6%, which cosmetically, I mean, here you cosmetically see a 2% difference, but actually I think it’s rather a 3% difference between both.

Mario Saric

Got it. Understood. Thank you.

Antoine Tronquoy

Thank you.

Operator

Thank you. And at this time Mr. Cossette, we have no further questions. Please proceed.

Sylvain Cossette

Okay. Well, thank you everyone and I wish you all a very nice day and we will be in touch very shortly. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this presently concludes your conference call for today. Once again thank you for attending, and at this time, we do ask that you please disconnect your lines.



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