Use of non GAAP financial measures are described in more detail in H and R's public filings, which can be found on our website and at www.sedar.com. I would now like to introduce Mr. Tom Hofstetter, Chief Executive Officer of H and R REIT. Please go ahead, Mr. Hofstetter.
Good morning, everyone, and welcome to today's conference call, where we will discuss the first steps made in our strategic repositioning announced earlier this morning. On the call with me here today is Larry Frum, Executive Vice President and Chief Financial Officer Alex Avery, Executive Vice President, Asset Management and Strategic Initiatives and Robin Kestenberg, Executive Vice President, Corporate Development. Over the past few years, H and R's Board has 14 markets that aligns the REIT's business model with investor preferences. REIT's ownership of the vote has been a characteristic element of the REIT's profile for more than a decade and something investors have focused on as a key risk, elevating the REIT's cost of equity and limiting strategic flexibility. Today's $1,500,000,000 office portfolio sale is a critical step forward on our path to achieving a more simplified structure and is evidence of our commitment to our strategic repositioning.
By substantially reducing the REIT's Calgary office exposure and improving our tenant concentration profile, we are addressing significant issues of concern as voiced by our unitholders. With today's announcement, we are now in a position to enhance financial flexibility, enabling us to execute on the next steps of our strategic repositioning. The Bowenville campus office transaction is comprised of 3 key elements. 1, the first of 100 percent ownership of the land and building of the Bow, together with a 40% interest in net rent payable under the Ovinta lease for gross proceeds of $613,000,000 2, the effective sale of a 45% interest in the Aventiv lease to Deutsche Bank through a securitization structure for gross proceeds of $418,000,000 And finally, the sale of 100 percent of the Vail campus for gross proceeds of $439,000,000 On closing, these sales will generate approximately $800,000,000 of cash proceeds, net of associated mortgage repayments and transaction costs. Of significance importance, the transaction also includes an option in favor of H and R that allows us to repurchase the bow on expiry of the event of lease in May 2038 for $735,000,000 or 60% of today's total transaction value.
And for square foot terms, the transaction services approximately $608 per square foot of value from the bow as compared to the repurchase option at a price of $3.68 per square foot, which is 40% below today's transaction value. This option gives The REIT the ability to capture upside in the value of the bow as the Calgary office market recovers over the next 17 years, while providing substantial cash proceeds today to allow the REIT to pursue other opportunities. I'll now turn the call over to Larry to discuss a few financial implications.
Thank you, Tom. Good morning, everyone. The transactions announced today effectively reduced the re sellering office exposure from 9% to 3% on a fair value basis and Reducer Vinta's share of REIT revenues from 12% to 2% and Bell Canada's revenues from 9% to 5%. These two tenants make up 21% of H and R's total revenue at Q1 2021. On a pro form a basis, our top 10 tenants will comprise 34% of total revenue, an improvement from 44% of revenue as at at the end of Q1.
The dispositions will reduce annualized cash FFO by approximately $0.20 per unit, assuming 100% of the proceeds are used to repay debt. This dilution in FFO will largely be offset by the lease up of River Landing and Jackson Park. From a balance sheet perspective, the transaction reduces debt to total assets from 50% to approximately 44% on a proportionately consolidated basis and from approximately 10x debt to EBITDA on a trailing basis at Q1 2021 to 8.6 times on a pro form a 2022 EBITDA, which includes the lease up assumptions for River Landing and Jackson Park. The repo has legally disposed of its interest in the boat property, But due to the repurchase option in favor of H and R and in accordance with IFRS 15, The Bow transaction will not be treated as a disposition for accounting purposes. The Bow will continue to be recorded as an asset on the balance sheet with the proceeds from the sale being recorded as deferred revenue with both items being amortized over the remaining term of the lease.
The sale of the 45% interest in Avinta's lease to Deutsche Bank will be treated as prepaid rent for income tax purposes and recorded as deferred revenue on our balance sheet. It is expected that the transaction will generate taxable income of approximately $225,000,000 or $0.75 per unit of taxable income, including both recapture income and capital gains.
We
anticipate that a special distribution will be required and will provide you with full details in the coming months once they are finalized. I will now turn the call back to Tom.
Thank you, Larry. While we're sharing good news, let me provide an update on the continued strong momentum we have been experiencing at Jackson Park and River Landing. Committed occupancy at Jackson Park recovered sharply, reaching 97% to date, effectively making the project fully leased. Royal Landing in Miami has seen a similarly remarkable pace of leasing momentum with over 86% of the residential units now leased. The retail component of River Landing is over 95% leased and the office is now 36% leased with advanced lease negotiations on substantially all of the remaining office space.
Management now expects the overall development to reach stabilization of 95% leased up by the end of the year, a full year ahead of our previous expectations. Upon stabilization, Jackson and partner of Landing are expected to contribute approximately $25,000,000 $30,000,000 of incremental annualized NOI respectively. The combined CAD55 million is expected to add approximately CAD0.18 per unit of annualized FFO, offsetting most of the impact on FFO per unit over the off strategy we are announcing today. The REIT has also recently completed the sale of its interest in 16 industrial properties aggregating approximately 900,000 square feet owned through its joint venture with Quest Point PSC for $162,000,000 of the REIT share, reflecting a 4.1% cap rate and a 28% premium to the REIT's last IFRS fair value of the properties. Management and the Board plan to continue to pursue opportunities to further streamline and simplify the REIT's portfolio and structure to better align with investor preferences.
Earlier this year, we outlined plans to create at least one new REIT entity in 2021. And with today's announcement, we remain on track to achieve our goal, which we believe will materially enhance the value of our units. We appreciate the patience and support of our unitholders as we work through the execution of our strategic initiatives. We now be pleased to answer any questions from call participants. Operator, please open the lines for questions.
And our first question is from Matt Logan with RBC Capital Markets. Your line is
open. Thank you and good morning.
Good morning.
Would you guys be able to provide any early thoughts on the nature or quantum of the planned special distribution.
No, we're still finalizing that, Matt. We still got to figure out the tax, any other sales, interim guidance that we've given right now.
Fair enough. And in terms of the planned creation of new public entities, has there been any further thought on which entity might be spun out later this year?
Absolutely. Plenty of further thought. Just can't share them with you, Matt. Sorry. Stay tuned.
And maybe a couple other ones changing gears here. In terms of the South Block portion of the bow, What was the logic in retaining that piece of the building?
It's a land for future development that has no Revenue potential for our buyers and therefore they didn't really have an interest in it.
And lastly, any thoughts on why the pursuit of a Secured lease financing arrangement versus just an outright sale?
Sure. To maximize value, the homeowners came together creating a higher value than an outright sale. This is a structured financing and it's a large, large transaction, especially in anything in the Canadian marketplace, which would be deemed to be one of the largest transactions, very hard to find a buyer who take on that liability By piecing it into 2 different components, you're effectively dividing the asset into smaller buckets, which are now more easily salable. And quite frankly, I don't think it's I think this is a structured finance deal. And sorry, Matt, I was just joking beforehand.
On the answer to your question of any more guidance as to what will happen to spin out our IPO. We hope to have something by the end of the year finalized. So stay tuned. It's not in Never Never Land.
Well, I appreciate the color, gentlemen. I'll turn the call back. Thank you.
Thank you.
Our next question is from Matt Kornack with National Bank Financial. Your line is open.
Hi, guys. Just a quick question as to the residual exposure to Ovintiv. Can you just walk us through what would happen In the case there was a default by them and what your exposure is ultimately at this point? Is it just the 15% residual Lease component?
Yes.
Okay. So the Deutsche transaction is entirely Their exposure to Aventiv?
Yes, that's right. Deutsche transaction really is just the cash flow. Look at it like They sold an unsecured piece of Aventa paper. And the logic being it's priced at a premium sorry, it's priced at a discount to The where the bond is trade and it's arbitrage on the event of bonds.
Okay. Fair enough.
It's not an uncommon phenomenon in the United States. We don't have in Canada, as you all know, bondable leases. This is one of the few animals that exist like this, doesn't have the right to set offs And the other thing, so it can be sold as a debt piece instrument. It's priced off of the Aventa bonds.
And then I think it's fairly consistent with regards to DCF approach, but like I guess if rents are above 25 net or so in Calgary in 17 years. It may be an interesting purchase on your part to get back into that market.
Yes, if I can just add a little color to it. I mean, it's not the only asset in the world that's being sublet. Even our Bell facility in Mississauga has substantial sublet component. And therefore, the logic being at the end of the 17 year term, it will probably be retenanted by other tenants who want the space, need the space or could be Avantiv at that point in time. So you'll be buying cash flow stream of tenants actually live bodies.
Logically speaking, we're actually occupying the building and it'll have a value. The value we're paying, we can buy that at a price per square foot basis could be an interesting play.
Okay. No, makes sense.
And don't forget, we don't have Option to buy. So you can sell the option. You can actually sell the asset before you actually buy the asset. It's a one way street whereby we can make money, can't lose money on
Yes. No, it's nice optionality to have if Calgary comes back, which it may well. And then last one for me with regards to the pro form a balance Larry, I missed your commentary there on debt to EBITDA. And also, does that include The industrial sale that you provided subsequently and where would sort of debt EBITDA be as well as the debt to total assets on a
And on the debt to EBITDA, as well as the sale of vertical assets, it goes down to 8.6 times, but that includes The lease up for River Landing and Jackson Park, which as Tom's commentary indicated, leasing done that's pretty much
Okay. Great. Thanks, guys, and congrats on getting this done. I know there were a few kicks of the can in the past. So congratulations.
Thank you.
And our next question is from Sam Damiani with TD Securities. Your line is open.
Thanks. Good morning. And I'll say congratulations again. I'm sure This has been a lot of effort to get to the stage, so well done. The only question I have left on today's announcement is just on the Bell asset.
What drove the pricing there? And any comment on the pricing versus IFRS?
Yes. I think the answer to the question is there it's not Separate transactions, it's a one transaction, it's just an allocation of price. We didn't really care. So I don't think you should look at The pricing of the bow or the bell reflective of market conditions. It's really just one asset, 2 different buckets by the buyer and we didn't really care how it went.
The deals were tied together. They couldn't buy one without the other.
Got it. And just one final one for me on Jackson Park, really great to see the lease up. Any comment on the rents that you are getting or the change in the rents that You've been doing more recently versus a few months ago and also on incentives.
So the rents haven't gone down. The rents have been basically the same as The concession started off at 3 to 4 months on depending on the lease term between 13 months 2 years and they're now going to go back to pretty well by the end of the year back to the typical maximum 1 month concession if that in that marketplace. And you're seeing that phenomenon right across New York, New Jersey. Quite frankly, it's been a huge recovery in the entire Manhattan market. Ours is more reflective of the students coming back for September We leased like 700 units in the process of 2 months, which is unheard of.
And River Landing is just the strength of theirs. Concessions are burned off again in 1 month. Will probably go down to 0 pretty soon. It's the strength of the Miami market. But we're seeing in all of the Land Tower residential properties, concessions down and rental rates up.
So the overall, the rental rates are pretty much the same as pandemic. Pandemic was in our minds just a bad nightmare that's hopefully endings in many cities sooner rather than
later. That's great. Thank you again.
Our next question is from Sumayya Syed with CIBC. Your line is open.
Thanks. Good morning. So with this deal today, you're obviously reducing your tenant concentration quite a bit. So What does the office portfolio look like now qualitatively on a pro form a basis? And do you see more
So a lot of our office portfolio will be announced Not too distant future is a lot of it has residential intensification. A lot of our properties have the ability to go ahead and service value on residential. So you're going to see a shift of a significant amount of our properties. Burnaby is an example, 55 Young, 145 and many others that have residential intensification. The real question is where is our mind as far as office use goes, work from home, all those type of things, which I don't think the world's landed on, we'll see where it goes.
We're not looking to further increase our concentration in the office sector at this point in time. I think it's more a question of changing that into what's going to become ultimately a lot of residential for us. But we are not looking to increase our concentration in office. We will be increasing our concentration in the Land Tower divisions and the Industrial divisions through more development and acquisitions because the cap rates are just too low. Right.
And then
On a pro form a basis to your question, without the development coming online, We'll be reducing from these transactions, the office exposure will be reduced to about 36% on a pro form a NOI, same asset NOI basis.
Okay. That's helpful. And then I guess on that point, like after this deal, is it Fair to assume that H and R is now well positioned to create a standalone entity? Or do you think There is more work to be done to prepare for that.
No, we are in a financially, we are in a position. The question is How much of strength we have to give to the balance sheet of the not only the spin off, the IPO, whatever Maybe versus what H and R looks like after that. But strategically, we don't need to sell more assets to go ahead and embark on our Next stage of our strategy.
Yes. These sales have set us up well on our balance sheet to determine the best course of action Going forward, I think we have a strong balance sheet now.
Well, it's the 2 issues. It's a balance sheet cash issue and the other issue, of course, is the concentration. If we went to So the bow, we'd have if we spin off our IPO and the A division, whatever that division may be, it creates a higher concentration in the bow We're not satisfied with the current concentration. Obviously, we're going to be satisfied with a smaller H and R with a higher concentration. So it was a paramount importance to We'll conclude this transaction spinning off the bow, reducing our exposure to Bell, reducing our exposure to the office component in order to When we have a smaller company, the concentrations don't become an issue.
Okay. That's great. Thank you.
Our next question is from Matt Logan with RBC Capital Markets. Your line is open.
Thank you. Just one quick follow-up question. In terms of the planned use of proceeds for the 800,000,000 Can you talk about which pieces of debt you plan to pay down first?
Sure, Matt. There's about 2 $60,000,000 of mortgages that we will be paying down. That's mortgages that are not related to the properties that we are selling. And then after we paid back $250,000,000 of the first tranche of mortgage bonds in June, We increased our bank lines. Our bank lines of about 300 currently about $360,000,000 So that will be the first use of proceeds in the mortgages of $260,000,000 And the balance, we have some options.
We have either The 2 term loans that we have, dollars 250,000,000 each that the maturities are a couple of years out. We have the debentures, a series of debentures maturing next year in May that we could elect to prepayment. We haven't decided what we'll use the last,
We have no further questions at this time. I'll turn the call back over to Mr. Hofstetter for any closing remarks.
Thank you and stay tuned. Chapter 1 is now just over. Take care everybody. Bye.
Thank you, ladies and gentlemen. This concludes H and R Real Estate Investment Trust conference call. You may now