Good morning, and welcome to H and R Real Estate Investment Trust 2020 4th Quarter Earnings Conference Call. Before beginning the call, H and R would like to remind listeners that certain statements, which may include predictions, conclusions, forecasts or projections in the remarks that follow, they contain forward looking information, which reflect the current expectations of management regarding future events and performance and speak only as of today's date. Forward looking information requires management to make assumptions or rely on certain material factors and is subject to inherent risks and uncertainties and actual results could differ materially from the statements in the forward looking information. In discussing H and R's financial and operating performance and in responding to your questions, we may reference certain financial measures, which do not have a meaning recognized or standardized under IFRS or Canadian Generally Accepted Accounting Principles and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non GAAP measures should not be considered as alternatives to net income or comparable metrics determined in accordance with IFRS as indicators of H and R's performance, liquidity, cash flows and profitability.
H and R's management uses these measures to aid in assessing the REIT's underlying performance and provides these additional measures so that investors can do the same. Additional information about the material factors, assumptions, risks and uncertainties that could cause actual results to differ materially from the statements in the forward looking information and the material factors or assumptions that may have been applied making such statements, together with details on H and R's 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 at www.sedar.com. I would now like to introduce Mr. Tom Hofstetter, Chief Executive of H and R REIT. Please go ahead, Mr.
Hofstetter.
Thank you, and good morning, everyone. I'm Hofstadter, A. S. Tarswick's CEO, and I'd like to thank everyone for joining us on today's call. With me here virtually are Larry Froome, our CFO Philippe Lapointe, COO of Land Tower Pat Sullivan, COO of Primaris Alex Avery, EVP, Asset Management and Strategic Initiatives and Robin Kestenberg, EVP, Corporate Development.
We are gathered here today to we celebrate the end of 2020 and a good riddance to 2020, despite being one of the worst years for humanity in a long time, we're pleased to report solid financial operating results. We responded to the challenges of 2020 in a manner consistent with the conservative nature of H and R REIT. We we prioritize the safety of our employees, tenants and visitors to our properties and followed all recommended protocols, including social distancing, frequent cleaning and temporary closure of select properties. From a business perspective, we batten down the hatches focused on both ensuring smooth operations and maintaining a strong financial position. As the team is about to discuss, we are pleased with how well our portfolio has performed underlining the stability and resilience of our business.
Now I'll turn it over to Filip, who will review our multi residential operations, followed by Pat, he will provide an update on our retail portfolio and then to Larry, who will provide some context on our financial results. And finally, I'll make some closing remarks. Filippo, over to you.
Thanks, Tom, and good morning, everyone. As we report on the closing of 2020, I'd like to begin by revisiting the dedication of our on-site and corporate staff members. As mentioned in previous quarters, our collections rate remains above the industry average, On the JV development front, the Pearl in Austin, Texas is scheduled to fully deliver in the Q3 of 2021. Nightingale in Seattle, Washington is in the early stages of pre leasing, and the project will be fully delivered in April of this year. Phase 1 of our Hercules development north of San Francisco, named The Exchange, is currently 74% occupied.
Construction of Phase 2 named the Grand has remained on schedule and is expected to deliver in the Q2 of 2021. Lastly, Shoreline Gateway, is also on schedule and expected to be delivered in the summer of 2021. To supplement our JV development partnerships in the U. S. Gateway markets, Lion Tower has been increasingly focused on expanding its wholly owned ground up development platform.
Internally managed multifamily development is, in our opinion, the call, I'd like to turn the call over to Steve. The best strategy to increase shareholder value within our space. The expected development yields relative to historically low Class 8 cap rates our recent land purchases in Dallas, Texas and Tampa, Florida underscore our intent to capitalize on this development strategy. Clientele is able to leverage its brand and network to source opportunities, its market level experience to select sites and its property management division to help design, plan and operate an exceptional multifamily community. The synergies between our divisions bolster a competitive advantage as a vertically As previously mentioned, Land Tower has been able to secure additional Class A sites for development in our target markets it expects to source additional opportunities in the upcoming quarters.
For instance, we recently acquired an infill site in Dallas, Texas in proximity the Dallas Love Field Airport and Medical District, the plan for the 5.4 acre site is a 5 story community with approximately 415 units. Additionally, on January 28, we purchased a 4.2 acre infill site with direct frontage to Highway 75 North Central Expressway, one of the most traffic thoroughfares in the core of Dallas, we expect to build a similar 5 story wrap product with approximately 3 60 units on that site. As always, we look forward to sharing more information on the timing of these developments next quarter. On the topic of prevailing Class A multifamily cap rates, we found it prudent to convey what we're seeing in the private market from a valuation perspective. Due to favorable debt terms stemming from historically low interest rates, paired with an increased institutional appetite and capital allocation for multifamily investment, we're seeing substantial cap rate compression in our Sunbelt markets.
For context, we witnessed cap rates for comparable Lantower assets decreased by well over 50 bps on average across all of our markets in 2020. This sentiment is shared by most of our peers, both public and private. Quite counterintuitively, public real estate valuations are trading at an elevated discount, illustrating an increasing detachment from valuations of the underlying real estate. Consequently, this reiterates our observation that many publicly traded multifamily REITs are thus undervalued. On the Lantaro River Landing front, our leasing pace continues to beat expectations.
As of today, we are 28% occupied and have we leased 169 apartments, we are pleased with the leasing velocity that we experienced during the fall and winter months and expect an even more impressive spring and summer leasing season. On to Jackson Park, as we mentioned last quarter, we're encouraged what we believe to be the start of a rebound from an operational perspective. The return to stabilization will largely be driven by the vaccine rollout, workers returning to the office and students returning to the classroom. With that said, the property is expected to gain positive absorption as we enter the favorable spring and summer leasing season, and we hope to experience a noticeable recovery by We remain confident that Jackson Park is one of the best, if not the best value proposition for prospective residents in the submarket when considering the location, amenities and quality of construction. We have been encouraged by the elevated recent traffic and most importantly, underscoring our belief that a recovery is in sight.
On the financial front, when point 9 percent for the 12 months ending December 2020 compared to the respective 2019 periods. Lastly, on a personal note, I'm very pleased with the positive go to my colleagues in our U. S. Markets and at our corporate office who work tirelessly for the betterment of our communities. And with that, I will pass along the conversation to Pat.
Thanks, Philippe, and good morning. During the Q4, the retail division reported a Primarily due to a significant reduction in bad debt, improved occupancy and growth in retail rents. During the quarter, enclosed malls recorded an increase in NOI of 2.5 percent despite recording $1,200,000 in bad debt. Without any bad debt provision for the quarter, the retail division would have shown an increase of 1.8% with enclosed malls growing by 5.5%. For the full year, the retail division would have shown an increase of 2% without bad debt being recorded and closed malls would have grown by 4.5%.
Significant leasing completed in the past few years with large format retailers and premises formerly occupied Target and Sears the primary driver of NOI growth in enclosed malls. Positive rental growth, lower expenses and improved recoveries in the quarter were offset by bad debt, the impact of CCAA tenant filings, coupled with reduced percentage rent and specialty leasing revenues, which were down 69% 30% respectively in 2020 compared to 2019. We were well positioned moving into 2020 having completed remerchandising the majority of our vacant anchor boxes. Since the start of the pandemic, our primary focus has been providing the support to our local retail partners and to maintain occupancy. Occupancy in the retail portfolio is 92% as at the end of 2020 compared to 91.5% at the end of 2019, While occupancy in the enclosed malls ended the year at 88.1% compared to 87% at the end of 2019.
Unfortunately, government mandated closures in Manitoba, Ontario and Quebec starting in Q4 2020 will result in further bad debt provisions prior to the end of February limiting the downside risk of 2021 NOI. We anticipate a further $1,800,000 contribution
During the
year from tenant schedule to open from premises formerly occupied by Sears. In addition, we completed a number of notable transactions in the 3rd Q4 that will positively contribute to rental growth later in 2021 with full year contribution in 2022, including a new 15,000 Square Foot Government Passport Office at Place D'Orleans, approximately 28,000 Square Foot Lease with the City of Toronto occupied second floor the space at Dufferin Mall at rents 1.8 times higher than the prior tenant, a 20 year lease renewal of Walmart at Dufferin Mall with a 55 being medical, dental and average rents being 2.5% higher than prior rents. Collection of rents in the retail portfolio have trended higher since the low point in May. In Q4, we collected 83% from our enclosed malls and 88% from the retail segment overall. Collections for January and enclosed malls are 82%.
We have leased 23 of 49 locations vacated following CCAA filings. Approximately 61 percent of the gross revenue associated with space vacated due to CCAA tenant filings is located in 5 of our stronger malls, including Stone Road and Orchard Our enclosed malls reported sales in Q3 of 86% compared to the prior same period last year. However, due to government mandated mall closures in Ontario, Quebec and Manitoba, coupled with occupancy limits in Alberta, sales were significantly lower in Q4. In general, sales of property in larger markets had been trending at about 80% of normal until the shutdowns, while smaller market properties such as Medicine Hat Mall, Regent Mall in Fredericton and Park Place in Lethbridge we have posted sales at about 90%, with several properties including Kildonan and Winnipeg and McAllister Place in St. John showing some monthly gains over the prior year periods.
Generally, those tenants that sell products associated with office work such as suits, formal footwear and even cosmetics are experiencing lower sales As compared to retailers that sell casual apparel, athletic footwear and household goods, some of which are posting higher comparable sales figures. FoodCor tenants, typically a significant driver of sales productivity, have been down about 30% prior to recent mall closures, Primarily due to reduced seating or service being restricted to takeout only. As a result of the pandemic, traditional bricks and mortar retailers accelerated the adoption of e commerce. E commerce sales in Canada have risen to represent 5.7% of Canadian retail sales for the 12 months ending November 2020 were $35,800,000,000 of the $626,600,000,000 of overall retail sales. During this time period, bricks and mortar online sales grew to $13,700,000,000 or 38% of all the online sales.
5 years ago, bricks and mortar online sales represented just 28% of online sales. Since the beginning of the pandemic, an increasing number of our tenants have invested in their operations to facilitate e commerce sales in exploring innovative technology that facilitates the seamless online purchase and delivery of real time inventory directly from our shopping center real estate. The call, the digital strategy that Primaris is exploring will soon be a prerequisite to attract new bricks and mortar locations, retailers and direct to consumer brands to our center. Thank you, and I'll now turn it back to Larry.
Thank you, Pat, and good morning, everyone. Since the onset of COVID, our number one goal was to protect our employees, our tenants and our shoppers. We also ensured we protected our balance sheet. We finish the year with $63,000,000 of cash on hand and $1,100,000,000 of unused borrowing capacity under our lines of credit. In addition, we have an unencumbered property pool of approximately $3,700,000,000 which is set to grow in 2021.
Our debt to total asset ratio at December 31, 2020, was 47.7%, an increase from 44.4% a year earlier. This increase is all due to the fair value adjustment of $1,200,000,000 to our real estate assets. The IFRS fair value of H and R's retail portfolio was reduced by approximately $660,000,000 in Q1, With the changes related primarily to inputs into the forecasting of cash flows, including vacancy rates, market to rental rates, tenant retention rates and releasing assumptions. The IFRS value of H&R's office property was reduced in Q1 by approximately $670,000,000 primarily from These properties are generally subject to long term leases and as such there has been limited changes to cash flow models, but more significant changes to discount rates. While there have been very few recent transactions for comparable properties, our valuation team used prudent assumptions reflecting pricing signals observed in oil prices and the energy sector corporate credit market.
These fair value adjustments have hit our portfolio in Alberta the hardest, as shown by the decline in fair value of approximately 900,000,000 from $3,200,000,000 a year ago to $2,300,000,000 at December 31, 2020. As a result of these significant write downs, Our net asset value per unit decreased from $25.79 per unit to $21.93 per unit at December 31, 2020. We are optimistic we may see some of these fair value adjustments reverse as we emerge from COVID. Moving on to operations. We're pleased to report that Q4 collections of 95% continued the upward trend since the Q2 lows, Including continued improvement in our most challenging segment of enclosed malls, which reached 83%.
This trend has continued into January, where we have collected 82% to date from our enclosed malls and 94% overall. A similar positive trend has been seen in our bad debt expense. Our bad debt expense in Q4 2020 was $3,900,000 a significant improvement from $13,500,000 in Q3 2020 $24,500,000 in Q3 2020. Our bad debt expense for the year 2020 was $42,200,000 compared to only $2,200,000 in 2019. Most of the bad debt expense incurred was a result of H and R providing abatements to our hardest hit retail tenants, many of which were mandated to close as part of provincial lockdowns.
At December 31, 2020, we had a provision for expected credit losses and accounts receivable of $15,100,000 which we believe provides ample room against the gross accounts receivable balance of $34,700,000 Given the pandemic backdrop, we are extremely pleased to report our 2020 FFO per unit was $1.67 compared to 1.7 $6 for 2019, Q4 2020 FFO per unit was $0.42 compared to $0.44 a year ago. 2020 AFFO per unit was $1.27 compared to $1.33 for 20 19. Turning to 2021, there are a few items which we expect to influence results going forward. Firstly, as River Landing construction is completed, interest that was capitalized for the River Landing project will no longer be capitalized. Interest capitalized for 2020 amounted to approximately US11 $1,000,000 we expect a net drag on FFO until the project achieves stabilized occupancy.
Notably, we expect the project to reach stabilized occupancy and NOL In January 2021, H and R converted a $140,000,000 U. S. Mezzanine loan on a 12.4 acre development site in New Jersey City to a direct ownership position. This will reduce interest income by approximately US14 $1,000,000 in 2021 compared to 2020, and interest will not be capitalized on the project until development commences. While these factors will temper our 2021 results, they're expected to substantially reverse in 2022 and 3 lower leasing expenditures and tenant inducements.
Within our equity accounted investments, 5 multi residential development projects we have interest in, we'll commence lease up, creating a modest drag on FFO initially, but adding to the upside potential over the course of 2021 2022. Overall, we expect higher AFFO per unit in 2021 compared to 2020, but lower FFO per unit with a significant positive growth trajectory over the course of the next 2 years. We also expect the development activities to contribute to NAV per unit growth and improve the overall quality of our portfolio. And with that, I will turn it back to Tom.
Thank you, Larry, and thank you to the entire H and R team for their hard work and dedication in 2020. We are pleased with the operating and financial results the team just reviewed and believe The REIT is well positioned as we progress towards a return to a post pandemic new normal. Thematically, I'll make a few comments on the outlook for Office and Retail opening segments, offices are largest segment, accounted for 44% of our revenue. Work from home and return to office are our most hotly debated topics in the real estate world today. Ops markets were booming as the world entered the pandemic with broadly low vacancy, broadly high market rents and high asset pricing.
The 2019 2020, H and R took actions to fortify our office portfolio, selling assets that have significant near term lease expiries with strong demand and The result is a portfolio with an average rental lease term of over 12 years, 85% of revenues coming from investment grade tenants at high quality properties well located in their markets and leases on only 1% of office GLA expiring in 2021. We believe the long term value proposition of office properties is specialized environments we continue to explore ways to incorporate more flexibility into how their employees use office space over the next few years and that this could exact rate the ordinary softness in office leasing conditions Our portfolio is defensively positioned, and we'll be closely monitoring the market for opportunities to both buy and sell properties we enhance Kourish's portfolio and create value for our unitholders. Our retail portfolio accounted for 34% of revenues has delivered very solid results in challenging market conditions, our portfolio includes a mixture of grocery anchored properties, single tenant properties and closed centers that are dominant in their respective markets. A common thread to all of these properties is a focus on providing affordable space for more staples oriented retailers, allowing the stores to be profitable.
Store closures have aggregated less than 1% of retail GLA in our portfolio since the beginning of 2020. Retail rent collection reached 88% in Q4 retailers have begun signing new leases and making expansion plans as they look forward to a post pandemic environment. In 2021, we look forward to the rising contributions from River Landing, 4 other multi residential projects included in our equity accounted investments due to begin lease up this year as well as making progress on our industrial and multi residential developments in the GTA in Vancouver, new developments create a temporary drag on FFO during the early days of lease up. And as Larry just outlined, this will be the case for H and R in 2021. However, we are focused on the positive contributions to cash flow in NAFTA Unit as these projects reach stabilization over the next 18 to 24 months.
We remain committed to maximizing value for our unitholders and plan to take advantage of opportunities in 2021 to evolve H and R we begin, we will now be pleased to answer any questions from call participants. Operator, please open the line for questions.
Our first question comes from Sam Damiani from TD Securities. Please go ahead. Your line is open.
Thanks and good morning everyone. First on Jackson Park, Philippe, I wonder if you could just give us a little bit of detail on the occupancy At Jackson Park, I guess during Q4 and where it is today, I guess what your expectations might be for Q1 and Q2?
Hi, Sam. Good question. So in the last quarter, it's hovered around, I'd say, a tad over 60%. My expectation for the next month or 2 is it probably starts inching towards the middle of the 60s. It's going to be really interesting.
I want to be careful in not offering too much guidance only because of the outliers. If this was just a market demand issue, then it'd be easier to give a prediction. Because of the vaccine rollouts and frankly what happens with Midtown office, I'm not terribly certain. Like I mentioned though, we are seeing a ton more traffic than we have seen in the last 6 months and obviously our conversion rate from traffic to actually lease signing it has been doubled in the historical average and so somewhat encouraging, but I just out of prudence, I'm not capable of giving you accurate guidance on that.
Okay. That's fair. And then just on the NOI impact, I mean, when you look at the 65% occupancy there, how does that impact either the margin or the absolute NOI dollars compared to, let's say, Q1 or Q2 of last year, when it was over so much higher?
It's a good question. I think perhaps Larry can apply in the specifics. But because the property is a very large property, a Class A and very modern, the percentage of NOI clearance from revenue is obviously much lower than With a breakeven point from an occupancy perspective is much lower than the Class A building or Class B building. And so As far as I can tell, I believe we're still positive on an NOI basis even at 60%. It's something that Larry can confirm.
And so from that perspective, less so worried. And obviously, like I said, all signs are pointing to us reaching the bottom, so from here on out, I would expect only positive NOI growth.
I'll just add, Felipe is correct. We are still positive on an NOI basis, at Jackson Park, but there has been significant reduction in NOI.
Okay, that's great. Thank you. And then just on the Bow, with the mortgage bonds maturities starting to come up here this year, I wonder if you could just share your thoughts on how you're going to sort of approach that situation or if anything has been accomplished to date?
Nothing has been accomplished to date. Obviously, AvantiV bonds are trading very, very well compared to where they were a year ago, as is their stock performance, so that opens up a whole new opportunities that didn't exist a year ago. So I'm optimistic we'll get to it, but it's kind of For the short term, we have a bond that's expiring $250,000,000 in June 2021, which you'll be paying off by issuing an unsecured piece of paper Into the markets within the first half of the year.
Okay, thanks. I'll turn it back.
Thank you. And our next question comes from Mario Saric from Scotiabank. Please go ahead. Your line is open.
Hi, good morning. Sorry, Tom, given some of your commentary in the letter to shareholders and what's been defined in the restructure In 2021, which is something that I've been waiting for
Sorry, Mario, I'm not hearing you that well. Can you just I don't know, try again?
Is that better?
Yes. Try it.
Perfect. Okay. So I was mentioning given some of the commentary in the Unitholder letter with respect to simplifying the structure of H and R in 2021, which is something that you looked at since I guess 2019, Can you give us any sense in terms of what the debt to fair value for each of the verticals would be as of Q4?
Sorry, again, I'm losing, I apologize. The debt to the what?
Debt to the value value.
I can't hear. Larry, can you hear?
Thanks, Mario. You're asking what the debt to fair value would be per segment of Amongst the asset classes, is that your question?
Yes. Thank you.
We haven't given that information, Mary, and I don't really have it offhand. Happy to maybe speak to you and give you some guidance Offline, but I really don't have it
right now. Yes. And I It's Alex. I think Mario, It's difficult to allocate by segment when you've got as much unsecured corporate level debt as we have. I think maybe what you're asking is a little bit more about what we think maybe the appropriate level of debt would be by different property types.
Yes. If we just take a look at your mortgage debt outstanding, kind of the mortgage debt to Asset value by vertical would be something I'd be interested in.
Okay. The mortgage tax.
Sorry, but Mario, that's not very relevant. That's where the opportunities lie to, you look at your total unencumbered pool And you want to maintain a certain percentage overall, where the opportunities lie to go ahead and do secure debt at best better pricing, you do that. And you take the ones that are less receptive to getting good pricing on secured debt and your outlook it's not by a division by division, it's by an asset by asset basis.
I think qualitatively, you could say that, if you look at the availability and cost of debt, the trend over the past few years has been to have less secured debt on retail assets. In the H and R Because they're very long term fully amortizing mortgages and we highlight some of those coming due over the next 12 or 18 months. But there are some properties within the office portfolio that have higher loan to value. And within the multi residential, we tend to have higher leverage as a result in part due to the tax advantages and the natural hedge that that provides, given that those are U. S.
Assets And there is clearly abundant availability of debt at aggressive pricing on the industrial portfolio.
But also Mario, obviously, In certain asset classes where we want to sell properties, we want to leave them debt free because then you have to pay through yield maintenance to get rid of the debt. So you look at our office portfolio, for example, Hess is debt free. So really it's not on an asset by asset sorry, category by category, it's more on an asset by asset basis we make those decisions, whether it's secured or unsecured.
Okay. And then associated to that, In terms of creating these new public entities, is it your view internally that each of the verticals, office, retail, industrial and residential are large enough and distinct enough to be able to stand on their own?
I think the answer is yes.
Okay. And then in terms of the structure, how should we think about the relationship between those 4 verticals in H and R are corporate, like in terms of internal relationships, like external. So hypothetically, if these were to be spun out, let's say, would you consider an external structure? Or would you go along the internal structure?
I don't think I want to give the guide and we know what the market wants. So we're going to try to give the market what it wants, but I don't think I can answer that question at this early stage of the game. As far as the structure goes, there's many initiatives involved in making the decisions like that, but we'll see, we can see.
Okay. That's fair. My second question just maybe for Philippe with Land Tower. You noted a wide gap between how the public and private markets have been treated during the COVID crisis in terms of the U. S.
Sunbelt market, what do you think you can do in terms of trying to narrow that gap? And I recognize it's hard to understand what Lantau's implied cap rate change has been given it's part of a bigger organization, but in terms of strategy, what do you think you can do for narrowing that gap going forward?
Well, it's a very good question. I don't know that necessarily there's anything we can do to narrow that gap and change the public perception of If cap rates, like I mentioned, went down 50 basis points and are closer to 4 than they were to 5 and were developing closer to a 6, Then it probably behooves us to look increasingly towards development, Especially in our Sunbelt markets. The delta as well from the private and public market is more pronounced on Or rather with REITs that have gateway exposure. And so my belief is that's temporary in nature only because our house view is Gateway Cities will always remain the Gateway Cities and COVID will one day subside. But as it relates to the development yields, they're Frankly, in my opinion, they're just too wide.
And so we like I said, we made the announcement that we bought in the last 90 days 2 more sites. I would anticipate that we continue that strategic acquisition initiative moving forward in 2021 and look to quite honestly put a shovel in the ground in some of these sites
Great. I think it was maybe 6 months ago or 9 months ago there was discussion of potentially trying to monetize the Land Tower brand and platform in terms of possibly bringing in partners, could you provide an update in terms of where that stands from a capital allocation perspective?
Yes. Like all things, I mean, there's 24 hours in a day and And so we it's just a matter of where we want to place the focus. In our opinion, Land Tower's platform has consistently risen quarter over quarter in value. We've grown exponentially as evidenced by our quarter over quarter growth last year, especially given the challenges of COVID. And so in this environment where the platform keeps getting better in my opinion and is worth more and we are in June with how to create additional value for development, it's just a matter of when we find it opportunistic Well, frankly, we have to allocate where we focus our energies.
And it is our opinion that as of right now given COVID and especially what we're seeing in the development, perhaps doing that in asset management would risk being a dilution of focus. And so, the appetite is certainly there on the 3rd party side to join us. It's just more a matter of us determining the best timing for unitholders.
Got it. And does the gap between public and private valuation that you noted, does that change Your desired timing at all in terms of possibly bringing partners in or not?
I don't think it does because I think that the delta is temporary in nature. I think it will course correct fairly quickly, Especially in the U. S, as it relates to the next 6 months with the rollout with the vaccination and obviously having a better handle on COVID, I would suspect that that And so trying to capitalize on that delta is, I think will dissipate too quickly. And so I don't know that that's necessarily a factor in our decision making right
Thank you. And our next question comes from Jenny Ma from BMO Capital Markets. Please go ahead. Your line is open.
Thank you. Good morning, everyone. Going back to Jackson Park, I'm just wondering when you look at sort of the post COVID view, I know Felicia had mentioned in the past that a large portion of your tenants were sort of college students. Do you expect that to change a bit given that you referenced the return of Midtown office or do you think that the tenant base it's going to stay relatively unchanged versus pre COVID?
It's a great question. I think 1st and foremost, it really depends on what opens 1st, if they're both concurrent in nature where universities are opening up at the same time as employers are asking their employees to come back to the office, Then I'd say it's probably going to be a good mix and we're going to see a similar mix of tenants. But if one opens before the other, then I But my expectation candidly is that once the situation in New York City And it's obviously 5 boroughs normalizes. Jackson Park will probably lease up and stabilize faster than most properties. And the reason I say that is, casting aside, the quality of the construction and its location and proximity to the subway and obviously one stop away from Midtown.
I think if anything COVID has taught us is the idea that somehow you want to stay in your 300, 400 square foot studio apartments and be content with that without access to a park or nearby walking trail, I think is moot and I think people are putting a premium on that open space. And I know you remember this, but Jenny, there's a 2 acre park, a private park for Jackson Park, which quite honestly no other property nearby has, Certainly not in New York City, but there's not that in many of Long Island City. And so I think that when tenants come back either to work or to study And value that open space and want to be outside and have that fresh air, I think that they're going to be flying in droves to Jackson Park.
Okay, great. So I guess in the interim, like let's if you think students are going to be a reasonable driver, I guess the demand will probably return summer hopefully, but in the interim, how is it balancing occupancy versus rent in Jackson Park? Because if you think there's sort of 6 to 12 month visibility on the demand coming back, are you willing to give a little bit on rent just to have these suites occupied or how are you thinking I open a very short term.
It's a great question. I think the strategy lies in obviously without reducing rates just using Strategic blend of concessions, but also of term maturity. And what I mean by that is being aggressive with the months of concession of free rent that is being offered, but also pushing the leases that historically have been 9 to 12 months, pushing the 15 to 24 months and then spreading the Concession along the terms of the lease. And so I think those are the levers that are going to be
Okay. So are you saying that you haven't had to move face rent much?
Right. That's exactly right. I think the on a net effective basis, The rents have moved, but obviously as an issue of concessions.
Okay, great. Moving on to retail, I think Pat, I didn't hear I'm not sure if I heard you correctly, but you mentioned that the Walmart lease at Dufferin Mall was renewed for 20 years, is that correct?
Yes. It was a blend and extend. They had some term left on it, but yes, we did a 20 year it's a 20 year term now.
And you said that there was some rent steps involved as well?
Yes. There's an initial rent step that kicks in, in the spring and then every 3 to 4 years there's rental bumps.
Can you give us a rough magnitude of that bump?
The first bump I mentioned was about 55%. There's a significant bump and the bumps thereafter are also pretty significant.
Okay. No, I guess, I mean, that's not necessarily typical for a Walmart lease. Is it because of the virtue of the strength of that location in particular? Is that the case or is it because it's been, I guess, the first reason we've decided a long time ago, is that a mark to market, like what's really driving
Yes. No, it is reflective of the location, the strength of the location, the fact the market was under rent. It was a lease that was done a long time ago and the market clearly has changed from what it was. And it was an early renewal, so it's like I said, it was really a blend and extend. And as part of that deal, we got our development rights back To facilitate our redevelopment at the property.
Okay, great. I guess last question on that specific store. Does Walmart feel that the store size is appropriate for what it is? Or is there any possibility down the road of expanding that store? Or is it sort of the right size for that market?
I'd suggest to you that the store is a good size given what Walmart's footprint is today. It's Really, I don't think either I don't think we'd even look to expand it. By expanding, we would diminish our ability to rent Smaller shop space, which pays much higher rent. So, I think they're kind of their footprint is what it is.
Okay. Well, I guess it seems like you think it's good for the next 20 years, so that's great. And then moving on to industrial, it looks the first building of the Caledon development has been very successful, but I know in your commentary, you sort of reiterated that Buildings 2 and 3 are still on hold, I guess just given what we know about the industrial market now and the success you've had with Building 1, what are you waiting for to change before developing? I mean, I recognize it's a lot easier to start and stop with industrial, but what else do you need before you embark?
Absolutely nothing. We're just waiting for the winter. So we don't need to have winter construction to pay for construction. So we are negotiating with someone calling the larger building and whether we land it
or not, we're going to
be proceeding after the winter.
Okay. And remind me the build time on that, is that less than 12 months or is it sort of in that 12 to 18 range?
It's in the 12 range.
Okay,
CoBank Financial. Please go ahead. Your line is open.
Good morning, guys. I'm not sure what information you can provide, but I'm going to ask the question anyway, A follow-up to Mario's line of questioning. Notwithstanding the ability of these segments to stand alone, do you anticipate that H and R, whatever the surviving entity is, would own a stake in each of these going forward?
So that's detail that we are not at the stage of answering, can't answer yet.
Okay, fair enough.
It's a fair question, but early days. We're not there yet.
I guess, yes, at the end of the day, it will either be a asset management type structure you could parse it off, but is there a single
Well, you can't have an IPO versus a spin, you can spend it all, you can IPO part of it.
And just from a fixed income standpoint, because we have been fielding some questions from them, there will be a surviving entity large enough to sustain the unsecured debt to large enough to sustain the unsecured debt that's currently outstanding?
Absolutely. Absolutely.
And then on the retail front, Pat, there was some positive on the leasing of space that was subject CCAA, it sounds like it was 35,000 square feet on 100,000 square feet. What is the nature of those Tenancies and you provided some leases in your commentary, would some of that have been on previously Occupied space by guys that went into CCAA.
Yes. 1 of the deals, Structube went into a Pier 1 At Stone Road Mall, we backfilled a lot of the David's Tea. There's not I wouldn't say there's There's no fashion deals replacing these right now. The fashion guys are pretty much not doing anything at the moment, although there's discussions from them for doing deals next year. So it's a lot of the smaller space.
Moving forward, we have 2 more Pier 1s We have we're negotiating LOIs on right now and that would be the end of our Pier 1s. We'd have gotten rid of all 3 at that point. And then Yes. There's a lot of just in terms of the CCAA space, there is quite a bit of activity and discussion in the last It really started up in the last few weeks for a number of our better malls that really were the brunt of the impact of the CCAA filings. So Again, for instance, at Orchard Park, I know we've got active discussions with about 6 deals right now, the fill space.
So It's good to see some positive momentum on the leasing side.
Sure. And then are any of these new tenants to Canada new to your portfolio or are they all kind of existing guys that you've dealt with across the portfolio already?
Nothing new to Canada, Not right now.
I've heard
stories of some brands looking at bringing coming to Canada and opening, but Not right now in our portfolio. We're just dealing domestic players.
And your commentary around sort of the e commerce play in enclosed malls That was interesting. Is the structuring of the malls and the loading docks, etcetera, is it suited to provide that and just what if anything do you need to do to the malls to make it a better sort of place to either Take in returns or send out product.
I'd suggest that the it's still a bit early days in terms of what we're doing, but there's a lot of we go to source inventory that's actually available in the shopping center and that seems to have been something that's been overcome now according to the people we've talked to. The beauty of an enclosed shopping center is, as you know, they're really, really flexible. We can kind of move things around and create space
that, I wouldn't say easy, but
it's very doable to recreate certain areas where need be. Not exactly sure what our net needs will be going forward. Clearly, we want to continue with curbside pickup, But the buy online, pick up in store model and such forth is something we're really going to push along.
Okay. That makes sense. On the residential side, and I guess it's a 2 pronged question. With regards to the projects like Pearl, Hercules, Nightingale, Shoreline, there's some question as to whether those are sold off or purchased at some point. Interested in your thoughts And then on the Canadian residential offering or opportunity, when we think of that as a silo, Is Land Tower an exclusively U.
S. Operation and those residential suites would with the asset class that they're going to be built on top.
So I'll answer the latter question. We don't have visibility to that. As you know, we have quite a number of projects that fit the bill, 145 Wellington, Front Street, 55 Young and our large joint venture on the TELUS Tower in Burnaby, so and then there's Dufferin Mall. So we don't have the answer as to what bucket it would work or how it would work because it's going to be mixed use Not it doesn't have to be exclusive U. S.
Can be, but there's too many questions as to Lantower and where it goes just to be able to answer that question in the future is the which bucket to place these things, but it's quite frankly they're a ways off. The first project wouldn't be ready probably for selling the ground at the earliest, I 1.5 years, 2 years. So it's early days.
Thanks, Matt.
Yes. Matt, and as it relates to your first question, I think just as like any other asset in our portfolio, we have an evaluation internally of what we think is the fair market value of the asset. In the case of those developments, When they stabilize or before stabilization, but upon that review, if the market, Which is what I suspect is going to happen, and I think that's what you're trying to get to. I suspect that the market, given the frothiness for U. S.
Multifamily, especially given the quality of that construction in its locations, I suspect the market is going to value those assets more than we do internally. And so if I was a betting man, I would say we'll probably end up selling those assets at a very, very low cap rate and quickly redeploying that capital into more accretive investments Such as what we just discussed earlier today on the call.
Okay. That makes sense. And then last one On Jersey City, just wondering if you plan on developing that on your own or if you'd bring in a partner, if you've got any ideas as to what's Going to go on there, I know it's probably going to be a few years out, but just interested.
So it's a mixed use development. It has it can be a mixed Right now, we're marketing it to users for both the lab space, the technology that Life Sciences, that's very much in vogue, and we'll see what we land there. And that will follow with residential. But from a residential perspective, we are basically, I would say, 2021 is a year on hold because I would say overall, if you look at a good example, Mack Cali, which is one of the largest residential developers As a read in that area, you're probably seeing rents occupancy rather trend 80% to 85%. So this is a post COVID story.
If we're not in a rush to It is one of the spectacular sites that you can't really repeat, but it has a good affordability At the mixed use development, so mixed use development really entail bringing in either a partner who has experience in that sector or landing a major tenant, which we're out currently marking as 4. So whatever comes first is really going to be the answer and residential, my guess, will follow because it's going to have to wait till Jersey City recovers from the pandemic.
Sure. Thanks for the color. Looking forward to more news on the
Thank you. And our next question comes from Matt Logan from RBC Capital. Please go ahead. Your line is open.
Thank you and good morning. There's a lot of opportunity across your business. And When you take a step back and think about the 30,000 foot view, could you give us a sense for what your top three priorities are for 2021?
Yes, I can give you the top 2 pretty easily. The top 2, but not in that order, in the next cylinder order is Pimaris and the Bow. That's definitely within the top 3. Then the third one, I think what I really have to see is get everybody Getting the vaccine and moving on in life and opening up. Those are the top 2.
I'm looking forward to getting River Landing. We have a lot of action on the office space. What you're reading in the newspapers is actually true. They're flooding to people moving to Miami in droves, and we've had more showings, we were landing on office than we've ever seen before. So I'm very encouraged.
I think we'll land our first tenant finally. It's been dragging on, because of the pandemic, probably Within the next 6 days, I'm very much certain we will. And thereafter, we have actually more users than we have space for, which is interesting to see, Miami is a small tenant market, not a large tenant market. And all of a sudden, with the pandemic, it turned into a large tenant market. We have a 40,000 square floor place, which is unusual in the market.
So I'm looking forward actually to stabilizing River Landing a lot sooner than I would have thought. I'm forward to actually signing our restaurant leases and having space open again. So I'd say Primaris and the Bo are definitely ranking
Great recovery and certainly positive news on River Landing. Was that did you say 6 days or 60? 60 days.
60 days. I'm being conservative. I can't imagine blasting that one.
And when we think about the stabilization of that project as a whole, is that really more of an H2 event or could that come a little bit sooner?
Is it an age I couldn't hear, is it an what event? Is it a second
half of twenty twenty one event?
Well, no. Well, as it depends on the terms of stabilization. As Philippe mentioned, we're leasing at a conservatively 30, but we've been high as 40, 30 to 40 units a week, so we initially thought that it was going to be a 2 year lease up from now. It's really going to be probably going to finish this within 18 months. So that's going to happen sooner rather than later.
The retail is basically 80% there. So we're just waiting for the market to COVID to subside so we can actually fill up the balance of the restaurant space, which We haven't done. But the office space takes, I would say, the earliest is going to be the end of the year before I have the leasehold built out and the tenants pay That's a big that's realistically speaking, once we clear the committee approval within the next little short while even on the first tenant, it's not going to happen before the end of the year. So stabilization From unrealistic perspective, it's probably, I would say, 16 months, 15 months from now. Okay.
Stabilization meaning basically fully lease up.
And maybe just changing gears
Probably not. I think start up the residential. So Philippe did mention all of the properties that we have with our joint venture partners who are building In the markets of Seattle, Los Angeles, San Francisco, etcetera, that can be geared for sale and that's something that my guess is as Philippe did I'll allude to and clarify, it's probably too expensive for us to buy because I think the caps are going to be very, very low and in around the 4 ish range. That's not accretive enough for us. So that will be a disposition.
I think as far as industrial goes, there will be no dispositions. As far as office goes, I think that we're we obviously have some target office buildings that we want to sell, but I don't necessarily think that 2021 is the right year to do that until there is some light at the end of the office recovery tunnel, even though we have long term leases quite frankly. So our assets can wait and be sold if we want to sell later on to generate cash. So I can't give you clarity on what assets are going to be sold and when. We're looking at it and when the markets when the time is right, we will do so, but I don't think the time is right now in those sectors.
So I can't I regret we can't give you a clarity. It's really to the pandemic is really plus too much uncertainty as to which what the timing is as to sell assets or and aim to purchase assets. From a purchase perspective, I don't think Canada affords much opportunity. I think the opportunities that everybody's waiting for is distressed, and distress is only going to happen in certain key markets like New York City, they're not going to happen in Austin or Dallas or quite frankly, any other target markets, and they won't happen in Canada for any of the assets we want to buy. So bottom line is Canada is going to we're going to be very challenged to go ahead and buy accretively in Canada.
I think we will be able to purchasing in the United States, but I think it's more balance sheet management for 2021 and opportunistically sale if the market opens up.
Well, that's good color. I appreciate all the comments. I'll turn the call back. Thank you.
Thank you. And that concludes our questions. I will now turn the call back to Tom Hofstetter for closing remarks.
Thanks, everyone. Stay healthy, stay well and hopefully next quarter that we'll be vaccined. Thank you. Have a good weekend.
Thank you for joining us today, ladies and gentlemen. This concludes our call and you may now disconnect.