Good morning. Welcome to the H&R Real Estate Investment Trust 2019 Fourth Quarter Earnings Conference Call. Before beginning the call, H&R would like to remind listeners that certain statements which may include predictions, conclusions, forecasts, or projections, and the remarks that follow may 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 may require management to make assumptions or rely on certain material factors and is subject to inherent risks and uncertainties. Actual results could differ materially from the statements in the forward-looking information.
In discussing H&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 measures determined in accordance with IFRS as indicators of H&R's performance, liquidity, cash flows, and profitability. H&R's management uses these measures to aid in assessing the real 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 and the forward-looking information and the material factors or assumptions that may have been applied in making such statements, together with details on H&R's use of Non-GAAP financial measures, are described in more details in H&R's public filings, which can be found on our website at www.sedarplus.ca. I would now like to introduce Mr. Tom Hofstedter, Chief Executive Officer of H&R REIT. Please go ahead, Sir.
Morning, everybody. Thanks for joining us today. I'd like to welcome everybody to the call. Joining me today are Larry Froom, our CFO, Patrick Sullivan, COO of Primaris, and Philippe Lapointe, COO of Lantower. First, Larry will summarize our quarterly and annual financial results. Pat will then provide an update to our retail portfolio, followed by Philippe, who will update us on our multi-res portfolio. Finally, I'll conclude with some closing remarks to be followed by your questions. Over to Larry.
Thanks, Tom. Good morning, everyone. I'll begin with some high-level remarks, starting with FFO. Funds from operations, FFO, Q4 2019 basic, diluted, and normalized FFO was CAD 0.44 per unit, compared to CAD 0.43 per unit in Q4 2018. For the year, normalized FFO was CAD 1.74 per unit, compared to CAD 1.73 per unit in 2018. Although these are small increases, we view them as quite an achievement, given that we completed approximately CAD 1.8 billion of asset sales over the past 24 months, compared to CAD 645 million of property acquisitions during the same period. Part of these acquisitions was for newly constructed U.S. residential properties that were in leased up during 2019. They are expected to generate approximately CAD 4.8 million more in FFO in 2020 than they did in 2019. Part of the proceeds from the asset dispositions were used to fund H&R's development pipeline.
During the course of the year, we invested over CAD 300 million into developments that will provide future FFO growth as they are completed and stabilized. We have three U.S. development projects scheduled to be completed in 2020. River Landing in Miami, phase I of Hercules in San Francisco, and The Pearl in Austin. In Caledon, Ontario, we are pleased to announce we recently leased the largest of the three industrial buildings we currently have under construction to Data Post for 10 years. Occupancy is expected to commence in Q3 2020. Additionally, part of the asset disposition proceeds were invested in redeveloping the former Target and Sears stores in our portfolio. We are expecting growth in rental income of approximately CAD 4.3 million from new tenants occupying this space.
Our trophy development in Long Island City, N.Y., Jackson Park, was completed during the year and generated $10 million of FFO at our 50% percentage share. In September, interest-only financing of CAD 1 billion was secured by the property for 10 years at an annual interest rate of 3.25%. After repayment of the construction financing, H&R received a $195 million distribution from the joint venture, which was used to repay other debts. The project's unlevered yield on budgeted cost is expected to be 6%, and the levered yield on H&R's net cash contribution invested is expected to be approximately 50%. We have leased the majority of the vacancies in our office and industrial segments, and in addition, committed retail occupancy at December was 94.1% versus the actual occupancy of 91.5%.
Debt to total assets per the financial statements at year-end was 44.4%. Subsequent to year-end, the CAD 256 million mortgage receivable that was secured by the Atrium was received. These funds were used to repay debt, which reduced the debt to total asset ratio to 43.4%.
With that, I will now turn the call over to Pat to give us an update on our retail division.
Thank you, Larry. Good morning. Leasing activity during the past two years has been very strong, with our leasing team completing more than 400 transactions during each year, including 250 new lease deals, of which there were 35 new large format transactions. While our occupancy rate and net operating income have been negatively impacted by the closure of Sears and other tenant bankruptcies, we're starting to realize the positive momentum as tenants begin to open from their redeveloped boxes. During the last quarter of 2019, more than 220,000 sq ft of box stores opened in the portfolio, and approximately 280,000 sq ft of new box stores will open in 2020. There continues to be tenant demand for space within our portfolio. We anticipate strong leasing activity once again in 2020.
Our occupancy rate at the end of 2019 was 91.5%, compared to 89.3% at the end of the third quarter, while our occupied and committed rate rose to 94.1% from 93.8%. 12 months rolling same-store sales within our enclosed mall portfolio are 545 per square foot, a decline from the end of 2018, but in line with the productivity figures posted in both 2016 and 2017. With respect to all store sales volumes, we have been reducing the amount of CRU area for the past few years, which is a result, for the most part, of expanding existing tenants or leasing space, in both cases, to large format tenants who are not included in our sales reporting area. Many of these new large format tenants, such as Winners, Mark's, Urban Planet, and Old Navy, have been great additions to our properties and generate significant traffic.
With our anchor development projects nearing completion, we are exploring opportunities to diversify our shopping center sites to include office and residential uses. By way of example, with the city of Ottawa planning for light rail transit to stop at Place d'Orleans in Ottawa in the next few years, we have relocated the food court to the main level of the mall with the goal of utilizing the second floor for office uses. Recently, we completed two long-term leases with Public Works, one for 53,000 sq ft and the other for 9,500 sq ft. In addition, we are in the preliminary planning stages for residential densification at Orchard Park in Kelowna, Stone Road in Guelph, and Place d'Orleans in Ottawa. At Dufferin Mall, the approval process to add significant residential density is in progress, and we expect to start construction on that project in approximately two years.
Thank you, I'll now turn the discussion over to Philippe.
Thank you, Pat. Good morning, everyone. We've got some notable updates for this quarter. I'm delighted to share the latest news from Lantower Residential. As mentioned in the previous quarters, one of our strategic initiatives is to examine our existing portfolio to determine if any reallocations would be accretive to the overall portfolio. As we alluded on our last quarter's call, we were under contract to sell two legacy assets from Lantower's portfolio. In January of this year, we successfully disposed of Magnolia Grove, the 1984 vintage property in Houston, Texas, and Tribeca, a 2008 vintage property in Dallas, Texas. Magnolia Grove, purchased for CAD 16.7 million in 2014, sold on January 23rd for CAD 23.9 million, representing an IRR of 24.2%. Tribeca, purchased for CAD 52.3 million in 2015, sold on January 9th for CAD 66 million, representing an IRR of 17.6%.
In light of these dispositions, we expect to disclose a new acquisition next quarter. On the portfolio front, the Lantower Residential portfolio consisted of 7,507 apartments across 23 properties at the end of the fourth quarter, when excluding Jackson Park. Following the recent dispositions in January, the Lantower portfolio, excluding Jackson Park, again, has a weighted average vintage of 2014, representing one of the newest portfolios in our sector and underscoring our intent to maintain a quality portfolio supportive of long-term growth potential. On the operations front, at the end of the fourth quarter, the Lantower portfolio was approximately 91% occupied and over 92% occupied when excluding our lease-up properties. On the financial front, our same asset quarter and operating income increased in U.S. dollars from $9,559,000 in the fourth quarter of 2018 to $11,165,000 in the fourth quarter of 2019.
This equates to same asset quarter-over-quarter operating income growth of 16.8%. Our same asset operating income increased, again, in US dollars from $40,456,000 during the year ended in 2018 to $42,912,000 during the year ended in 2009, representing an annual operating income growth of 6.1%. The above-average 16.8% quarter-over-quarter operating income growth is primarily due to rental growth, but most notably the stabilization of a few assets in our portfolio. On the development front, our phase I Sunrise project, a 321-unit Class A gardens-style multifamily project in Orlando, Florida, is scheduled to break ground in the first quarter of this year. We look forward to expanding our Central Florida development pipeline and disclosing more exciting Class A development opportunities in 2020. With that, I will pass along the conversation back to Tom.
Thanks, Philippe. Before we begin the Q&A portion of the call, I'd like to highlight a few items. Firstly, leverage continues to trend lower. Debt to total assets pro forma the receipt of the CAD 256 million of vendor take-back mortgage on Atrium was 43.4%, down 120 basis points from 44.6% a year earlier. Prudent leverage has always been core to our strategy, and the trend to lower leverage over the past few years allows the REIT to prudently invest more in developments and also provides us with significant strategic flexibility. Second, our development pipeline of value-creating projects is large and exciting. In 2019, we delivered our flagship Jackson Park development, which reached 96% occupancy in Q4. We were secured, as Larry has mentioned, a 10-year interest-only mortgage at the return to all but $31 million .
For our original investment, resulting in a 50% levered return on our net equity investment of the project. River Landing is nearing completion. It's scheduled to open in April of this year as being the first tenant followed by brands to the retail space, with residential leasing commencing very shortly. We're advancing our intensification plans at Dufferin Grove Village, 145 Wellington, 55 Yonge, and the 320 Front Street in Toronto, and in Burnaby, B.C. Phase I of our 2.7 million square feet Caledon industrial development was complete this year. The Toronto industrial market has effectively zero vacancy, and rents continue to rise. Augmenting Caledon, we have a number of additional industrial development opportunities in the Toronto market, providing attractive opportunities to grow our exposure to this strong market with state-of-the-art properties.
In December 2019, we issued a mortgage receivable for [UFR] $124.1 million, secured against 12.4 acres of land in Jersey City, New Jersey, for a two-year term. The loan is expected to increase up to $116 million and bears interest of 10% per annum. The land is adjacent to the Liberty State Park, with views of downtown Manhattan and the Hudson River. The project is zoned for 1.7 million square feet of commercial space and 1,544 residential units, with a full residential development option encompassing 2,835 units. The location is accessible to multiple nodes of transportation, including the Grove Street Path station, 0.7 mi away, with direct access to Manhattan through Penn Station and Wall Street, and an 11-minute ferry transit ride to Google's new Manhattan campus, as well as access to Manhattan's Lower West Side.
The REIT has an option to convert the loan to an 80% equity ownership interest in the project. In the U.S., our pipeline of multi-res and mixed-use development projects will see deliveries this year with River Landing in Miami in Q2 of this year, phase I of our Hercules project in San Francisco, also in Q2. In Q3, The Pearl in Austin will be delivered in 2021. These completions will be followed by Shoreline in Los Angeles, Sunrise in Orlando, phase II of Hercules, and Astoria Park in Seattle. All these developments are expected to increase in net per unit and FFO per unit as they reach completion over the next couple of years. Lastly, we have fielded a number of questions over the past six months regarding The Bow headlease.
Our tenant at The Bow, Ovintiv, recently re-domiciled its business to the U.S. We confirmed that the lease obligation of The Bow was assumed by the newly domiciled Ovintiv as required by the terms of the lease. Should any further developments regarding The Bow arise, we will provide more detail at the appropriate time. Today, we don't have anything further to report on this front. We have made significant progress on our goals of enhancing our internal growth profile and reducing leverage. We expect the investments we have made in these areas to contribute to growth in our financial performance in the year ahead. With that, I'll turn over back to the Operator for your questions. Operator?
At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. That's star and the number one. Your first question comes from Dean Wilkinson.
Thanks. Morning, everybody.
Morning, Dean.
Yes, Larry, the first one's probably for you. On River Landing, as that flips over from PUD to IPP, will we see the same kind of lack of capitalizing, like what we saw at Jackson Park? You have that a bit of dilution, and then as you lease up, you catch that back up over the course of the next year and a half?
Yes, it should be exactly like we disclosed for Jackson Park, and I'll try and get the same kind of disclosure for River Landing as it happens.
Would the magnitude of that be about the same given what your full interest is that versus what it was in Jackson Park?
No, Jackson Park is bigger. The retail leasing will occur a lot quicker at one time, as opposed the residential leasing will be over the next 18 months to 24 months. The residential part will be the same kind of lease-up as Jackson Park, whereas the retail will be a lot quicker.
Okay, great. How much is the quarterly capitalization of interest right now?
The quarterly capitalization of interest on River Landing, specifically?
Yep.
Give me a sec to look that up. I think we said it.
Maybe while you're looking.
I think we're running at around CAD 3.5 million a quarter.
CAD 2.5 million a quarter? Okay.
CAD 3.5 million.
CAD 3.5 million.
Great. On the loan advanced at Jersey City, I'm just trying to triangulate that exact location. Would that be the lot which is currently being used for the Zeppelin Hall Beer Garden?
No, it's on Liberty State Park. The marina's right there. It's right at the foot of the marina.
It's right at the foot of the marina. Wow, that is a fantastic location.
Yeah. You have the new road that's being built over there, the new highway. It bounds the highway. It bounds the marina, which we'll have the ferry boat right to Manhattan. You have the Liberty State Park, and you have right near the path to Downtown or Midtown Manhattan.
You'd be able to come out of that residential development right into the ferry?
Correct.
Okay. There's zoning in place right now. Is that something that's going through sort of an application and permitting process?
The zoning is in place. As I mentioned, it's a mixed-use zoning or all residential. It's totally in place. Everything's good to go. We have no affordable housing component in it at all. We are just now doing our master planning and permitting. The first phase of the residential will be ready to go in around a year.
Yeah.
When we do all residential, commercial, it's really a question of how we pre-market it. We will not be building a commercial spec building at either end, and the life sciences is a potential there as well.
Good. Great location. Can you disclose who the partner is on that?
I think so. It's Argent Ventures from Manhattan.
Okay. The last question from me is, maybe for Philippe. As you're rounding out the markets that you're in Lantower, are there any other markets or perhaps markets outside of specifically the U.S. that you may be looking at? How big do you need to be in any given market for the scale to make sense?
It's a very good question. I think as of right now, obviously we have nothing to announce regarding anything outside of the U.S. As it relates to entering a new market in the U.S., it's something that we're always kind of paying attention to. I would say, though, that we believe that the more attractive acquisition or development opportunities are in the markets that we are currently in.
I'd love to expand our position in Tampa, in Orlando. I'd like for us to consolidate some of our markets in Texas and Raleigh and Charlotte just keep doing very well, and opportunities there are few and far between, but we obviously wouldn't mind aggregating a more solid position in those markets. I think our focus is more predicated on that than going upstate to an Atlanta or to a Phoenix.
Okay, great. Well, we're looking forward to Alex hosting a property tour down in River Landing sometime in the near future. I will hand it back. Thanks, guys.
Your next question comes from Sam Damiani.
Thanks. Good morning, everyone. Just to start off on the Jersey City project to a couple other questions I had. What would be the budget on the first phase of residential that Tom you're saying could start next year?
We don't have those numbers yet. We don't have that. Once we have the permit windows that they were basically not even so sure of the first phase size. All the blocks within a 13-acre site have to be first allocated, figured out. We also have a 2.5 acre-ish park that we have to, which is a water park, that has to be considered. We're not at that stage yet to announce a budget on the first phase or the size of the first phase.
Okay. What would be, I guess, the next steps? You mentioned you're doing some planning and permitting and whatnot, but is there a sort of a next major step that we could look forward to in the next few months?
Yeah. Exercising our option to be smart. Right now it's a [meh]. We have nine months to look at it. Now towards the end of the year, we'll announce if we would actually end up pulling the trigger on it. We're going to go through the entire master planning process, dividing up the blocks with giving us optionality on the commercial. We haven't pulled the trigger on it yet. It's still just a [meh].
Okay. Finally, your partner, Argent Ventures, what sort of experience do they have in this type of development historically?
I've known them for going to [make back my youth into hotel]. When we used to build across America, they were very active in that business as well. To answer your questions, they're currently building in Jersey, some residential, and they've been very active in the redevelopment of Penn Station area office. They've been around for the past 40 years and have a lot of experience both within the residential and commercial New York area market.
Did you see the need to bring in other partners on this project, given the size at all or no?
We did life sciences potentially. We wouldn't do life sciences on our own. There is a strong New Jersey life science market, so that would involve a partner for sure. Right now we're also interviewing brokers to go ahead in the life sciences and assist us in case there's a campus potential for some of the big companies out there.
Just over to River Landing, I noticed the cost went up this quarter. Any color you can provide there as to the reason why?
Yeah. Well, it's a couple of reasons. One of the major reasons is, though, we are currently negotiating with a very large, attractive, by any means large, it's a 27,000 sq ft restaurant space. The TIs on the restaurant space are substantially more than contemplated. We also are negotiating on the office space with the user that, again, the TI has gone up. The rents could go up and not necessarily size the infrastructure for the development. Just a few cost overruns, nothing too significant. It's really more that the overall quality of the outside of the retail has gone up, and there's a cost factor to that.
Okay. I also noticed the budget went up a bit on the Sunrise development in Orlando. Any particular reason there?
Not particularly. I think as of right now, we're doing our best to essentially engineer the cost down. I think candidly, once we're all said and done, those differences will be negligible.
Okay. One more question. Just on the debt maturities, there's a good chunk of mortgages coming up in 2021. What sort of rate on refinancing that should we expect is reasonable? I'm not sure which properties and which locations those are secured by.
Sorry, you're asking what we'd expect to get currently on those mortgages?
Yeah. If you were to finance it today.
That would be if we did a 10-year financing, would probably be a spread of 180 basis points, call it, would be conservative.
It's just with announced here in markets, you know where we trade at.
Right. Are those mortgages in the U.S., Canada? Would you do more U.S. mortgages, more Canadian mortgages?
Most of those coming up are in Canada.
Are they? Okay. Thanks. I'll turn it back.
Thanks, Sam.
Your next question comes from Jenny Ma.
Thanks. Good morning. Just wanted to dig into your developments a little. There's been a number of new projects that you've identified. I'm just wondering if you've actually mined through the entire portfolio to look for densification or redevelopment opportunities, or you're really going at this on a property-by-property basis?
I don't really understand the question. We're looking at the macro and going at it on a property-by-property basis. Every property is under scrutiny to see where the potential redevelopment is.
Well, I guess my question is, have you looked through the entire portfolio for all the potential projects down the road?
We've announced the downtown Toronto potential intensifications, which we're working on, which are real, and Pat's announced some of the intensification of his malls. I think the answer is today and age, every single property is being looked at for intensification potential. Between the announcements of our downtown portfolio, 145 Wellington, 55 Yonge Street, 310 Front Street, Burnaby, which is substantial. The office portfolio has a lot of potential densification. Pat mentioned a few of the shopping malls in intensification. I think the answer to your question is every single property is going to be looked at as far as potential re-intensification.
I guess what I'm getting at is, can we expect to see potential new developments being announced down the road, or, I mean, this is a lot to chew on? Is there going to be more coming down the pipe, or are you going to focus on what you have?
Okay. Specifically in the office properties outside of Burnaby, which we have potential to do something sooner rather than later because we bought some excess land there with our partner. The rest of them are going to take a little bit of time because the rezoning process takes time. Right now, the market's very favorable in Downtown Toronto, as you well know, for rezonings. We've taken advantage of starting Front Street, 55 Yonge, 145 Wellington. Those take time. They also have tenancies in them with the potential to go ahead and replace the office and add a few 58-story towers sitting on all those properties. There is great potential. In Burnaby, there's the potential to add a good 1,100 units. Again, those are all real, very real, very accessible to do. When will we actually launch a redevelopment?
I think the answer is that's going to take some time to roll out the tenancies. I would say the earliest you're going to see in 55, 145, or Front Street is probably five years away.
Okay. That's actually a good lead into my next question. Specific to the downtown Toronto properties, I know at 145 Wellington, you're looking to replace the office space and add residential. But just given how tight the office market is in some of these properties, how are you looking at whether or not you expand the office component and balance it with what you can do with residential? Or is it really just trying to maximize the residential in these properties?
Well, the quantity of downtown Toronto is very simple. In round numbers, residential is worth CAD 250 a foot and office is worth CAD 125 a foot. It's only the necessity for REITs and pension funds and insurance companies to incur continuous cash flow that they'd actually pay more for the office component than the residential component. The residential component always was worth more for the past number of years in Toronto than office. It's a tough balancing act. I think the simple answer is the world has now accepted, if you look at all of our peers, they're now gone from shopping centers to being shopping centers/residential.
The mixed-use development, the diversification within the REIT world has now become the norm, and therefore, since it's acceptable to go and develop residential, I think that the recurring income can happen from residential just as much as it happens from office, and the highest and best use is usually residential in today's day and age. You also have a whole slew of new office product coming to the market in downtown Toronto, which will relieve some of the pressure on the res . Right now, the residential component is still returning to higher numbers. Residential land values are going up. It's up to CAD 325 a foot in downtown Toronto for some of the better sites, and office basically has really leveled off.
I think the answer to the question is at this stage of the game, all of our developments are going to be mixed use that we're talking about, whereby the office component will be replaced and on top of that will be a residential component.
Okay. I guess if you look at Front Street, for example, would it make sense to actually eliminate the office component and maximize res, or is there a need to retain some of that office?
There's no need, but we wouldn't do that. That goes way down to the road. There is the ability to go ahead and take the smallest of the towers and replace that with a large tower. We've actually have plans that we're going to be submitting to the city to do that and actually leaves the balance of the complex intact and creates a residential component on top of the office.
Okay. Do you have a sense of what the remaining lease term on the downtown Toronto assets is?
Well, they vary in every single building. As I said, realistically speaking, five years out.
Five years. Okay. Well, I look forward to seeing the plans. I'll turn it back.
Your next question comes from Matt Kornack.
Good morning, guys.
Good morning, Matt.
With regards to your U.S. residential developments where you're a minority interest, have you at this point, given that they're coming up in terms of completion of construction, decided on which ones you'd like to keep versus sell? At what point do you think we'll know what that decision is?
We have partners in them, very friendly partners. We've been partners now for many, many years, and we haven't made those decisions, which will be a collective decision. I think the philosophy of H&R is this gives us the opportunity to get an entry at a higher cap rate on the part, one that we own, but actually first right to go ahead and purchase our partners out should they wish to sell. We're really dictated by a collective decision of all the three partners as to what the game plan is. Gives us access to markets which are much more expensive, much more difficult to build in, such as San Francisco, Los Angeles, a product which we wouldn't otherwise have, a product at a better pricing, and first opportunity to purchase. We have not made those decisions. That's because it's pretty early on in the game.
Long Beach, California, is probably two years out. San Francisco is sooner rather than later for one of the first phases, but not necessarily that we want to pull the trigger on the first phase. No decisions are made at this point in time.
Fair enough. Net, net, it sounds like it may be a self-funding program to some extent in terms of what you sell versus buy anyways, because it doesn't sound like you'd necessarily keep everything.
That's correct.
Okay. On the industrial side, congrats on the leasing. It seems like that project's going ahead well. Does that sort of get you more keen to expedite the process on the rest of the phases? How are you thinking about that project going forward?
We have built on spec. We're very comfortable in Toronto, and I think as everybody would be building on specs, we're looking at two other projects in Toronto that would be built on spec as well. We're totally comfortable with the Toronto market.
Okay. On the CapEx side, it's been elevated for a while now. I guess it's probably largely related to the retail re-tenanting of Target and Sears, but should we anticipate that to come down in 2020, or will it continue through 2020 and then come down subsequently?
I think it will continue in 2020 and then hopefully 2021 we should see a decrease.
Okay. Last question. With regards to same-property NOI growth, obviously this year you had a few things go against you, but you don't have many lease maturities in terms of percentage of the total portfolio. Also, you've got some upside in terms of occupancy, it seems like, with the trajectory coming out of this quarter. Should we expect a pretty good year next year? Is there anything in the existing lease profile that we should see as a net negative against those positive trends?
We're expecting positive trends from all our segments next year, quite frankly. Each one should be up.
Yeah, there's no holes as far as looming leases expiries that are causing us any angst.
Okay, no early sort of renewals and extensions similar to Bell that you'd anticipate this year?
I wouldn't say that. We're always looking to do that. Just like we did Bell, we'd love to do others. It's also tenant-driven as well. Nothing we're working on right now, but I'd never say no to that.
Fair enough. Okay, thanks, guys, and congrats on the quarter.
Thanks.
Thanks, Matt.
Your next question comes from Mario Saric.
Hi, good morning.
Good morning, Mario.
Just sticking to the mixed-use intensification theme, which is ramping up over the next several years, as you noted. Can you highlight how you think about recognizing some of this intensifiable land in your IFRS values over time? It varies across the street in terms of how companies are dealing with it. How should we think about your recognition policy going forward?
At this stage of the game, we have not, in any developments, put anything into it. The question is when it's fully zoned and right, I don't know what we'll look at it then. I guess it'll depend what the industry does. At this stage of the game, we don't have the intensification values recognized in our IFRS. It's not going to be dependent on us so much. It'll be dependent on what the rules of the game are, what everyone's doing, what the auditors basically say should be done. Nothing's in our numbers right now for intensification optics.
Okay. Maybe switching gears to the unit holder letter. You kind of highlighted the substantial progress that you've made in terms of improving portfolio quality, diversifying into U.S. resi. Balance sheet leverage has come down, as you noted on the call. You kind of highlighted pursuing further opportunities to simplify the investment profile of H&R. I'm just curious if you can elaborate on what you mean by that and what are some of the things you're thinking about.
Okay. Anybody want to answer that question? I think, yeah. Okay, Larry, over to you.
I think it's just on the theme, Mario, that we go in and try to always simplify the disclosures we've done, simplify the buckets that we have. We have the four segments, and we're trying to simplify that to make H&R a lot easier to understand to investors.
Okay.
Nothing more than that.
Okay. My last question, just in terms of capital allocation. You kind of mentioned no update on The Bow today. With the balance sheet leverage having come down like it has, where are you seeing kind of the best opportunities from a risk-adjusted return perspective to redeploy capital today, should you see further liquidity coming into the system?
We're growing our Lantower division, as you well know. We have the Jersey opportunities. We have the industrial opportunities and some of the industrial deals that we're looking at. We don't see any real opportunities in the office development. Primaris is basically going to go ahead and put its money into re-intensifying its own properties and bringing capital upgrades into its properties. I think the answer to the question is really the focus is on residential growth, industrial growth, and capital intensification where the money's at work. We're very happy to keep the debt low.
All right. How do you think about the risk-adjusted returns of buying back units today versus development and expanding your portfolio?
We have a lot of ideas and a lot of things on the go, and until we mature those ideas, we're not going to pull the trigger and necessarily buy back the stock. I think we're very focused on the discount in NAV, and I don't think the solution is just sitting back and doing nothing. That being said, it's nice to have a good balance sheet to give us the flexibility, afford us the luxury of master planning our structure going forward with a strong balance sheet. Right now, the answer to your question is we're going to keep the strong balance sheet to use it for, implement it for our overall strategic initiatives going forward.
Okay. All right. I concur with Dean's earlier commentary, the Jersey City project looks quite interesting. Thank you.
Thanks.
All right.
Again, in order to ask a question, press star, then the number one on your telephone keypad. That's star and the number one. Your next question comes from Sam Damiani.
Thanks. Just a couple of quick follow-ups. Tom, you mentioned two other industrial projects in the GTA you're looking at. Is that land on the books today or land you're looking at acquiring, and then whereabouts in the GTA are they?
Land we're looking to acquire, they're in the western part of the city. They're off-market. I don't think you can buy land today in Toronto and make the numbers work at the current market values for it to build a rental building. We're looking at some relationships that we have to go ahead and build on spec. Again, if you're paying CAD 200 million, CAD 225 million, the numbers just don't work.
Right. Great. Look forward to that. The second question is on Dufferin Grove. Pat, you mentioned construction potentially as soon as two years from now. What gives you the confidence on the zoning and, I guess, just the timing in general, especially with the project to the north also going ahead?
I think we've been in the preliminary planning stages. We've met with the community. It's moving through the process. Right now, it's an estimate, but I think we've got pretty good guidance on timing given where the project to the north, how long it took to get through the process for that.
They're just about finished the process, right?
Yeah.
Great. Thank you.
Thanks, Sam.
There are no further questions at this time.
Thank you, everybody, and have a nice happy Family Day next weekend.
Cool. Thanks.
Bye.
This concludes today's conference call. You may now disconnect.