Good morning, and welcome to H and R Real Estate Investment Trust's 2019 Third 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 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 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 in 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. Larry Froome, Chief Financial Officer of H and R REIT. Please go ahead, Mr. Froome.
Thank you. Good morning, everyone, and thank you for joining us on our call today. With me on this call are Tom Osterler, President and CEO of The REIT Pat Sullivan, Chief Operating Officer of Primerus, our Retail division and Philippe Lapointe, COO and Chief Operating Officer of Land Tower, our Residential Division. I will begin our highlights on Q3, then Pat and Philippe will speak about the divisions, and finally, we will open the lines for questions. Firstly, Encana, our tenant in the Bow recently announced plans to redomicile to the U.
S. We have received lots of questions on this. In short, we don't expect any impact to us. We have a robust lease in place with the tenant with an intensity from the parent company. During 2019, we have continued to actively reallocate capital through net property dispositions to fund value creating developments, expand the residential rental platform and strengthen H and R's balance sheet.
We have completed approximately 1,800,000,000 dollars of asset sales over the past 21 months, substantially repositioning the portfolio, enhancing the internal growth profile and reducing leverage. Debt to total assets for the financial statements has decreased from 44.6% at the beginning of this year to 43.3%. We expect leverage to decline modestly with the remainder of the proceeds from the sale of the Atrium due in Q1 2020. Subsequent to the quarter end, H and R repaid a U. S.
Mortgage of approximately DKK219 1,000,000 bearing interest at 4.5 percent per annum. Jackson Park, the 18 71 luxury residential rental apartments in Long Island City, New York, in which H and R has a 50% ownership, reached occupancy of 94% at September 30. Interest earning financing of CAD 1,000,000,000 was secured by the property for 10 years at an annual interest rate of 3.25 percent. On closing of this financing, H and R received US195 $1,000,000 distribution from the joint venture, which was used to repay other debts. The project's unlevered yield on budgeted cost is expected to be 6.4% and the level yield on H and R's net cash contribution is expected to be approximately 57%.
Q3 2019 basic, diluted and normalized funds from operations, FFO, was CAD0.43 per unit compared to CAD0.42 per unit in Q2 to in Q3 2018. Although office occupancy dropped to 98.3 percent at September 30, 2019, significant leasing has already occurred and committed occupancy was at 99.5%. For our industrial segment, we expect occupancy to increase from 96.5% at September 30, 2019 to 97.2 percent by December and committed occupancy to be 98.9%. On our 3 industrial developments, the 3 industrial buildings currently under construction in Kelowna, Jikea is totaling 526,000 square feet, has seen strong tenant interest, and we are optimistic that we'll have some leasing through our 4th next quarter. We also expect completion of developments and new lease commencements in both the retail and residential segments to contribute to positive growth in FFO.
I will now turn the call over to Pat to give an update on our retail division. Thank you,
Larry, and good morning. Our enclosed mall properties have experienced significant disruption during the past years with anchor vacancies, redevelopment and re tenanting impacting the shopping experience. However, we are pleased to report that the majority of anchor redevelopment activity is nearing completion. Since late September of this year, approximately 210,000 square feet at H&R ownership share, including more than 110,000 square feet at Sunridge Mall, will open from an area formula occupied by large format tenants, while another 244,000 square feet is expected to open in 2020. This leasing activity is expected to generate additional revenue of approximately CAD5 1,000,000 in 2020.
We continue to experience healthy leasing demand in our properties. Through the 1st 3 quarters of 2019, our Primaris leasing team has completed just over 300 lease transactions, which is a typical figure over the past 5 years. However, these 300 transactions represent approximately 1,600,000 square feet, which is considerably greater than our historical average. This leasing activity has resulted in our occupied committed occupancy rate rising to 93.8% at the end of the 3rd quarter. As you may be aware, Forever 21 filed for bankruptcy in September of this year and occupied 3 stores in our portfolio encompassing approximately 43,000 square feet.
We anticipated the failure of Forever 21 and have negotiated terms with the replacement tenant for all locations. Leases are at the execution stage and we expect a new tenant will take possession in December of this year and will be open within the next few months. With respect to Sears, at the end of the Q3, we had committed and conditional transactions in place representing approximately CAD3.7 million in annual base rent at H and R share or just over 52% of our anticipated total rents upon completion. Subsequent to the end of the quarter, we have completed or at least execution stage for tenants occupying just over 56,000 square feet of tenant at H&R ownership share. Including these tenants, we have CAD4.5 million in annual base rent committed, equating to approximately 63% of the total amount anticipated.
Sears paid annual base rent of CAD2.3 million at H and R ownership share. We are being selective with replacement tenants, focusing on those tenants that are prepared to pay market rents and enhance our merchandise mix. Turning to productivity. Sales were down 3% on a same and all store basis as compared to the 12 month period ending Q3 2018. The most recent data point has shown a return to positive same store sales with productivity increasing sequentially in Q3 of 2019 as compared to Q2.
The 3 year trend in same store sales remains positive, having risen from $5.40 per square foot to $5.57 per square foot, notwithstanding the disruption our centers have experienced. Over this time period, we have expanded successful tenants that performed above mall average and removed them from CRU same store sales, such as Shoppers Drug Mart at Park Place and Ardent at Place Royale. While the change may result in a drag on productivity, both the tenant and the shopping center benefit from the tenant offering from their typical footprint. We continue to remerchandise our properties to keep the tenant mix relevant, increase traffic and in turn improve productivity. Over the past year, we have added many prominent retailers to our portfolio, which we believe will drive productivity, including Tommy Hilfiger at Duffer Mall, Stage at Cataractli Center and Aritzia at our 2 Orchard Park Shopping Center.
In closing, we're pleased to be nearing the completion nearing the conclusion of a difficult period of anchor tenant disruption and believe we have been successful in improving the tenant mix and resiliency of our centers.
Thank you and I
will now turn this discussion over to Philippe.
Good morning everyone. We've been active in 2019 on multiple fronts and so I'm delighted to share some notable updates from Lantower Residential. As disclosed last quarter, we announced that we had acquired Lantower Garrison Park in Charlotte, North Carolina. The 322 Unit Class A property is performing well and is nearly 65% leased as of this month. We expect Garrison Park to stabilize in the first half of twenty twenty.
The property benefits from proximity to 3 large business and research parks that collectively make up University City, which boasts over 75,000 jobs. Additionally, the property is a short commute to the major local university, UNC Charlotte. As mentioned in the previous two quarters, one of our strategic initiatives for 2019 was to examine our existing portfolio to determine if any reallocations would be accretive. As we had alluded on last quarter's call, we're under contract to sell one of our assets that fits the criteria. The property in Marabella at Waterfront Lakes is a 400 unit property built in 2000 located in Orlando, Florida.
Mirabella purchased in April 2017 for 53.25 million dollars U. S. Dollars was successfully sold in September 25 for $77,000,000 underscoring the strong NOI growth during the whole period. The transaction results in a favorable financial returns, including an IRR of 19% and an equity multiple of over 2x in just over 4 years. Furthermore, there was 0 capital gains tax leakage as the acquisition of Landau Grande Flats in the 2nd quarter fully covered the Maribela disposition via referred to 1031 exchange.
Additionally, we are currently under contract to sell 2 more legacy assets from Lantor's portfolio. We believe these pending dispositions complete our 2019 strategic initiative. We will disclose more information on those potential dispositions in the coming quarters. As always, our intent is to dispose of these assets and reinvest via 1031 Exchange into newer properties that are more representative of our underlying portfolio and investment strategy. So we expect to announce the new acquisitions in the near future.
On the portfolio front, following the disposition of Mirabella, the land in our residential portfolio consists of 7,570 apartments across 23 properties, when excluding Jackson Park. On the operations front, at the end of the Q3, Land Tower's portfolio was approximately 91.4 percent occupied and was nearly 94% occupied when excluding our lease up properties. On the financial front, our same asset quarter end operating income increased in US dollars from US10.220 dollars in the Q3 of 2018 to US10.695 dollars in the Q3 of 2019. This equates to same asset quarter over quarter operating income growth of 4.6%, representing another quarter of strong sustaining NOI growth. On the development front, our Sunrise project, the 321 Unit Class A garden style multi hailing project in Orlando, Florida is scheduled to break ground in the coming months.
The development site benefits from a short commute to Orlando's largest employer Walt Disney World. The projected development yield of 6.1% represents a favorable spread between prevailing related Class A multi family market cap rates of 4.5% to 4.75%. We look forward to expanding our Central Florida development pipeline with more Class A developments in the future. And with that, I will pass the long conversation back to Larry.
Thank you, Philippe. I'll turn it back to open the line for questions, please.
And we have a question from the line of Mario Saric with Scotiabank. Your line is open.
Hi, good morning. Maybe just coming to the Gulf, I guess, earlier you're saying no impact on the chain domicile. Can you give us an update in terms of your capital recycling initiatives there and the timing and whether there's any implications to potentially selling stake in the building as a result of the announcement?
We're still hard target. The market has to digest and understand what this change of domicile means. And the Lilly proxy has to be
voted on, but we're still on
target moving forward with our strategy. No change.
Okay. So that's still something that you think could be resolved this year or
Well, let's this year is almost done, but within the next I would say within the next quarter or 2.
Got it. Okay. And then I noticed that there was a bit of a fair value decline in your Alberta office portfolio quarter over quarter. Was that kind of spread across the 4 assets?
We're always tweaking our portfolio asides, but anything in Alberta would have been substantially above. And that's the biggest one in Alberta.
Okay. And there's an $831,000,000 principal maturity in 2021. Is that related to the lower? Can you give us some color in terms of what comprises that maturity?
831 in 2021, We have part of that would be part of the first part of the gold bonds, which would be $250,000,000 I believe. And the rest of that should be regular mortgages on other properties.
Okay. And then maybe just shifting gears to Primaris, Pat. Your comment on a recent print, I just want to clarify whether you were inferring that the same store sales, which were down 3.1% this quarter, are you inferring that those are expected to become positive in Q4 2020?
Not necessarily. I mean, the sales figures have some focus, but what comes in and out of the same store what stores are we included. But I think last quarter, we were 555 or 557. So far, retailers are reporting that they're performing well on the fall, and we'll see how that translates to the end of the quarter.
Got it. Okay. And with the holiday season coming upon us, how does your kind of outlook for 2020 in terms of potential restructurings with tenants, which happen fairly often, but how does that watch list today compare to what that watch list may have looked like a year ago?
I think every year since I've been doing this, which is quite a long time now, there's tenant failures that happened at the start of the year. So the watch list is not significant. I've seen it longer than prior years. We've had our eye on a few potentials, and we've been adjusting our waiting with those tenants for some time now. At PREP 21, we were not surprised when they filed.
We had discussions well in advance of their failures. So I fully expect that next year will bring a typical year for failures, but nothing out of the ordinary.
Okay. And my last question just comes back to the balance sheet. The weighted average debt term came down below 4 years this quarter. The portfolio has changed over time. So land tower, for example, is a fairly significant part of our portfolio where the average lease term is lower than what you typically see in office or retail.
Is that a strategic decision to kind of lower the weighted average debt term consistent with the kind of portfolio shift to new asset classes like residential and increased focus on development? Or should we expect that number to kind of go up going forward?
When you bring down your debt by definition, you're bringing down your it's close one or the other. We're taking cash. We're paying off debt and not renewing the debt, bringing down our debt. So by definition, it's going to go down. So the answer is it's going to continually go down.
It's not a strategy as far
as long term or short term debt.
It's a strategy of bringing down the debt.
Okay. Thank you for the color.
Your next question comes from the line of Sam Damiani with TD Securities. Your line is open.
Thanks and good morning. Just keeping with the balance sheet, what is the leverage target that you're looking at for 2020, maybe with or without sale of an interest in the boat? What sort of capital recycling activity should we expect to see?
Good morning, Sam. Without any activity on the bow, we expect to be more or less the same where we are now. We have the development to complete, which if you look at the timetable, probably the under development table, we have approximately $250,000,000 to complete the developments we have on the go right now. That will be offset by the balance of the proceeds that we received from HLM based or we're going to take that mortgage. So it's just at the end of the day watch out to where we are right now.
Unless you do a significant transaction with sale, again, it's very hard to move the needle in a company ourselves.
And if an interest in the bow were to be were sold, like what would be the use of proceeds there?
Pay down debt. That would be initially use of proceeds. Yes.
And Land Tower is continually refreshing its portfolio. Is there any desire to grow? I know you're building obviously industrial in Toronto, but is there any desire to expand your portfolio outside Lantar?
I don't sorry, I don't really understand the question.
Are you looking at acquisitions or developments in office right now or
We are looking at industrial. We have our 300 that are under construction. We have good leasing activity and we are looking to build 2 other industrial buildings that we're currently negotiating the land on. So we're looking to increase our industrial platform through development and Land Tower will be increasing its development platform on acquiring further lands. It's in the process right now of acquiring further land.
So Land Tower's goal for foreseeable future is more to be a developer than an acquirer. The reason it acquires is to accommodate the 1031, but if it wouldn't be 1031, that's how it would be primarily a developer rather than an acquirer.
I see. And then on the Caledon developments, what sort of rents are you targeting today versus earlier this year?
We're currently negotiating on the big building. The rents are in line with the original budget. Nothing has really changed. We were starting at 8.25 percent and that's what we're achieving with the growth of the rents of approximately 3% per annum, annum. In line with exactly in line with our budget.
The budget, okay. And then Pat, great to see the 3 Forever 21 spaces filled quickly.
Could you give us a little
bit of color on the type of user that's replacing them, if it's all the same? And also the red versus the prior as well would be helpful.
Fashion tenant, that took all 3 and the rent is comparable to what we were getting previously.
And the downtime is, I guess, maybe 6 months?
It'll be much less than that actually. We were pretty far ahead and advanced and the tenant taking it is already advanced and hiring and such for it. At least it was disclaimed at the start of November. We get it back at the start of December, and I would think it's maximum 90 days downtime.
For rent to be flowing again?
Yes. That's great.
All right. I'll turn it back. Thank you.
And there are no further questions at this time. I turn the call back over to our presenters.
Okay. Thanks everybody. We'll speak to you next quarter. Have a great holiday season coming up. Thanks.
Ladies and gentlemen, this concludes today's conference call. You may