Good afternoon, and welcome to H and R Real Estate Investment Trust 2018 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 may contain forward looking information, which reflects 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 the 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 and at www.sedar.com. I would now like to introduce Mr. Tom Hofstetter, Chief Executive Officer of H&R REIT. Please go ahead, Mr.
Hofstetter.
Thanks for joining us today. I'm Tom Hofstetter, and I'd like to welcome everyone as is our custom. Larry Fuhrm, CFO of The REIT, will give you a high level summary of the quarter results. Pat will provide an update on Chimerais and Philippe will provide an update on Landstar and then I will conclude with some closing remarks.
Over to you, Larry. Thanks, Tom. Good afternoon, everyone. Jumping right into our bottom line. FFO on a fully diluted basis in Q4 was $0.43 per unit compared to $0.45 in Q4 of 2017.
The decrease is directly attributable to the sales of $950,000,000 worth of properties during 2018 compared to acquisitions of $280,000,000 during the same period. AFFO on a fully diluted basis was $0.32 in Q4 of 2018 compared to $0.35 in Q4 2017. Additional CapEx deducted from AFFO in Q4 compared to Q4 2018 compared to Q4 2017 was approximately $6,000,000 Part of our proceeds from the asset dispositions have been used for our development pipeline, which will be a source of significant growth in property operating income and FFO in the next few years. On a same asset basis, Q4 2018 property operating income from Canada was up 2.2% over Q4 2017. And on a same asset basis, Q4 property operating income from the U.
S. In local currency, that is in U. S. Dollars, was up 2.4% over Q4 2017. These increases in same asset property operating income are a testament to our capital recycling program to sell assets with low growth potential and replace them with assets that have higher growth potential.
We recorded a fair value decrease on our real estate assets of $152,000,000 in Q4 2018 and $247,000,000 for the year ended December 31, 2018. This arose mainly from adjusting Primera's portfolio cap rates and we made this adjustment despite the lack of any recent sales comps. And furthermore, it was not made because of any operational performance issues. In fact, Promera's property operating income has risen in 2018 compared to 2017. Rather, this adjustment was made due to the market's overall negative perception to retail malls.
And given this background, we felt it was the right thing to do. Despite this fair value adjustment, H and R's NAV per unit, net asset value per unit rose from $25.57 per unit at December 31, 2017 to $26.30 per unit at December 31, 2018. This increase is partly due to $108,000,000 fair value gain recorded at Jackson Park, Long Island City, which is accounted for as an equity investment. This gain was the result of an independent national firm's appraisal and was not based on Amazon's planned investment into the area. The rate assumptions and cap rates would not change at all for Amazon's initial planned arrival and that was always considered too far out to impact us today.
The U. S. Dollar strengthening to CAD1.36 at December 31, 2018 from CAD1.26 a year ago was also a large contributor to the increase in NARE per unit. I will now hand over to Pat.
Thank you, and good afternoon. In 2018, Primerus assumed responsibility of the H and R retail portfolio, and we completed 2 significant transactions during the year. We negotiated lease extensions with Sobeys for 6 locations in the portfolio with the average weighted lease term to maturity increasing from just over 3 years to 14 years. In addition, we negotiated lease extensions with 9 large format Lowe's stores occupying an area exceeding 1,000,000 square feet for an additional 15 years with rental escalations every 5 years. As part of our agreement with Lowe's, we negotiated rights which enable us to add density to the sites which we will pursue on an opportunistic basis.
Following a thorough review of the portfolio, we have identified non core assets located in small markets that will be marketed for sale over time. In this regard, we have recently entered into agreements to sell 2 retail projects that identified for disposition for $16,900,000 With respect to Sears, Sears paid annual base rent at H and R ownership interest of $2,300,000 We anticipate approximately $7,000,000 in annual base rent will be generated from Sears store replacement tenants with rental payments starting in Q4 2019 and most tenants open and paying rent by Q4 2020. Sears typically occupy prominent space at our properties As such, we're being selective with replacement tenants, focusing on those tenants that are prepared to pay market rents and enhance our merchandise mix. Several of our redevelopment plans include partial demolition of Sears and the addition of outparcel development. Leasing activity during 2018 was very strong.
Our team completed 4 19 transactions including 132 new lease deals. Our overall occupancy continues to be negatively impacted by the closure of Sears. However, our CRU occupancy rate has risen for the 4th straight quarter and is at its highest level in 2 years due to consecutive years of strong leasing activity. Primaris owned dominant malls in the respective trade areas and one which are often the only regional mall in the respective city. With tenants recognizing the importance of operating an online business in addition to maintaining a bricks and mortar presence, we continue to see strong tenant demand for space in our portfolio.
12 months rolling space same store sales within our enclosed mall portfolio are relatively flat at $5.65 per square foot as compared to the prior year, but they are considerably higher than the $5.42 per square foot recorded in 2016. Over the past 3 years, we have been rebalancing our merchandise mix with a focus on reducing our exposure to fashion tenants. The result has been stabilized productivity from the fashion category coupled with fashion tenants posting declining occupancy cost ratios. While categories such as health and beauty, food and footwear have all shown solid growth over the past years, electronics and jewelry categories have shown weakness after having been strong performers for many years. In 2018, we spent time reviewing opportunities within our portfolio to redevelop and intensify properties in markets such as Toronto where the economics of these projects has improved materially in recent years.
With sales of approximately $700 per square foot, Dufferin Mall is not simply a high performing shopping center, but is also a 21 acre site approximate to a subway station. We have started public consultation meetings regarding our preliminary plans to add density to Dufferin Mall, which includes the addition of significant residential development, which will further benefit sales at one of our top performing shopping centers once completed. We anticipate the approval process will take approximately 3 years. Thank you, Alain. I will now turn the discussion to Felice.
Good afternoon, everyone. I'm pleased to be on this call today to share the latest news from Lantau Residential. As mentioned last quarter, we closed on a 308 unit property named Lantau Westham Corner is located in the Cary submarket of Raleigh. Closing occurred on October 16 bringing our Class A Raleigh portfolio to nearly 1,000 units. The 5 storey property benefits from its proximity to some of the prized white collar employers in the entire Raleigh MSA such as MetLife's Global Technology Headquarters Campus and the SAS Institute's headquarters which is the world's largest private software company.
We also mentioned last quarter the potential acquisition of a property in Charlotte, North Carolina. We are happy to announce that we closed on the property on December 3, making our first acquisition in the Charlotte market. Built in 2016, Liza Waverly is a 375 Unit Class A development in one of the most affluent submarkets in Charlotte, characterized by high income households and A rated public schools. Lantau Waverly is also located within a Waverly mixed use development which includes over 200 and 50,000 square feet of retail and walkability to a Whole Foods market. As a side note, we are also pleased to hear the news of the BB and T and SunTrust merger due to the proposed headquarter relocation in Charlotte.
2018 was an active year for us. White Tower Waverly rounded out our 2018 acquisition bringing our total to approximately $340,000,000 across 16 38 units. On the portfolio front, following the closing of Lantyre Waverly, Lantyre Residential consists of nearly 7,300 apartments across 22 properties. Land Tower's weighted vintage of 2011 represents one of the newest multifamily portfolios in our sector. We expect this vintage to trend newer as we made dispose of our older assets and bring in more recently constructed properties as we complete our ground up multifamily developments.
As mentioned in previous quarters, our reported 4th quarter occupancy is artificially lowered due to the inclusion of the lease ups at Ambrosio and Edgewater in Austin and Bullhouse in Western Corners in Raleigh and Durham. Excluding the impact of these lease ups, our portfolio occupancy was nearly 93% at the end of the 4th quarter. On the financial front, our same asset year end operating income increased in U. S. Dollars from $25,867,000 to $27,010,000 in 2018.
This roughly equates to same asset year over year operating income growth of 4.4%, representing yet another strong year of NOI growth. On the development front, construction is underway at the 425,000,000 River Landing project with approximately 1,000 feet of waterfront on the Miami River. River Landing is a mixed use development including approximately 346,000 square feet of retail space, approximately 13 100 sorry, 136,000 square feet of office space and 529 residential units. To date, 66% of the retail space has been leased with a further 10% under executed non binding letters of intent. We expect to start pre leasing the multifamily towers towards the end of Q4 of this year and construction is expected to be completed in the Q2 of 2020.
Construction at Jackson Park has been progressing as scheduled when the project is currently 96% complete. Jackson Park will be moved from properties under development to investment properties in the Q1 2019. Leasing velocity remains strong over the Q4 bringing total occupancy across the three towers to over 65%. We expect leasing to accelerate given almost all of the amenity areas are now open to residents and the fact that we're moving into higher leasing months. The last remaining unopened amenity space is the rooftop on top of Tower V1, which is scheduled to open in March.
As we look into the future, we believe Land Tower's investment strategy will pivot away from the acquisition of existing assets to focus on a more accretive approach to growth through the execution of our development pipeline and investing in opportunistic ground up development. We look forward to sharing more exciting progress on our developments on our next quarterly call. And with that, we'll pass along the conversation back to Thomas.
Thanks, Philippe. As I hope everyone can tell, the entire team at H and R has been very busy over the past year on multiple fronts. Highlights include recycling capital through over $1,000,000,000 of sales and reinvestments into higher growth assets and the repurchase and retirement of 6,600,000 units. Significant advancement of our $1,500,000,000 development pipeline, including our flagship Jackson Park development in LIC that is now 68% leased and our River Landing project in Miami and material progress on enhancing our Primaris properties with the new tenancy commencing over the next 24 months that will generate $9,400,000 of additional NOI for H and R. These accomplishments align very closely with the goals we set out a year ago, streamlining and simplifying our portfolio, raising the internal growth profile of our portfolio and enhancing the profile of H and R to its unitholders.
We believe the actions taken in 2018 have not only made H and R a better REIT for the long term, but we expect to see over $26,000,000 of new NOI contribution in 2019 from Jackson Park, the lease up of recently developed land to our properties and the commencement of Sears and Target replacement tenancy. Amazon's announcement today that they are abandoning their plans to build the headquarters in Long Island City does not change the fact that Long Island City was chosen for its appealing characteristics, the same factors that drove our investment in 2 Gotham and Jackson's Park. These two properties sit at what we believe is the single best location in Long Island City atop the Queen's Plaza subway station, gateways and LIC as the nexus of 3 main New York City subway lines. Our investment in LIC along with Coors Key in Toronto and Urban Landing in Miami are key examples of H and R has exified and made significant investments in attractive gentrifying urban locations early in their development cycles, subsequently benefiting from the merchants of these locations as Prime notes. We've always maintained that despite the excitement created by Amazon's November announcement, it remains too early to forecast that Amazon's plans might impact our development.
The assumptions used to support our Paes Valley and our future cash flow forecast from Jackson Park have never reflected the move by Amazon to Long Island City. So the decision today to back away from LIC will not have any impact on our value and our forecasted cash flows. We continue to be highly focused on growing the FFO NAV per unit ratio in our REIT unit holders and are working towards continuing on the progress H and R has achieved in this regard in 2019 and beyond. Operator, you can open up the call for questions.
Your first question is from Sam Damiani with TD Securities. Your line is open.
Thank you. Good afternoon. I had a question on Jackson Park just on the appraisal. It did go up by $107,000,000 $108,000,000 in Q4. And can you tell us what drove that particular increase?
How much was it cap rate compression versus higher rents expected going forward or anything else?
Sam, it's Larry. I can give you a little bit of flavor. It was based on the current lease up. So it's not projecting rents increasing way up, but it's based on a stabilized property, capped at 4.25%. It was also based on deducting then the cost to complete for the construction and the cost to complete for lease up.
Sorry? That was the basis of the appraisal.
Yes. I noticed your guidance for NOI in 2020 was went up slightly for Jackson Park, which I imagine might have been part of it. As well, your FFO guidance is up significantly with lower interest costs now expected on this project. Is there a financing plan in place to lock in a lower coupon than you were previously thinking?
No, it was actually an error in our last forecast that the current mortgage on the property or the current construction financing was capped with a swap rate. And Tishman's was allocating that to income as opposed to netting it also interest expense. So when they did their forecast, they forecasted a higher rate of interest than we currently have locked in. And we have the interest rate locked in going until 2020, June 2020.
Okay. I'll just switch over one more question and then turn it back. Just on the balance sheet, debt to gross book value is 47% now with Jackson Park is done, but there's still $500,000 of cost to complete on Miami River and other projects. In terms of balance sheet management to fund that, is there going to be more dispositions in the next year or 2? And what is your long term, say, 2 to 3 year leverage goal on a debt to gross book value basis?
Well, Pat alluded to a couple of dispositions on the retail front that we hope to execute. There will be probably a couple more going forward into the year that we have slated and hope to execute on. But it's pretty early. Leverage may tick up a little bit in the next quarter or so. But once we get those dispositions back, it should probably trend
back down to where we are today.
Thank you.
Your next question is from Jenny Ma with BMO Capital Markets. Your line is open.
Hi, good afternoon.
Hi, Jamie. Welcome back.
Thank you. I have a few questions about Primaris for Pat. So you're talking about some disposition plans in place. I'm wondering if for particularly for the ones in the smaller markets, if you're still pursuing sort of the fifty-fifty JV that you've done in the past or you're really looking to sell these at 100%? And if you can comment on what you're seeing as far as interest and perhaps cap rates?
I think in terms of JVs, I think we'd still look at executing on those. As the opportunity arose. There's no activity in that front right now, but we certainly keep our eyes open for it. And then just in terms of there's no real comps out there for drive what the cap rates would be right now.
But Jenny, the real answer to the question is the sales are going to be taking place and nothing in closed malls. It was really in the outlier old H and R portfolio that's now going to be under primary Sunbelt, which we'll be selling over time.
Okay. Is there any view to looking at some of the enclosed malls, putting them on market? No. No? Okay.
That's fine. And then with regards to the same store performance, the numbers look really good all things considered. I'm not sure if you have an idea of what the sort of same store NOI would have been if you ex out Sears when you're looking at the performance of everybody else?
Well, Sears would have added another $2,500,000 more or less to the Primaris numbers.
Okay. And back out to that math. And then one last one question on Jackson Park. As far as the appraisal goes, did the Amazon news have any bearing on the Q4 appraisal as far as forecast or cap rates or any sort of assumptions that went into that?
No, definitely not. It had no impact. It's not mentioned in the appraisal at all. It was too early to see what was going to happen while we're doing the appraisal. Amazon's announcement was only in November, because appraisal was already was already underway, way underway then.
And I don't think it would have anyway been forecasting. I think when Amazon said something, it was like after 10 years later.
No, no, no, no. It was 5, 10 years later. The answer to the question is that we never increased the projected NOI or potential rents on Amazon at all to reflect on LIC to reflect Amazon ever. And the appraisal went out before the Amazon decision to come in. And we stated emphatically even before that that it has no bearing
at all on our on
the appreciation. If location speaks to its own merits, our investment has asked for its own merits. Amazon has nothing to do with that.
Okay, great. Thank you. I'll turn it back.
Your next question is from Matt Kornack with National Bank Financial. Your line is open.
Good afternoon, guys. With regards to your mention of intensification opportunities in the Toronto portfolio, would you look to do those entirely by yourself or do you seek out partners on a JV basis?
Yes. In the Toronto areas, they all have been done by ourselves.
Okay. And then, Philippe, can you speak to sort of the opportunities that are unfolding in the Dallas market with regards to some of the merchant developers that are there and it sounds like they've got a tough go of things and how potentially you could maybe take advantage of those types of opportunities?
Yes, I think that Rick Campbell at Camden had mentioned it probably had tipped the cards a little bit a couple of weeks ago on his call and I think one of the analysts had picked it up. The stress that he is mentioning we're not seeing. I think his comment was more on Houston. What we are seeing those merchant developers are coming out of the ground with products and having an offer more concession than planned and having to hold the asset longer than planned. And so if their execution was or if their plan was to sell in the 9th or 10th month of a lease up, now they're well into their 2nd month.
And so as far as we're concerned, the opportunities are starting to emerge. Our guess is some of the more aggressive merchant developers have probably gone over their skis and if those opportunities arise then will definitely take a look at them. But I think there is more pain elsewhere than in Dallas currently.
And then on the same token for stabilized assets, 1031 exchange and fund interest is still there. So it sounds like cap rates have remained pretty tight on those type of assets?
Yes, I would argue that there is more equity in the space than at any point in time.
Interesting. Larry, on the lease termination in the U. S. Industrial, I don't think it was quantified, but do you know what the value of that would have been just so I can back it out? It's not a substantial portfolio, but
It was about $150,000
Okay. I think that's it for me. It's you were lucky and smart and now you're just smart, but I think things are turning around and looking good. Congrats on the quarter.
Thanks, Matt.
Your next question is from Mario Saric with Scotiabank. Your line is open.
Hi, good afternoon. Just a follow-up question on the intensification opportunity in Toronto.
Having gone through the properties,
is it truly to quantify the type of GLA that you consider bringing online over the next 5, 6 years? Or maybe longer, maybe let's take a look sort of 10 years given the zoning
We have 3 besides the De Pere Mall, we have 3 offices that have substantial intensification. It's too early to talk to them though.
Okay. And when do you think you might be able to provide a little more color in terms of the magnitude of the opportunity?
Too early to tell.
Okay. That's it for me. Thanks. Your next question is from Sam Damiani with TD Securities. Your line is open.
Thank you. Philippe, just on the same store occupancy, it did tick down a little bit in Q3, tick down a little harder in Q4, close to 1% year over year. Is there something driving that, that I guess gives you some concern about trends looking out to 2019?
No, I think, Sam, just to be candid, we managed NOI, not so much occupancy. And so while I understand why people look at the metric in U. S. Multifamily, I'd be much more concerned about same store NOI growth as opposed to same store occupancy.
And so the NOI growth that you're putting up is a revenue story, it's not so much expenses going down or anything like that?
I think it's a combination of both. We're obviously we've got a great asset management team in Dallas to expense a tremendous amount of time compressing their expense as best they can, but we also have a great team on-site that is looking to increase rents. I can't speak to the exact percentages, but I would say it's probably a healthy blend
of both. Great. That's helpful. Thank you.
At this time, there are no
more questions in queue. I'll turn the call back over to the presenters.
Thanks, everyone. Have a great long weekend, and we'll speak to you next quarter. Bye.
This concludes today's conference call. You may now disconnect.