Good afternoon, and welcome to H&R Real Estate Investment Trust 2018 second quarter earnings conference call. Before beginning the call, H&R would like to remind listeners that certain statements which may include predictions, conclusion, forecasts, and projections in the remarks that follow may contain forward-looking information which reflect the current expectations of management regarding future events and performance, and speaks 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. Actual results could differ materially from the statements in the forward-looking information.
Additional information about the material factors, assumption, 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 is described in more detail in H&R's public filings, which can be found on our website, and at www.sedarplus.ca I would now like to introduce Mr. Tom Hofstedter, President and Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstedter.
Good afternoon, everyone, and welcome to our second quarter 2018 financial results conference call. On the call with me today are Larry Froom, CFO; Patrick Sullivan, COO of Primaris; and Philippe Lapointe, COO of Lantower Residential. We're going to start with Pat updating us on Primaris, followed by Philippe on Lantower, then I'll close out our formal remarks with some comments. Pat?
Thank you, Tom, and good afternoon. With regard to Target, we are nearing completion of our Target replacement program. Construction recently started on the former Target at Sunridge, and we anticipate CAD 1.5 million in annual base rent contribution from new tenants at Sunridge Mall, starting in Q4 2019. With respect to Sears paid annual base rent at H&R ownership interest of CAD 2.3 million. Moving forward, we anticipate CAD 7 million 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 Q3 2020. With respect to our enclosed mall portfolio, we'd like to take the opportunity to highlight several of our major properties. H&R owns a 50% managing interest in seven of our 18 regional enclosed shopping centers, earning management, leasing, and development fees.
Four of our malls owned at 100% level, being Orchard Park Shopping Center, Sunridge Mall, Stone Road Mall, and Dufferin Mall, represent approximately 50% of the total fair value for our enclosed mall portfolio. Each of these institutional quality assets are dominant in the respective trade area and collectively perform at an average sales per square foot of CAD 630 per square foot compared to our portfolio average of CAD 560 per square foot. All have potential for residential intensification. Stone Road Mall is located on a site of approximately 35 acres close to the University of Guelph. Over the next few years, we'll increase annual base rent earned from the former Sears premises at Stone Road. The Stone Road Sears will be partially demolished, providing excess density on the site for future development.
Sunridge Mall is located on a 67-acre site adjacent to a major hospital with a light rail transit stop at the property. The city has recently completed a master plan for this area and has designated a significant portion of the site to be community high density, which provides for a maximum building height of 36 meters. In the past year, 275,000 square feet of anchor space has been committed by way of new lease or renewal to major tenants, including Hudson's Bay, for a duration of 10 years. This area represents one-third of the property GLA. In addition, we are in the final stages of completing leases for an additional 30,000 square feet of major tenant space. Orchard Park Shopping Center is the largest shopping center in the British Columbia interior and performs at more than CAD 700 per square foot.
The site encompasses more than 50 acres in the heart of the city, there is significant residential development planned across from the shopping center. We expect a significant increase in the annual base rent from the redevelopment of both Sears boxes at this property. The redevelopment will result in approximately 25% of the existing Sears area being demolished, we will look to develop the remainder over time as opportunities present themselves. Dufferin Mall is situated in the inner city of Toronto on a site of just over 21 acres. The mall performs at approximately CAD 650 per square foot with high-performing anchor tenants. Adjoining our site, a development permit has been made to build more than 2,000 residential units, we expect this added density will further increase Dufferin Mall's traffic. At this time, we're in the planning stages for adding residential to the Dufferin Mall site.
On a preliminary basis, we anticipate that we could build more than 1,000 residential units at the property. Thank you, I will now turn the discussion over to Philippe.
Good afternoon, everyone. I am pleased to be on this call today to share the latest news from Lantower Residential. We introduced last quarter BullHouse Apartments, a five-story, 305-unit mid-rise property located in the High Grove submarket of downtown Durham, North Carolina. We are delighted to add yet another state-of-the-art A+ asset into the Lantower portfolio as we close on BullHouse on June 1st. Also introduced last quarter was Lantower Weston Corners, a 308-unit development in the Cary submarket of Raleigh. The five-story property benefits from proximity to some of the most prized white-collar employers in the entire Raleigh MSA. MetLife's global technology headquarters campus and the SAS Institute's headquarters, which is the world's largest private software company, is nearby. We expect to close on Weston Corners in mid-September.
Our Edgewater property in Austin, Texas, is leasing exceptionally well, with 132 leases signed, or approximately 40% of the property in the first three months of leasing. We expect to receive the final CO in late August, with closing scheduled for early September. Last quarter, we disclosed that Lantower was under contract to acquire an asset in North Tampa, Florida. We are happy to announce that we closed on the 322-unit Lantower Astoria, previously known as Integra Junction, on June 11. Its location in Northwest Tampa submarket is characterized by affluent demographics, with average incomes of over $100,000 and A-plus public schools. The newly constructed property, built in 2017, is nearing stabilization and reached 92% occupancy this week. Lantower Astoria marks our fourth acquisition in Tampa and is indicative of our interest in the growth prospects of Central Florida.
On the portfolio front, once we close the acquisition of Edgewater and Lantower Weston Corners, Lantower will consist of 6,896 apartments across 21 properties. In 2016, the weighted average age of our portfolio was 17 years. In the second quarter of 2018, it was 7 years, or in other words, an improvement of 11 years in over 24 months, representing one of the most modern portfolios in our sector. As mentioned last quarter, our same-property occupancy is artificially lower due to the inclusion of the lease-ups of Ambrosio in Austin, BullHouse in Durham, and Lantower Astoria in Tampa. Excluding the impact of these lease-ups, our portfolio occupancy is 94.4% at the end of the second quarter. On the financial front, our same asset quarter and operating income increased in US dollars from $6,655,000 in the second quarter of 2017 to $6,918,000 in the second quarter of 2018.
This equates to same-asset quarter-over-quarter operating income growth of 4%, representing yet another strong quarter of NOI growth. Furthermore, our same assets rolling six months operating income increased nearly 5% compared to the first six months of 2017. On the development front, we are nearing the start of our Koenig Lane development called The Pearl in the heart of Austin, Texas. The 383-unit mid-rise community is awaiting final approval from the city and could see groundbreaking as early as September. Our Hercules project in Northeast San Francisco commenced construction in early June. This 172-unit development, called The Exchange at Bayfront, represents the first phase of over 1,000 units within the Hercules Bayfront development on the San Pablo Bay. The second phase, consisting of 232 units, is expected to receive site plan approval and building permits by December, with construction expected to start in January of 2019.
As mentioned previously, Lantower Residential is developing 1,000 apartments in the prosperous submarket of North Dallas at 100% ownership stake. The first phase, consisting of approximately 325 units, will mark the start of construction of a large mixed-use development at the high-traffic intersection of Dallas North Tollway and Highway 380. We expect to receive building permits by the end of the year, with construction starting in the first quarter of 2019. Construction at Jackson Park is progressing on schedule, with the project currently standing at 88% complete. Jackson Park's leasing has exceeded expectations as leasing velocity has been very healthy through the summer months, with an average of over 100 signed leases per month. In the month of July only, Jackson Park had 158 new leases and 162 move-ins, despite that we are just now starting to turn over the most desirable amenity space to the residents.
Tower A has completely been turned over for leasing. Tower B2 has only one batch of units representing 176 units left to turn over to the leasing team. The last tower has turned over 208 units, and we expect to receive the third batch of 5 in late August. Construction is expected to be 100% complete in the fourth quarter of this year. We look forward to sharing more exciting progress on our developments on the next quarterly call. With that, I will pass along the conversation back to Tom.
Thanks, Philippe. Pat and Philippe have just provided a great summary of our more operationally dynamic portfolios, both of which we expect will contribute meaningfully to our growth in per-unit FFO and NAV over the next several quarters. Last year, we spent considerable time reflecting on our business. With our year-end results, we provided a summary of the significant strides we have made in recent years and where we saw opportunity for improvement. I would encourage anyone who has not read the letter to unitholders included in our last annual report to read it in conjunction with the results reported today. It really ties together all of the significant activities we have completed this year. In a nutshell, we noted that we have made great strides in adopting best practices in our governance and have made significant progress on improving our profile with investors through enhanced investor relations and disclosure improvements.
We have always had a significant quality bias when buying property, which has served us well over the years. While it was large and high quality, it was also quite broad and in some areas had prioritized stability of income over growth of income. As a result, we set out the dual objectives of streamlining the portfolio and enhancing H&R's overall FFO and NAV growth profile. In the second quarter, we acted decisively on these objectives by selling very steady but lower growth properties and reinvesting the proceeds of these sales into acquiring higher growth properties and advancing and expanding our value-creating development pipeline. The transactions we completed in Q2 were both large in dollar value and in their impact on our business. We executed the sale of the bulk of our U.S. retail portfolio for $633 million.
We announced $245 million of multifamily property acquisitions, with more than half of those closings in June, and the balance to follow over the next two months. We invested over $70 million in our nearly completed Jackson Park trophy apartment development in N.Y. and converted CAD 137 million of warrant receivables into ownership interests in our River Landing and Prosper developments. An additional CAD 50 million investing those projects in the quarter. Our properties under development now totals CAD 1.2 billion of invested capital and represents a meaningful driver of FFO and NAV growth as we execute on these projects. To provide better visibility into this large pipeline this quarter, we added new disclosures to our MD&A on page 14 with total budgets, remaining costs, expected yield on cost, and completion dates for each of our projects. All of this activity is designed to streamline our portfolio, enhance our growth.
In Q2, and we expect again in Q3, the cost of these initiatives is a modest short-term impact on FFO per unit. We're highly confident that the changes we have made have improved our business and will prove rewarding for our investors. Of course, all these activities, investments are only made possible by our very conservative and defensive balance sheet. Our credit metrics are very strong and should further strengthen as Jackson Park fully leases up and stabilizes by late 2019 with additional growth from other parts of the portfolio. We're proud of the results we delivered in Q2 and the significant changes we have made to our business, and we are looking forward to see the growth we are investing materialize in our financial results in coming quarters. With that, I'll open the lines to questions. Operator?
At this time, I would like to remind everyone, in order to ask a question, press star, then number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Sam Damiani with TD Securities. Your line is open.
Thanks, and good afternoon, everybody. Tom, just first of all, you've added to the development pipeline, and you've just sold your US retail, or at least most of it. Can you just give us an update on the sources of funding the remaining development? You've got up to CAD 600 million left to spend, it looks like for the next couple of years.
I'll hand it over to Larry. Anything to do with dollars and cents, I really don't know. I'm the good-looking one, remember, on this call. Larry?
Yeah. That will be spent over the next, probably the bulk of it over 2019 and 2020. There's CAD 75 million or CAD 80 million left that we have to spend on Jackson Park. We have construction financing. That's not coming from any more debt that we're going to be putting on our balance sheet, so to speak. That's an equity account and investment. That financing is arranged. The bulk of it will be coming from the River Landing project, and that'll probably be coming from our balance sheet funding it till we get construction financing, and we'll play that closer to the time. Our plan is not to get construction financing at this time, and we'll look at it early next year, whether we get construction financing on that project or finance that through our operating lines.
Okay. I'm just curious where you would like to see leverage a couple of years out with It looks like you're expecting some more fair value gains with Jackson Park and potentially some fair value gains across some of the other developments in the pipeline offsetting the leverage that would tick up as a result of the spend. Just where do you see everything balancing out on a stabilized basis? If any further dispositions are required to keep that leverage, you would do that?
Yes.
Okay. Just sticking onto Jackson Park, I remember maybe last call, you were expecting over CAD 1 a unit of fair value gains in total for Jackson Park. Is that still the case, and can you be more precise at this point?
No, that's still the case. I think we're very satisfied with that.
It's great to hear.
Just to be clear, in the past two years, we've recognized about CAD 0.50 of that already. We have another CAD 0.50 to get to that CAD 1.00 in fair value gains.
Right. Sam, we're building to the low sixes, and the value's probably four-ish, so you have plenty of gain over there.
Okay. Sorry,
A dollar is CAD 300 million.
Yeah.
I don't mind giving that out.
Canadian dollar. We're talking Canadian, right? Okay. The trends, I guess, are the rents kind of ticking up a little bit over the course of this lease-up period?
I think they're right on budget. I think it's only once it stabilizes, as evidenced by the velocity of the leasing and also the pickup in interest once the amenities are delivered. It can only mean positive growth on the rents.
Right.
The mistake we made, if any, is that we took Investor Day too early. Right now, the project looks absolutely It'll knock your socks off. That's why we're so much ahead of our competitors. Actually, there is no competition. The nearest project that's going to be starting in 2019 won't be as competitive. There's nothing that offers the amenities, the park settings, and actually the views and the unit sizes that we have. I think we're very comfortable going forward that we'll be able to maintain an advantage over our competitors.
Okay. Maybe just switching over briefly to Primaris, where the occupancy did decline a little bit quarter-over-quarter. What was the key drivers there?
Well, Sears was a major impact on the occupancy.
Was that not all in Q1, though?
Yeah. You're right. It was more Primaris Q1. I think our occupied and committed number stayed fairly stable in the 94% range.
Okay. Thank you.
Again, if you would like to ask a question, press star, then number 1 on your telephone keypad. Your next question comes from Matt Kornack with National Bank Financial. Your line is open.
Hi, guys. Just following up on Primaris. Given improvement in the Alberta market, have you seen any improvement in leasing dynamics on your major malls there? Did you see any pullback during the energy crisis?
Yeah, I think there was a hesitancy for tenants to commit to a lot of new deals in that province a few years back. Right now we're seeing tenants expanding their footprint in Alberta. We've transacted quite a few new deals in Alberta in the last, say, 18 months.
Just in terms of Target and Sears. Target, you're well on your way, it sounds like. You've got the Sunridge property that's going to be a little bit delayed. What is the NOI profile in 2019, I guess, or the balance of 2018 and into 2019 for both, well, I guess Target, then Sears is really 2020 that you'll see the impact. Is that fair to say?
In terms of the increase in annual base rent, for instance. I think in 2018, we're looking at about CAD 7 million in NOI contribution in 2018. Sorry, 2018, CAD 7 million. 2019, I think the full-year number is around CAD 8.1 million. The Sears contribution Sorry, the Sunridge contribution really kicks in fully in 2020. The impact is really late in the year in 2019 from Sunridge.
That's Target. Sears, will you see anything near term, or is it all
Sears, really, with the permitting process and the construction, we really won't see any revenue start to flow until Q3 2019.
Have you demised those spaces at all, or are you finding single-tenant users for them?
No single-tenant users. They're going to be demised, and for the most part, we're demolishing portions of the buildings.
Is it the same tenants that are taking that space as would've taken Target? I know you had said prior that Sears was actually in better locations, I think, in some cases, than Target.
Yeah. No, Sears is prominently located on the site. I think there's two benefits out of getting the Sears boxes back. One, the prominent locations are helping us drive higher rents from the boxes that we are putting in. The second thing is by demolishing portions of its buildings, we no longer have no-build zones out in front of Sears. Quite often they're at the front of the property, so we can build out parcels, which we get very high rents from.
Okay. It sounds like from a Primaris standpoint, this quarter, I think, was positive on a same-property NOI growth standpoint, but it will be a meaningful contributor to results in the next couple of years.
Yeah.
Okay, great. Thanks, guys.
Your next question comes from the line of Sam Damiani with TD Securities. Your line is open.
Yeah, thanks. I just wanted to follow up on River Landing. Just if you could update us on the pre-leasing of the office and retail components.
The retail is around two-thirds lease assigned, committed. Office is under serious negotiations with one tenant for the entire space. It goes to committee next week, quite frankly, we're expecting that to get done. That's on all the 136,000 sq ft of office, which includes the mezz and the upper floors five, six, and seven. The balance of the retail space we have LOIs on, it's under active negotiations. We're very confident with the retail and office.
Who are the tenants on the retail that you've signed up so far?
Publix, Hobby Lobby, TJ, Ross, West Marine, Burlington, and then the smaller tenants such as Chase Bank, GNC. The standard cast of characters. Chipotle's under negotiation.
The residential component there is rental, not condo, is that right?
All rental, and we won't start leasing it until around six months before completion.
Great. Okay, thank you.
There are no further questions at this time. I will now turn the call back over to Tom Hofstedter.
Thanks, everybody. We look forward to speaking to you next quarter. Enjoy the rest of the summer. Bye.
This concludes today's conference call. You may now disconnect.