Good afternoon, and welcome to H and R Real Estate Investment Trust 2018 Second 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 and projections in the remarks that follow may contain forward looking information, which reflects 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, and actual results could differ materially from the statements in the forward looking information. 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 is 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, President and Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstetter.
Good afternoon, everyone, and welcome to our Q2 2018 financial results conference call. On the call with me today are Larry Frum, CFO Pat Sullivan, COO of Primaris and Philippe Lapointe, COO of Land Tower Residential. We're going to start with Pat updating us on Primaris, followed by Philippe on Land Tower, and then I'll close out our formal remarks and 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 in the former Target at Sunridge, and we anticipate $1,500,000 in annual base rent contribution from new tenants at Sunridge Mall starting in Q4 2019. With respect to Sears, Sears paid annual base rent at H and R ownership interest of $2,300,000 Moving forward, we anticipate $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 Q3 twenty twenty. With respect to our enclosed mall portfolio, we'd like to take R owns a 50% managing interest in 7 of our 18 regional enclosed shopping centers earning management, leasing and development fees.
4 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 $6.30 per square foot compared to our portfolio average of $5.60 per square foot. All have potential for residential intensification. Stoneroad 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 adjoining 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 the Bay, for a duration of 10 years. This area represents onethree 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 $700 per square foot. The site encompasses more than 50 acres in the heart of the city, and 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 series areas being demolished, and we'll 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 $6.50 per square foot with a high with high performing anchor tenants. Adjoining our site, a development permit has been made to build more than 2,000 residential units, and 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, and I will now turn the discussion over to Salif. Good afternoon, everyone.
I'm pleased to be on this call today to share the latest news from Lantyre Residential. We introduced last quarter Bullhouse Apartments, a 5 story, 305 Unit Mid Rise property located in the high growth submarket of Downtown Durham, North Carolina. We're delighted to add yet another state of the art A plus asset into the Land Tower portfolio as we close on Bullhouse on June 1. Also introduced last quarter was Land Tower Western Corners, a 308 unit development in the Cary submarket of Raleigh. The 5 storey property benefits from proximity to some of the most prized white collar employers in the entire Raleigh and the SaaS Institute's headquarters, which is the world's largest private software company is nearby.
We expect to close our Western Corners in mid to some sorry, mid September. Our Edgewater property in Austin, Texas is leasing exceptionally well with 132 leases signed or approximately 40% of the property in the 1st 3 months of leasing. We expect to receive the final CO in late August with closing scheduled for early September. Last quarter, we disclosed the land tower was under contract to acquire an asset in North Tampa, Florida. We're happy to announce that we closed on the 3 22 Unit Land Tower Astoria, previously known as Integra Junction, on June 11.
Its location in Northwest Campus submarket is characterized by affluent demographics with average incomes of over $100,000 and 8 plus public schools. The newly constructed property built in 2017 is nearing stabilization and reached 92% occupancy this week. Land Tower Story marks our 4th 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 Lantau Western Corners, Lantau will consist of 6,890 6 apartments across 21 properties. In 2016, the weighted average age of our portfolio was 17 years.
In the Q2 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 lowered due to the inclusion of the lease ups of Ambrosio in Austin, Bullhouse in Durham and Lanterra, Astoria in Tampa. Excluding the impact of these lease ups, our portfolio occupancy was 94.4% at the end of the Q2. On the financial front, our same asset quarter end operating income increased in U. S.
Dollars from 6,600 and $55,000 in the Q2 of 2017 to $6,918,000 in the Q2 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 for the 6 months operating income increased nearly 5% compared to the 1st 6 months of 2017. On the development front, we're nearing the start of our Canyon Lane development called The Pearl in the heart of Austin, Texas. The 383 unit midrise community is awaiting final approval from the city and could see a groundbreaking as early as September.
Our Hercules project in Northeast San Francisco commenced construction in early June. There's 172 unit development called the Exchange of Bayfront represents the first phase of over 1,000 units within the Hercules Bayfront development on the Sao Pablo Bay. The 2nd 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, Lantana Residential is developing 1,000 apartments in 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 Q1 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're just now starting to turn over the most desirable amenity space for the residents. Tower A has completely been turned over for leasing. Tower B2 has only 1 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 3rd batch of 5 in late August. Construction is expected to be 100% complete in the Q4 of this year. And so we look forward to sharing more exciting progress on our developments on our next quarterly call. And 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'd encourage anyone who hasn't read the letter to unitholders included in our last annual report to read 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 We've always had significant quality bias when buying property. We've We've always had 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 have prioritized stability of income over growth of income. As a result, we set out the dual objectives of streamlining the portfolio, enhancing H and R's overall FFO and NAV growth profile. In the Q2, 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 US633 $1,000,000 We announced US245 $1,000,000 of multifamily property acquisitions with more than half of those closings in June with the balance to follow over the next 2 months. We invested over US70 $1,000,000 in our nearly completed Jackson Park trophy apartment development in New York and converted $137,000,000 of warrant receivables into ownership interest in our River Landing and Prosper developments, an additional $50,000,000 advancing those projects in the quarter.
Our properties under development now totals $1,200,000,000 of invested capital 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 and A on Page 14 with total budgets, remaining costs, expected yield on costs and completion dates for each of our projects. All of this activity is designed to streamline our portfolio and enhance our growth. In Q2 and we expect again in Q3, the cost of these initiatives is modest short term impact on FFO per unit. We are highly confident that the changes we have made have improved our business and will provide rewarding for and will prove rewarding for our investors.
Of course, all these activities and 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. And with that, I'll open the lines to questions. Operator?
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 U. S. Retailer, at least most of it. Can you just give us an update on the sources of funding the remaining development?
You've got about $600,000,000 left to spend, it looks like, for the next couple of years.
I'll hand it over to Larry. Anything to do with the dollars and cents, I really don't really know. I'm the good looking one, remember, on this call?
Larry? Yes, the 600 that all the Sprint over the next probably the bulk of it over 2019 2020. The $75,000,000 or $80,000,000 left that we have to spend on Jackson Park. We have construction financing. So 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 kind of investment. That financing is arranged. So the bulk of it will be coming from the River Landing project and that will probably be coming from our balance sheet funding it till we get construction financing and we'll pay that close at the time. Our plan is not to get construction financing at this time. We'll look at it early next year, whether we get construction financing on that project or finance that through our operating lines.
Okay. And I'm just curious where you see leverage where you would like to see leverage a couple of years out with it looks like you're expecting some more fair value gains at 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. But just where you see everything balancing out on a stabilized basis? So if any further dispositions are required to keep that leverage, you would do that? Yes.
Okay. And just sticking on to Jackson Park, I remember maybe last call, you were expecting over $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.
And it's great to hear the Sorry,
to speak here. In the past 2 years, we've recognized about $0.50 of that already. So there's another $0.50 to get to that dollar in fair value. Right.
We're building to its low 6s and the value is probably 4 ish. So you have plenty of gain over there. The dollars $300,000,000
Yes. That's
Canadian dollars, we're talking to the grain. So okay. And the trends I guess are the rents kind of ticking up a little bit over the course of this lease up period?
I think you're right on budget. I think it's only once it stabilizes as evidenced by the velocity of the leasing and also the tick up 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 the Investor Day too early. Right now, the project looks absolutely it will knock your socks off. And that's why we're so much ahead of our competitors. And actually, there is no competition. The DIRS project that's going to be starting in 2019 won't be as competitive.
There's nothing that it offers the amenities, the park settings and actually the views and the unit sizes that we have. So I think we're very comfortable going forward that we have 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 were the key drivers there?
Sears has a major impact on the occupancy.
Was that not all in Q1, though?
Yes, yes, you're right. It was more primary Q1. I think our occupied and committed number is fairly stable in the 94% range.
Okay. Thank
Your next question comes from Matt Connack 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? And did you see any pullback during the energy crisis?
Yes. 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 18 months.
And 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. But what is the NOI profile in 2019, I guess, or the balance of 2018 into 2019 for both well I guess target and then Sears is really 2020 that you'll see the impact. Is that fair to say?
So in terms of the increase in annual case rent, for instance, so I think in 2018, we're looking at about $7,000,000 in NOI contribution in 2018 sorry, 2018, dollars 7,000,000 2019, I think the full year numbers are around 8.1 percent. And then this year's contribution, so as the Sunridge contribution really kicks in fully in 2020. It really the impact is really late in the year in 2019 from Sunridge.
That's target. And then Sears, will you see anything near term or is it all?
Sears really is with the construction, the permitting process and the construction, we really won't see any revenue start to flow until Q3 2019.
And 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.
And who would be is it the same tenants that are taking that spaces would have taken Target? I know you had said prior that Sears was actually in better locations, I think in some cases than Target?
Yes. No, Sears is prominently located in the sites. I think there's 2 benefits out of getting the Sears boxes back. 1, the prominent locations are helping to drive higher rents from the boxes that we are putting in. And the second thing is by demolishing portions of these 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. So it sounds like from a primary standpoint, this I mean, 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. Yes. Okay, great. Thanks guys.
Your next question comes from the line of Sam Damiani with TD Securities. Your line is open.
Thanks. I just wanted to follow-up on Miami River. Just if you can update us on the pre leasing of the office and retail components. The retail is around
2 thirds lease assigned committed. Office is under serious negotiations with 1 tenant for the entire space. It goes to committee next week quite frankly and I expect we're expecting that to get done. So that's on all the 136,000 square feet of office, which includes the mezz and the upper floors, floors 5, 6 and 7. And the balance in the retail space, we have LOIs on and it's under active negotiations.
We're very confident with the retail and office.
And who are the tenants on the retail that you've signed up so far?
Publix, Hobby Lobby, TJs, Ross, West Marine, Burlington and then the smaller tenants such as Chase Bank, GNC, the standard cash flow characteristics, probably is under negotiation.
And the residential component there is rental, not condo, is that right?
Oh, rental and we won't start leasing it in around 6 months before completion. Great. Thank you.
There are no further questions at this time. I will now turn the call back over to Tom Hofstetter.
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.