Good afternoon, and welcome to H and R Real Estate Investment Trust 2018 First Quarter Earnings Conference 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. 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&R's public filings, which can be found on our website at www.sedar.com. I would now like to introduce Mr. Tom Hofstetter, President and Chief Executive Officer of H and R Reach.
Please go ahead, Mr. Hofstetter.
Good afternoon, everyone, and welcome to our Q1 2018 financial results conference call. On the call with me today are Larry Froome, our CFO Pat Sullivan, CEO of Primaris and Filip Lapointe, CEO of Lantaro Residential. We're going to start off by bringing Pat to tell us a little bit about Primaris, followed by Philippe and then I'll basically bring us the rest of what's going on at H&R. Pat?
Thanks, Tom, and good afternoon. Our enclosed shopping centers typically the dominant or only enclosed mall in their primary markets. Sears, much like Target, occupied large premises that were situated prominently on the property. They paid significantly below market based rent, contributed very little toward the cost of operating the shopping center, thereby shifting the burden to small shop tenants and did not drive traffic to the shopping center in the end. With the departure of Target, we were afforded the opportunity to add new retailers to our properties, including Winners, London Drugs, H&M, HomeSense and Indigo to name a few.
In some cases, tenants were new to market, while others relocated from nearby retail development, seizing the opportunity to relocate to the dominant retail development in the market. Further, over the long term, the elimination of lease restrictions provides us the opportunity to further develop our sites, creating growth in both revenue and traffic to the property. During the Q1 of 2018, we obtained vacant possession of the remaining 7 Sears stores in our portfolio. Our 2 other Sears stores were disclaimed by the monitor in late 2017. We have now undertaken a thorough review of the condition of the Sears stores, redevelopment plans are advanced, construction groups have been engaged and discussions with replacement tenants are progressing in advance.
With the continued growth and evolution of e commerce, retailers are reshaping their operating platform. Using demographic information obtained from their e commerce business, retailers are becoming increasingly sophisticated in understanding their bricks and mortar needs. Shipping costs both for delivery and returns are high, especially to areas outside of Canada's major urban centers. As such, operating the physical store has become an essential component in the retailer's omni channel strategy. With the physical store presence, retailers can reduce shipping costs by way of in store pickup, simplify the return process and create opportunity for additional sales from online customers that come to the store in person.
One large format international fashion retailer stated that they are expanding into many regions where Primaris own shopping centers as their online business strengthens with a physical store open because without a bricks and mortar location, customers returning items are required to pay the cost of shipping. Our enclosed malls are typically the dominant retail property the respective region and we benefit from the retailers' increased understanding about their customer shopping habits in our markets. Strong e commerce sales for selected retailers in many of the cities where we own properties such as Fort McMurray and Fredericton have aided in advancing discussions with potential new tenants such as Sephora. Leasing activity throughout the portfolio continues to be strong with our team completing 108 transactions during the quarter, including 33 new transactions. By way of comparison in Q1 2017, our leasing fleet completed 93 transactions.
We have completed a significant number of lease renewals in the quarter, resulting in 66% of the 2018 expires being finalized. Significant store opening center property this spring include Marshalls, Dollarama, Indigo and Urban Planet, all opening at Cataraqui Center from a combined area of approximately 100,000 square feet, as well as Urban Planet opening new stores at both Sherwood Park and Sunridge Mall from 35,000 square feet in total. Further, we have completed 3 deals with TJX, totaling about 100,000 Square Feet at Sunridge, Garden City Square and McAllister Place. At McAllister Place, TJX will open a Marshalls HomeSense combo store in the fall of 2018, while the other 2 TJX stores opened in 2019. Thank you and I'll now turn the discussion over to Foli.
Good afternoon, everyone. I'm pleased to be on the call today to share the latest news from Lancaster Residential. As mentioned on last quarter's call, we are under contract for a brand new deal in Austin, Texas. We have since completed our due diligence, so we are now able to share details regarding our newest acquisition called Edgewater. The brand new 328 Unit Development is a sister property of 2 of our other assets, North Point Northeast and Ambrosio.
The acquisition provides operational economies and gives us strategic control of the Techbridge submarkets. Edgewater is about to begin its lease up, which provides us with better quality control of tenants moving into the first time in addition to offering a higher stabilized cap rate, otherwise unavailable on fully marketed stabilized Austin properties. Perhaps the most exciting news comes from our recent activity in Raleigh, North Carolina, As a result of the market's recognition of the Land Tower platform, we have secured 2 off market opportunities with 1 of the largest multifamily equity investors in the U. S. Both assets are brand new Class A properties in 2 of the most desirable submarkets in the Raleigh MSA.
The first currently called Woodfield Westin Corners, which upon closing will be rebranded as Land Tower Westin Corners, is a 308 unit development in a Cary submarket of Raleigh. The 5 storey benefits the 5 storey property benefits from its proximity to some of the most prized white collar employers in the entire Raleigh and Marseille. MetLife's 641,000 Square Foot Global Technology Headquarters Campus that currently employs approximately 2,000 people sits across the street from the property. Additionally, the SaaS Institute's headquarters, the world's largest private software company employing 6,000 people is located 5 minutes away. The second acquisition, Bullhouse Apartments is a 5 store, 305 unit mid rise property located on the high growth of downtown Durham.
The property earned a walk score of 90 due to its live, work and play location, a short walk away from major Durham destinations. Residents benefit from a quick commute to major employers as Duke University and Hospital and the large tech startup hubs, the Innovation District and Startup Factory. In addition to purchasing Edgewater and the 2 properties in Raleigh, we have secured another off market opportunity from a renowned developer in Florida. We placed on a contract a brand new property in a very dynamic submarket of Tampa, Florida. This will mark our 4th acquisition in Tampa, a market that is well positioned for strong and stable population job growth.
We will disclose more information regarding this acquisition next quarter. On the portfolio front, following the acquisition of Edgewater, Weston Corners and Bullhouse, Land Tower will consist of 6,574 apartments across 20 properties with a weighted average portfolio vintage of 2011. As mentioned last quarter, our same property occupancy is artificially below normal due to the inclusion of a lease up of Ambrosio in Austin, which is 60% occupied at the end of the Q1. Excluding the impact of Ambrosio's lease up, our portfolio occupancy was approximately 93% at the end of the Q1. On the financial front, our same asset quarter end operating income increased in US dollars from $6,793,000 in the Q1 of 2017 to $7,173,000 in the Q1 of 20 18.
This equates to same asset quarter over quarter operating income growth of 5.6 percent demonstrating yet again our continued NOI growth quarter over quarter primarily due to strong revenue growth and active asset management. On the development front, we're nearing the start of our Canyon Lane development in the heart of Austin, Texas. The 383 Unit Minrise Community called The Pearl is expected to commence construction in the late summer of 2018. Our Hercules project in Northeast San Francisco is also nearing construction mobilization. We expect to start shoring and grading work in June with vertical construction to start in August.
This 172 unit development now called The Exchange at Bayfront represents the first phase of over 1,000 units within the Hercules Bayfront development. As our multifamily developments progress, we look forward to sharing more exciting news on the next quarterly call. And with that, I will pass along the conversation back to Tom.
Thanks, Lee. So by now, you probably all saw that we issued a press release at the start of this conference call regarding our sale of the majority of our U. S. Retail portfolio in the United States for US633 $1,000,000 We're really going to the wire to get this done before the conference call, and so I apologize that it came out so late. So before mortgage and prepayment, the closing costs are proceeds of $633,000,000 This reflects a 7.3% cap rate, which will naturally result in some near term drag on our FFO per unit until the proceeds are redeployed.
We estimate the FFO impact at approximately $0.05 to $0.06 per unit in 2018 based on our current pipeline of acquisitions. The sale is key to our strategy to recycling our capital to higher growth properties, most lovingly our Lantau Residential division, which with this disposition reaches 15% of total assets, and we expect near term acquisitions to put that even push that even further to eventually over time be approximately 25% of our total assets. On a local currency basis, same asset operating income of 1% was powered by a 5% 5.6% increase from our Lantaro Residual division and 1.7% from our office portfolio. Our 12,300,000 square foot office portfolio accounts nearly half of our assets and includes 5,300,000 square feet in the tight Toronto office market, where we estimate market rents for our portfolio are approximately 23% above our in place rents, providing significant upside on future lease maturities and renewals. This positive internal growth came despite modest occupancy erosion from all of Asia in our REITs portfolios.
At 90 4.1%, we expect portfolio occupancy to rise over the next several quarters as recent Land Tower acquisitions still lease up stabilize. And as Primaris' occupancy rises through 2018 2019 with the final target in Sears replacement tenant fees taking occupancy. Jackson Park, as you heard, our 18 71 suite luxury rental building in New York has begun lease up and occupancy. The development is leasing up slightly ahead of our pro form a with both higher occupancy and higher achieved rents. We expect this project alone to have more than $1 per unit in NAV, some of which has already been recognized during construction.
With Jackson Park nearing completion and expected to be fully leased and stabilized in late 2019, We have a significant pipeline of other projects now underway and we expect to be able to provide further details of these developments, which total more than $1,500,000,000 of costs in coming quarters. All of our development projects are located in strong primary markets and we expect each to deliver value creation for unitholders and enhance the same asset operating income profile as income producing. Our Lantaro portfolio, which is concentrated in high population employment growth markets, saw same asset operating income increase 5.6% in the Q1. In the near term, we expect the impact of Jackson Park's lease up and the retail sale of our U. S.
Portfolio to reduce FFO in the next 2 or 3 quarters, followed by strong ramp up in per unit growth FFO growth as Jackson Park completes its lease up as primary to occupancy rebounds with Target and Sears replacement tenancy commencement and as the rising weighting of land tower residential in our portfolio all contribute to a higher internal growth rate. And finally, we are pleased to report that our amended reorganization plan has received final quarter approval, allowing us to collapse our stable unit structure during the Q3, pending CRA approval, returning H and R to a simplified REIT structure. And with that, operator, we'll open up the call to
questions. Your
Good afternoon.
Busy day, Tom.
Well, we're going to start doing so in 15 minutes, that's not so bad.
Maybe just a question for Larry. On the how we're thinking about the capitalized interest to come in, should we think of that sort of $0.02 a quarter over the next couple of quarters? Would that be the best way to think of that?
Hi, Dean. Yes, I think you would be correct in thinking of it that way. 2¢ a quarter would be good.
Okay. And then just in terms of the math there, it looks there's about $287,000,000 drawn against the facility and you've got another $74,500,000 to go. So would that be $362,000,000 which would imply something in the area of sort of a 4% to 5% cost on that construction financing?
Yes. I believe the cost is 4.7%.
4.7%. Okay. I got that one close to the pin. That doesn't ever happen. In terms of when this then stabilizes, what do you think the interest savings are that you could term this out
towards? Sorry, Dean, I don't follow the question.
Did you ask was it to permanent financing and the construction financing?
Yes. So when you term that, I'm assuming you're going to take the $362,000,000 and just term it out?
Around $60,000,000
Around $60,000,000
Okay. And
you'll take a 10 year term.
I don't
know if we will, but if we took
a 10 year term, it will
be 50 bps.
Okay. And you would think that you would do that as you hit substantial 2019 kind of thing?
You know what, that's the future depends on what the yield curve looks like and what the world looks like at that point in time probably, all things being equal.
Okay. Makes sense. And then just on the asset sale that you just announced, would I be reading that right? You're going to have about $430,000,000 net cash afterwards, which is largely going to go towards Lantower?
It's going to go towards Land Tower. There'll be some residual. Right now, we have to do the 1031 exchanges. So we've lined up enough to basically defer all of those taxes. Well, that should have no tax payable at all under this disposition.
So between the Landpower acquisitions, the paying off the mortgages and excess cash left for NCIB or whatever we want, future acquisitions, you've got your math right.
Perfect. Okay. I will hand it back to the queue. Thanks, guys.
Thanks.
Your next question comes from Sam Damiani with TD Securities.
Congratulations on the sale you just announced. Just on that Tom, I wonder if you have any further thoughts on potentially using more of that the proceeds to buy back stock potentially through a substantial issue a bit?
So the answer is depending where the stock is, what the opportunities are, but we're definitely open for that. There won't be a It's really going to depend upon where the stock is, as I said, and opportunities.
Okay. Just flipping over to the IFRS adjustment in Q1, there was about roughly $100,000,000 taken on the Primaris assets. Could you give us a little bit of color on sort of what moves behind that?
Sam, hi, it's Larry. Generally
You mentioned Sam with Larry's accent, do you really think he has to say Larry anymore? I think for now in all future conference calls, Larry should not say Larry. Okay, Larry, I'll let him know.
It was mostly the Sears that was contemplating the Sears redevelopments. So the work that has to be done on them, the lease up, the fact that the lease up is going to take probably a year, 18 months. So most of it has to do with this year's redevelopments.
Okay. And just over in Alberta, there's rumors that the Stantec tower there might get sold sometime soon. I wonder if you have any intelligence on that and if you see any follow through on potentially transaction involving the Bose?
I don't think it has anything to do
with the Bose. I mean the Bose
is a different animal. A long term lease, much larger credit tenant, as you well know. And the BOE's challenge is its size, nothing else. The BOE can wait about 20 years plus in lease term. So I think there's no really reflection on that at all.
Thank you. Thanks,
Dan. We do have a question from Neil Downey with RBC Capital Markets. Please go ahead. Your line is open.
Felipe, these three assets you've agreed to acquire Edgewater, Westin Corners and Bullhouse, what's roughly the acquisition value of those three assets?
Approximately, it's a little over $200,000,000
Okay. Thank you. On the retail sale, Tom or Larry, you do mention closing costs and mortgage prepayment adjustments. Roughly how much will those figures be?
US15 $1,000,000
Okay.
And the Pearl and the Hercules projects both were mentioned by Philippe, I believe in your prepared remarks. I didn't see any disclosures on the expected development yields on those assets and those projects rather. And I think we had them in the past. I think the latest number I saw was about, if I'm correct, 5.4% for Hercules and around the 5.9% for the Pearl. Do those numbers hold or are there some adjustments expected there?
I think the stabilized is higher than that, Neil. And the 6 is for the stabilized
yields. I think a good rule of thumb, Neil, is probably to tack on the balance of the market between, let's say, 60 basis points and 100 basis points over what a stabilized asset would yield. And so I think a 5.4% is QLO. I don't know where those numbers come from.
Okay. I will circle back and look at my own records. And I guess on the same subject of development, there was some disclosure, I believe it was last summer with respect to Long Beach and a project called Shoreline Tower and then one up in Seattle as well. Are those still part of the pipeline?
Yes, Stinar. Shoreline is just about ready to go. It should be going shortly Seattle is not quite ready to go. Shoreline is 2018 and Seattle is 2019.
Okay. And one last question, just sorry for the laundry list approach here. But the buyer of the U. S. Retail portfolio, can you give us a hint or maybe just a profile of the type of buyer?
I'd love to, but you know what, Neil, he's listening. We have confidentiality that we can.
Understood. By
closing, hopefully on closing, I'll be able to.
Okay. Thank you very much.
Thank
you. Your next question comes from Sam Damiani with TD Securities. Please go ahead. Your line is open.
Thank you. Just on the sale, I recall last quarter the fair value I think of the U. S. Retail was a little over $700,000,000 Can you say the sale price today how that compares to the fair value of those assets?
From last quarter's IFRS value?
Well, basically what I'm asking is, is there going
to be a loss or
a gain? No. There is no loss.
So we do expect a loss for the prepayment and closing prepayment mortgage cost mortgage prepayment and closing costs.
Yes. That's not for the quarter. That's for the following quarter. And then it adds to I think, Neil, US15 $1,000,000 is the closing cost and mortgage pay down. But to the average value of the tax of those other than the $15,000,000 costs.
Is roughly in line with the balance sheet value?
Yes.
Yes.
Okay. And then what's your a lot more development on the go. What's your target leverage for H and R maybe a couple of years out after Long Island and other assets are stabilized?
I don't expect it to change more than a point or so.
So in and around the 48% level?
In and around where we are now.
Okay. Thank you.
Your next question comes from Mario Saric with Scotiabank.
Just one really quick one on Jackson Park. I think Tom you mentioned about $1 per unit of upside to NAV on it. How much would have already been recognized in your IFRS value thus far?
Mario, I won't say it's Larry again. In Q4 2016, we recognized just under US55 million dollars as an
euros You have $0.50 there.
Understood. Okay. Okay.
Thanks.
Your next question comes from Matt Kornack with National Bank Financial. Your line is open.
Question on FFO per unit, the bridge between now and 2019. You mentioned the impact this year of the Jackson Park accounting items. But is the anticipation that the existing portfolio will generate positive FFO per unit growth and then you'll get the benefit of Jackson Park in 2019?
Sorry, we will get the benefit of Jackson Park in 2019 2020. But is your question on the rest of the portfolio for FFO?
Yes, I
guess you've sold assets, you've bought there's a lot of moving parts in terms of where things have gone on an FFO per unit standpoint. I think the negative impact that you described, would you expect otherwise flat FFO per unit growth for the rest and that we should see sort of $0.05 to $0.06 down or
I think, to answer your question, the Jackson Park we've discussed already should be an FFO adjustment down for 2018 or just a reported FFO down.
Right.
And then for the sale, the retail sale, there will be dilution from depending on typically we can read read a proposal.
Right. And so
But it's not the dilution and not that.
Without those two areas, it should be coming up pretty much to where analysts' consensus was for the rest of
We do not have any questions over the phone line at this time. I will turn the call over to Mr.
Hofstetter. Thank you all and look forward to seeing you again hearing you again next quarter.
This concludes today's conference call. You may now disconnect.