Q3 2019 Earnings Call
Good morning, and welcome to H. and our real estate investment Trust 2019 third quarter earnings Conference call.
Before beginning the core HR 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 more cars management, just to make assumptions or rely on certain material factors and is subject to inherent risks and uncertainties.
Actual results could differ materially from the students in the forward looking information.
And discussing each nurse financial and operating performance and then responding to your question. We may reference certain financial measures, which do not have a meeting recognize or standardized I forgot square Canadian generally accepted accounting principles.
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 for comparable metrics determined in accordance with <unk> for us indicators have each enters performance liquidity cash flows and profitability.
H. and Ares management uses these measures to aid in assessing to reach underlying performance 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 each nurse use non-GAAP financial measures are described in more detail in h. and ours public filing.
Which can be found on our website at www dot see dart dot com.
Now I'd like to introduce Mr., Larry fruit, Chief Financial Officer of 18 or wheat. Please go ahead mr. from.
Thank you good morning, everyone. Thank you for joining our call today with me on this call.
[laughter], President and CEO right.
[laughter] Chief Operating Officer America every television Felipe appoint C O Chief operating officer.
Our residential.
I'll begin on.
Q3.
People speak about individuals and finally, we will open the lines for questions.
Firstly in Canada tenants, Oh recently announced plans to read on how to the U.S.. We have received lots of questions on them.
In short, we don't expect any impact swaps would have taken place when the tenants what kind of Indiana implement parent company.
During 2009 team we have continued to activity.
Capsules for net property dispositions assigned a bad you're creating a better.
Expands the residential rental basketball and strains on a strong balance sheet.
We have completed approximately $1.8 billion or asset sales over the past 21 months.
It's actually repositioning the portfolio enhancing that internal growth profile and reducing leverage.
That's a total assets for the financial statements have decreased from 44.6% at the beginning of up to.
The 43.3%.
We expect leveraged to decline modestly what's the remainder of the proceeds from the sale of the entry on June in Q1 2020.
Subsequent to the corner in ancient already pay the U.S. mortgage of approximately 219 billion bearing interest at 4.5% Claire.
Jack so far.
HM the 1871 equity residential rental apartments in long Island City in New York, which ancient something for pet ownership reached occupancy of 94% at September 30.
It does not need financing of $1 billion a secured by the property for 10 years at an annual interest rate was 3.25%.
Quarterly almost financing or you should arsseven hundred 95 million U.S. dollar distribution from a joint venture which was used to repay other debt.
The project I never deals I'm, probably going to cost is expected to be six point focus fad and unlevered yields on H. and off net cash contribution is expected to be approximately 77 cents.
Q3, 2019 basic southern tide and normalized funds from operations and football was 43 cents per units compared to 42 cents per units in Q2, 2000 Q3 2018.
Although office occupancy dropped 98.3% at September Thirtyth 2019.
Another company thing and the remaining.
Committed occupancy was 99.5 cents.
Well I industrial segment, we expect occupancy to increase from minus 6.5% at September Thirtyth 2019, So 97.2 sustained by December and committed occupancy to be 98.9 cents.
I have three industrial development.
The three on the train basketball makes currently under construction in Canada.
<unk> totaling 526000 square feet has seen strong tenant interest and we are optimistic effect, we will have some leasing truffles next quarter.
We also expect completion on developments annuities commence something about the retelling residential segment to contribute to cover the cost then if at all.
I'll now turn the call out of its attached to give an update on our retail division.
Thank you Larry and good morning.
Enclosed mall properties have experienced significant disruption during the past years.
And they with anchor vacancies redevelopment or re tenanting impacting the shopping experience.
We're we're pleased to report that the majority of anchor redevelopment activity is nearing completion.
Since late September of this year, approximately 210000 square feet.
And our ownership share, including more than 110000 square feet at Sunrise Mall will open from an area, formerly occupied by large format tenants well. Another 244000 square feet is expected to open in 2020.
This leasing activity is expected to generate additional revenue of approximately $5 million in 2020.
We continue to experience healthy leasing demand for in our properties through the first three quarters of 2019 are primarily leasing team has completed just over 300. These transactions, which is a typical figure over the past five years. However, these 300 transactions represent approximately 1.6 million square feet, which is considerably greater than our historical average.
This leasing activity has resulted in Iraq quite committed occupancy rate rising to 93.8% at the end of the third quarter.
As you may be aware forever 21 filed for bankruptcy in September of this year and occupied three stores in our portfolio encompassing approximately 43000 square feet.
We anticipated the failure forever 21, and have negotiated terms with a replacement tenant for all locations.
Leases or at the execution stage and we expect a new tenant will take possession in December of this year and when we opened within the next few months.
With respect to Sears at the ended the third quarter, we had committed and conditional transactions in place representing approximately $3.7 million in annual base rent, an Asian, our share or just over 52% ever anticipated total reps upon completion.
Subsequent to the ended the quarter, we've completed or at least execution stage for tenants occupying just over 56000 square feet of tenants at age and our ownership share, including these tenants we have $4.5 million an annual base rent committed equating to approximately 63% of the total amount anticipated.
Sears paid annual base rent of $2.3 million at age their ownership share.
We are being selective with replacement tenants focusing on those tenants that are repairs pay market rents and enhance our merchandise mix.
Turning to productivity sales were down 3% on a same and all sort of bases as compared to the 12 month period, ending Q3 2018.
Most recent data point has shown a return to positive same store sales with productivity increasing sequentially in Q3 2019 as compared to Q2.
Three or 10 trend in same store sales remains positive having residents from $540 per square foot to $557 per square foot notwithstanding this disruption our centers have experienced.
At this time very we've expanded successful tenants have performed at Pall Mall average and removed a series of same store sales such as shoppers drug Mart at Barclays and our data plaster right yeah, well. The change May result in a drag on productivity both the tenant in the shopping center benefits from the tenant operating from their typical footprint.
We continue to remerchandise or properties to keep the tenant mix relevant increased traffic and in turn improved productivity over the past year. We have added many prominent retail its current portfolio, which we believe that drive productivity, including Tommy Hilfiger, a Doctor Mall Stager Cataract, We center anorexia at over two Orchard Park shopping center.
In closing we were pleased to be nearing the completion.
During the conclusion of a difficult period of anchor tenant disruption and believe we have been successful in improving the tenant mix and resiliency EVAR centers.
Thank you and I will now turn the discussion over to flee.
Good morning, everyone. We've been active in 2019 on multiple fronts. So I'm delighted to share some notable updates from ways our residential.
As disclosed last quarter, we announced that we had acquire later garrison park in Charlotte North Carolina.
The 322 unit class a properties performing well nearly 65% leased does have this month.
We expect garrison part to stabilize in the first half a point point.
The property benefits from proximity to three large business in research parks that collectively make up University city, which boasts over 75000 jobs.
Additionally, the property as a short term you to the major local university, you'll see shortly.
As mentioned in the previous two quarters, one of our strategic initiatives for 2018 was to examine our existing portfolio to determine if any reallocations would be accretive.
As we alluded on last quarter's call were under contract to sell whatever assets that fit the criteria the property near or below Waterford Lakes is a 400 unit property built in 2000 located in Orlando, Florida.
Mirabelle purchase in April 2017 for 53 point 25 million US dollars was successfully sold in September 25th were 77 million underscoring the strong NOI growth during the whole period.
The transaction the trends actual results in a favorable financial returns, including an IR, 19% and an equity multiple of over to us in just over 40 years.
Furthermore, there was zero capital gains tax leakage or the acquisition of winter grade flat from a second quarter fully covered the mirabella disposition via over first come through one shares.
Additionally, we are currently under contract to sell through more legacy assets from way towards portfolio. We believe these pending dispositions completed 20, making strategic initiatives.
We'll disclose more information those potential dispositions in the coming quarters.
As always our intent is to dispose of these assets and reinvest some 31 exchange into newer properties that are more representatives over underlying portfolio investment strategy. So we expect to announce the new acquisitions in the near future.
On the portfolio front unfolded disposition, we are both the landed our residential portfolio consists of 7570 sort of 7000 following several apartments across 23 properties when excluding Justin.
Well the operations first at the end of the third quarter Landstar Crawford lighters portfolio was approximately 91.4% occupied it was nearly 94% occupied when excluding where we sell properties.
Financial fronts for CMS at quarter end operating income increased in us dollars from 10 million 220003rd quarter 2018.
10.695 million a third quarter 2019, this equates to seeing asset quarter over quarter operating income growth of 4.6%, representing another quarter of strong sustaining and alike.
On the development front or Sunrise project. The 321 due to cost a garden style multifamily project when Florida is scheduled to break ground on becoming ones. The development site benefits from shore commuter orlando's largest employer Walt Disney World.
The projected development yield of 6.1% represents a favorable spread between for failing Orlando class a multifamily market cap rates, a foreigner out the for three quarters, we look forward to expanding or central Florida development pipeline with more costly developments in the future and with that I will pass along conversation back to Larry.
Thank you Steve.
Good luck to open the lines for questions Steve.
Thank you ladies and gentlemen at this time, if he would like to ask a question. Please press Star then the number one on your telephone keypad.
He would like to withdraw your question. Please press the pound key we'll pause for just a moment you can pull the Cuban a roster.
And again to ask a question. Please press Star then the number one on your telephone keypad.
And we have a question from the line of Mario Saric with Scotiabank. Your line is open.
Hi, good morning.
Maybe just a coming coming to this.
No impact on.
On the gene Dharma. So can you give us an update in terms of your capital recycling initiatives there.
Timing and whether there's any implications to.
Should we sort of stake in the building as a result with the announcement.
We're still on target the Mark has to digest and understand what the this change domiciled means and the proxy has to be voted on but we're still on target with what was on our strategy.
No change.
Okay. So something that you think could be resolved.
Sure.
Melissa this year is almost done but within the next the I looked at it when the next quarter too.
Got it Okay, and then I notice that there was a bit of a fair value decline in your Alberta office portfolio quarter over quarter regard kind of split across before I'm sorry.
There's always tweaking of the portfolio, how SaaS Park.
Anything and I thought I wouldn't say 18 substantially the ball.
Yes, the biggest worn and delta.
Okay.
And there's a there's an 831 million dollar.
Principal maturity in 2021 is not related to the board can you give some color in terms of what comprises the majority.
800 up 31 and 2021.
We have this part of that would be part of the first part of the bonds, which with the $215 million companies.
And the rest of ecstasy, rather than other mortgages on other properties.
All right.
Okay.
Maybe just shifting gears to primaries.
Your comment on.
A recent.
There is.
By weather or you were inferring that the same store sales, which were down 3.1% this quarter or are you in for those.
Q4.
20.
Not necessarily have ended sales sales figures ebbs and flows and spoke with what comes in and out of the same store.
Stores are we include but.
Yes, I think last quarter, we are 555 or 557.
So far.
Well as reporting that they're they're performing well in the fall and we'll see how that translates to the end of the floor.
Got it okay with the the holiday season.
Coming upon us.
Oh, you know how does your kind of outlook for 2020.
In terms of potential restructurings with tenants, which we sharpened fairly often but her arms that watch list today compared to what the watch list.
A year ago.
I think every year since I've been doing this which is quite a long time now theres theres tenant failures that happen at the start of the year. So.
The let the watch this is not significant I've seen it longer in prior years.
We've had arrived at a few a few potentials.
And we've been within adjusting our waiting with those tenants for some time to hold if perhaps 21, new were not surprised on the file we haven't had discussions well in advance of the failure. So.
I I fully expect that next year will bring [laughter] typical year for failure, but nothing on any ordinary.
Okay.
Remember my last question just comes back through the balance sheet.
The the weighted average term came down to four years.
This quarter the portfolio is changed over time, so when turnover for example is.
Before we review to lease term.
Well we're them.
We see in office or retail.
Is that a strategic decision to kind of where we're going through.
Consistent with.
Before we shift to you on the core.
Joel.
An increased focus on development or.
His or should we expect that number to kind of go up going forward you bring that when you bring Danny you definitely definition, you're being things and you're too.
It's flows when one of the other we're picking cat, we're paying off debt and not renewing the that bring down our debt. So by definition is going to go down.
So the answer is it's going to continue we go now it's not a strategy as far as long term short term, Texas strategy being down today.
Okay.
Thank you are going.
Thanks Barry.
And once again to ask a question that star one on your telephone keypad.
Your next question comes from the line of Sam Damiani with TD Securities. Your line is open.
Thanks, Good morning, just keeping with the balance sheet or what is what does the leverage target the that you're looking for for 2020, maybe with or without a sale of interest to the boat.
Sort of capital recycling activity should we expect to see.
Good morning, Sam without any activity on that ball, we expect to be more necessarily on now we'd have to development.
To compete which will.
[laughter] timetable of properties on the development table, we have approximately.
$250 million to compete the developments we have on the call right now.
That will be offset by the balance of the proceeds that we receive from each of them Bay.
And to take that moving so since at the end of the day, what shops or do we are.
Right now.
Well actually that was unless you do a significant transactions for sale again, it's very hard to move the needle and there's less.
And.
If it interested the boards were sold what would be the use of proceeds.
There.
[laughter] pay down debt.
That would initially lessened.
It is led tower is a contingent labor refreshing its portfolio.
Is there any any desire to grow I know you're building, obviously, a industrial it Toronto, but is there any desire to to expand your portfolio outside Atlanta.
I don't so I don't really understand the question.
Oh, you're looking at acquisitions or developments you know in office right now or.
We are looking at industrial we have a 300 that are under construction or have good leasing activity and we are looking to build petition to other industrial buildings that were currently negotiating the land on so we're looking to increase your industrial platform through development and land tower will be increasing its development platform on the and required for Atlanta The cross.
Right no why Furthermore, sharp Atlanta area goal for for the foreseeable future is more to be built within admire the reason that requires us to accommodate the tenthirty one.
But it wouldn't be the temporary one last note due primarily to develop rather flat.
And then on the calendar developments. So what's sort of rents are you are you targeting today versus earlier this year.
Were currently negotiating on the Big building the rents are in line with original budget Nothing's really changed we were starting entity in the quarter and that's what we're achieving a with both the rents of approximately 3% Brown.
Our inland exactly in line with our budget budget.
And then Uh huh.
Great to see the three forever 21 spaces spilled quickly could you give us a little bit color on the type of user this replacing them as if it's all the same and and also the red versus the prior as well would be helpful.
Fashion 10, Ah that took all three and the rest is comparable to what we're getting previously.
Yeah. The downtime is I guess, maybe six months.
It will be much less than that actually.
We were pretty far ahead in advance and taking it is already Benson.
Hiring in such directed at least with disclaimed started in November we get it back and started in December and I would think it's a maximum 90 days downtime.
For for Red.
Before when you got.
Yeah.
Alright ill turn it back thank you.
Yes.
And there are no further questions at this time I turn the call back over to what presenters.
Okay. Thanks, everybody will speak to next quarter have a great holiday season coming up thanks.
Ladies and gentlemen, this concludes todays conference call you may now disconnect.