Q4 2021 H&R Real Estate Investment Trust Earnings Call
Good morning, and welcome to agent or a real estate investment trusts 2021 fourth quarter earnings conference call.
Before beginning the call H I would like to remind listeners that certain statements, which may include predictions conclusions forecasts or projections in our 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 are subject to inherent risks and uncertainties.
Results could differ materially from the statements in the forward looking information.
In discussing <unk> financial and operating performance in responding to your questions. We may reference certain financial measures, which do not have the meeting recognize our standardized under I F. R S 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 are comparable metrics determined in accordance with I F or S. As indicators of HRS performance liquidity cash flows and profitability.
Hcr's management uses these measures to aid in assessing the rights underlying performance and provides these additional measures 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 and the forward looking information and.
And the material factors or assumptions that may have been applied in making such statements together with details on H&R is use of non-GAAP financial measures.
Are described in more detail and H&R is public filings, which can be found on our website at www dot SEDAR dot com.
I'd now like to introduce Mr. Tom Hofstetter, Chief Executive Officer of H&R Reed. Please go ahead Mr. Hofstetter.
Good morning, and thank every every one for joining us today to discuss <unk> fourth quarter and year end financial and operating results and provide an update on our strategic repositioning plan with me on the call are Larry from our CFO .
Philip I appointed President led tower residential 2021 was a truly transformational year for the REIT. Despite the enduring global pandemic our teams accomplished many substantial milestones.
<unk> valuing over $4 billion, we successfully enhanced our portfolio's geographic exposure asset mix and tenant diversification, while also lowering leverage and increasing liquidity.
In the fall H&R announced its transformational strategic repositioning plan to create a simplified growth oriented business focusing on residential and industrial properties to surface significant value for our unitholders. Our target is to be a leading owner operator and developer of residential and industrial properties, creating value through redevelopment and Greenfield development.
The prime locations within Toronto, Montreal, Vancouver, and high growth U S Sunbelt and gateway cities.
Yeah.
The strategic plan encompasses four key initiatives.
And it doesn't initiative was the tax free spin off to unit holders all of H&R is in closed malls into primary suite, a new completely independent standalone publicly traded entity. The spinoff simplifies enhances H&R is asset mix and enables investors to value Prime Minister is full service internal national management platform and properties.
The second initiative will be the exit of our remaining retail assets, including our grocery anchored and essential service retail properties and our interest in Echo Realty, our $600 million grocery anchored and essential service portfolio is comprised of high quality properties anchored by strong covenant tenants, such as Lowe's Metro <unk> and Walmart.
These 55 properties, comprising $2 7 million square feet or 98, 5% leased and are primarily located in Ontario.
Our investment in Echo Realty comprises 236 grocery anchored shopping centers. This portfolio is similarly, 95, 8% leased primarily to giant eagle the largest supermarket chain in Ohio and Pennsylvania.
Our third initiative is the strategic disposition over time of all our offers office properties did not offer significant redevelopment potential. There are currently 16 unique high quality office properties located in central business districts in major cities across the United States and Canada that meet this criteria. These properties are 99, 5% occupied with them.
Weighted average remaining lease term of nine three years and or at least primarily due to strong investment grade tenants.
The development team has been working diligently on the balance of the office portfolio to advance them through rezoning. We expect these 11 properties to yield 5383 hundred residential units and 396000 square feet of industrial space upon approval.
Last summer, we commenced execution of our strategy to exit the office market with the successful sale of the bowl of 2 million square foot office building in Calgary, Alberta, and the sale of the Bell office campus in Mississauga, Ontario, We are very confident in our ability to sell the remaining office portfolio in line with her I illustrate <unk> value fair values.
The fourth leg of our strategy is to grow our residential and industrial portfolios through the developments in prime locations in high growth U S. Sunbelt and Gateway cities, we launched Landstar residential in 2014 and to date have invested over $2 $3 billion with construction of six developments expected to start later this year.
2021 was a monumental year for capital allocation when we made huge strides forward in repositioning the REIT to date, we have significantly transformed our portfolio composition geographical exposure tenant mix growth profile and balance sheet.
These steps are moving us closer to our goals of streamlining and simplifying our portfolio and company.
Yes.
We have no doubt that we will achieve our disposition objectives, we'd like to be in a position to give you more concrete guidance at this time on our disposition program, but in order to prudently manage earnings sure. We always maintain our investment grade rating dispositions should we tie with capital deployment, whether it be for development to buyback units or for acquisitions as funds are required at this.
Time, the best use of our capital is buying back our units, which are trading at a substantial discount to NAV.
In 2022, we plan to continue allocating capital diligently starting with the utilization of our in CIB buying back $4 2 million H&R units to date for $55 million at a weighted average cost of $13 representing a 27%.
Percent discount to our net asset value per unit of $17 71.
We plan to continue to buy back units is the significant discount persists.
With our path forward now clearly established our teams are executing efficiently and effectively on our plan to create a simplified growth oriented company focusing on expanding our residential land tower platform in industrial portfolio the surface.
And then can get value for our unit holders and with that I'll turn it over to Felipe to discuss our residential platform laptop belief.
Good morning, everyone with the release of our strategic repositioning plan in October that carefully laid out <unk> vision. We are delighted to have successfully executed on our first key parts of this plan we have shifted our focus to the next steps and are preparing to redeploy capital into our development pipeline as we manage through the remaining divestitures of the legacy office and retail.
These.
Jackson Park, Atlanta residential developments are especially relevant in giving comfort to unit holders that accretive redeployment of capital into the residential sector is weaved into H&R is DNA.
And with that let's dive into later tired of the residential is impressive quarterly results.
When excluding Jackson Park, St massive property operating income from our portfolio in U S dollars increased by 9% and seven 8% respectfully respectively.
For the three months ending on December 31, 2021, and the full four year 2021 compared to the respective 2020 periods.
Including Jackson Park, St massive property operating income from our portfolio in U S dollars increased by 33% and decreased by three 5% respectively for the three months ending on December 31 2021.
For the full 2020 years compared to the respective 2020 periods.
Okay.
River landing as a unique $500 million mixed use development located in Miami, Florida, It's residential component at least up a full year ahead of schedule, while also capturing market rents above our expectations after increasing rents seven times throughout the lease up period for.
For example, a net effective basis, our current lease rate is over 40% over our initial lease rates when the lease up again.
River lending is truly a one of a client asset for the Miami market and its exceptional design will provide H&R with a tremendous competitive advantage for years to come.
As we mentioned previously we are experiencing substantial rental growth momentum in all of our U S. Sunbelt markets by way of example, our new lease trade off for our entire portfolio. Excluding Jackson Park was approximately $14 seven per cent throughout quarter four.
As an additional interesting data point, we have renewed or released approximately $5 55 per cent of our rent roll during those eight months.
Thus, we are encouraged by the strong demand fundamentals in the residential sector and very excited by the expected future value creation.
On the development front light tower currently expects to break ground on at least six distinct projects in 2022 and further developments to follow in 'twenty, three and 2022 we expect to break ground on six projects, What's love Midtown and city line are all three in Dallas based side in Tampa Sunrise in order.
Though and the first phase of the Cove in Jersey City, which represents on a combined basis, 2147 apartments, which will grow our portfolio by nearly 25%.
Anecdotally, we would like to highlight the current demand for multifamily has all but eliminated the lease up to scale. There's properties are valued at their full stabilized value upon receiving their final certificate of occupancy regardless of there'll be status.
And in 2023, we intend to break ground until at least six more projects in our existing markets land sites that are either currently owned or under contract, which combined would be over 2200 additional units further growing our portfolio by an additional 25%.
On the JV development front, the Pearl in Austin is under contract to sell with the closing anticipated in March of 2022 phase two of our Hercules development named the granted Bayfront has begun its leasing and is currently 23% leased.
And lastly, shoreline gateway in long Beach, California is now 31, 4% at least.
In conclusion and on behalf of H&R Wright's executive team I can unequivocally state that we understand how much work is in front of us and accordingly, we embraced a responsibility and look forward to continuing our strategic repositioning and creating unitholder for value for years to come.
With that I will pass along the conversation tiller.
Thank you Felipe and good morning, everyone.
The fourth quarter of 2021 was a very active quarter for H&R with a number of moving parts.
We have added additional disclosure for our financial statement note.
And DNA to help understand the effects of the proposed sale and primarily spinoff.
In October 2021, the refocus on the shift from the property known as a bone Calgary, Alberta Street real estate capital. The sale side Street included a sale of 40% of our future income stream to Rob from a closely where provinces until the end of the lease term in May 2038.
In a separate transaction <unk> also the further 45% of the teacher vintage of lease stream to Deutsche Bank.
Total gross proceeds from the two transactions were $946 million.
Separately off of these two transactions H&R is left or a 15% interest in the firstly for Vectra, which run to make 2038.
The REIT has an option to repurchase a 100% of the above approximately $737 million or $368 per square foot.
2030 April earlier this favorable co option is substantially below the current sales proceeds.
<unk> ability to capture potential future upside in the Calgary office market over the next 16 years.
Although the REIT has legally concert uncertain of the photonic stream because of the favorable option to repurchase the transaction did not meet the criteria of a cancer of control under <unk> 16, and as a result, we.
He continued to account for the Boeing investment properties on the balance sheet.
<unk> recorded a net proceeds received by the REIT from these transactions as deferred revenue to be amortized over the remaining term of elite.
<unk> will continue to record a 100% of the lease revenues from above even though we only actually receive 15%.
For <unk>, we have deduct the accrued rent from them to lease as well as added back the accretion finance expense on the <unk> deferred revenue.
I encourage all of you to read not turn to the financial statements in that North. We've also disclosed the income statement of the both for the quarter and for the year ended December 31, 2021 and have disclosed how much of that income was received in cash and how much revenue has been accrued for offer after counting.
On page nine of the MD&A and in the press release, we have also expanded the financial statement notes to reconcile the first net income to <unk> and <unk> for the quarter and year, we will.
To include this information going forward and we welcome feedback as to how we can improve this disclosure and a broader disclosure as a whole.
The successful sale of the bar Bell office campus significantly reduced ethanol Calgary office exposure improve the risk asset and concentration risk and improved our overall credit metrics.
This transaction was critical to enable the successful spinoff of primarily with our low leverage capital structure than it has while at the same time, reducing H&R overall leverage.
The results from the permanent spinal spin off of the <unk> properties are included in our results for the quarter and year ended December 31, 2021, but the property as assets and liabilities are not consolidated into <unk> balance sheet at December 31, 2021.
And the offer at the spinoff is treated as a distribution to unit holders on December 31.
And the details of this can be seen in note 13D to our financial statements.
We have also provided disclosure oscillating <unk> financial results for the three months and year ended December 31, 2021, including reconciliations to <unk>. This can be found on page 11 of the MD&A and is included in our press release.
Included in H&R property operating income for the three months and year ended December 31, 2021 was $34 6 million and $134 1 million, respectively relating to the 27 properties being contributed by H&R to primarily III.
Turning to office segments.
<unk> asset property operating income on a cash basis increased by four 9% as compared to Q4 2020 and was primarily due to Hess Corporation's lease extension agreements with full rent commencing in July 2021.
Office occupancy was 99, 2% a testament to the high quality nature of our office portfolio.
Retail same method property operating income on a cash basis decreased by 7% for the three months ended December 31, 2021, compared to Q4 2020, primarily due to the weakening of the U S. Dollar. Excluding this impact of foreign exchange same asset properties operating income increased by $2.
2% as a reminder, the primary property is excluded from same app.
For our industrial segment same asset property operating income on a cash basis decreased three 4% compared to Q4 2020, primarily due to vacancy at in Oakville, Ontario industrial property.
Overall <unk> units decreased from 42 in Q4, 2020% to 35% in Q4 2021, primarily due to the property sales.
Included in Q4 2021 to <unk>.
First prepayment costs totaling $4 7 million.
Excluding the prepayment cost so far for Q4 2021 would have been 36 cents per units.
Moving to the balance sheet at year end debt to total assets at the reach proportionate share which has been adjusted to exclude the borrow was 46, 6% compared to 51, 1% at the start of the year and debt to adjusted EBITDA was seven two times.
Unencumbered assets as a percentage of unsecured debt was one nine times coverage and improvement from 148 times at the beginning of the year.
H&R ended the year with ample liquidity.
We had cash on hand of approximately $124 1 million and $942 4 million available under our unused lines of credit. In addition, we have an unencumbered property pool of approximately $4 billion.
And with that I'll turn it back to Tom.
Yes.
Thank you Larry I am very proud of what we've accomplished in 2021 transacting on over $4 billion of real estate is no small feat and I. Thank our loyal and hardworking employees for their tireless dedication flexibility and adaptability through this considerable period of change at H&R, We will endeavor to continue the cadence of our work and perform in 2022 executing.
Against our strategic repositioning plan management and the board remain fully committed and are actively evaluating opportunities to increase unit holder value and address the significant discount at which our units trade to the reached $17 70 net asset value per unit management members of the board and their families collectively owned more than $300 million or approximately.
8% of the equity and H&R REIT, providing strong alignment with unit holders in pursuit of the REIT objectives. Looking ahead, we recognize that we have an opportunity for better and broader communication of our strategic repositioning plan. In addition to continuing to demonstrate meaningful steps to arrive at our capital allocation goals. We are very excited about the future of H&R want to impress upon.
Everyone on the call that 2022 marks the beginning of a new era for our company equipped with a strong balance sheet significant liquidity enhanced portfolio concentration to large primary markets with strong population and economic growth. We are very well positioned to take advantage of opportunities. We'd now be pleased to answer any questions. Operator. Please open the line for questions.
Certainly if you'd like to ask a question at this time. Please press Star then one on your telephone keypad.
Our first question is from Mario <unk> with Scotiabank. Your line is open.
Hi, good morning.
Just with respect to the planned distributions over the next five years.
<unk>, a really hot topic these days, but when you when you think about.
The disposition program that you are having.
Conversations that youre, having with potential buyers.
How has that evolved over the past six months or the inflation becomes kind of increasingly.
A subject to discussion.
That's an interesting question.
And because you're targeting that to inflation, which is quite I don't think that's paramount in everyone's mind, it's more of the what I would have thought it's more the uncertainty about the future of office, which we all know is a question mark and the future of retail in light of what's going on out there and has gone onto the pandemic I never actually hurt.
Anybody ask the questions, where you have which is in light of how does it how is inflation as I think although you couldnt be onto something I don't think thats the concern of the market.
In the case of H&R.
We've had numerous discussions obviously, we're looking to sell and what we should be selling so we've had in the hand and wrist couldnt discussions nothing serious surrounds around inflation that terence it surrounds around the uncertainty when the case of our assets and we have long term leases with credit tenants and in good locations. So it really doesn't have a big impact on our valuations app or on the demand for our assets.
I think our assets are better positioned than Royal Bank, which is one of the few assets that actually sold recently because it's more bite size on that large asset our large largest asset which is the bulk involve creativity and selling it the balance of our portfolio. We're looking to sell that does not involve the level of liquidity.
<unk>, it's straightforward real estate.
In all cases, just about the rents are below market almost all cases, and so we're expecting high demand. We don't think Thats, a very big challenge to achieve our goal and we will be able to sell at RFS values, probably will be able to sell it significant values in excess of that might give US you are of course asset on the waterfront in Toronto is a good example, long term lease.
Good if the tenant.
Very desirable assets.
Very typical of a lot of the assets we own I don't think inflation is our problem inflation only manifests itself into what your opinion is on interest rates and everyone will have different opinions on that and that will affect every sector of real estate, whether it's in our land tower division or our US division, but right now the the the the inflation is not the issue. It's really this is the <unk>.
Sectors and what are the demands what are the buyers' expectations in the sectors of office and retail and again for our portfolio, which is high quality.
Surprisingly enough through this pandemic.
Retail has survived in the form of a single tenant grocery the Alco portfolio is probably with more substantially more than there was pre pandemic sales are way way higher the company's way, we strong it paid off all of its debt and all of our single tenant retail assets are very simply sold without it without any question at all so I don't have any hesitation to tell you that I'm very confident we'll be able to transact on a very timely.
Basis, I don't think inflation is really key on everybody's mind.
Yes.
Rather than classifying that as a potential challenge as perhaps maybe coming at it from.
And then on the spectrum of Tomorrow's, presumably.
There are a lot of that $3 4 billion.
Contractual rent increases, whether it's inflation index or based on some other measure.
Did you ever which.
Question, your environmental because there will be more attractive to us.
Carter.
Do you have a sense in terms of what percentage of the $3 4 billion.
Inflation index leases or contractual rent step ups, which are on an average five years or so on and so forth.
Yes, I can honestly tell you the answer is zero, we don't none of our leases are CPI oriented only upon when you have a catch up upon expiry everything else for the past many years, our 10%, which is 10% refi or 2% annually other than the latest trend in industrial is seeing 3% to 4% annual escalators, but thats just the industrial world retail is you.
We'll know does not even have the 2%. It has let me take a shopper as you take a metro at just 51 at $13. It doesn't align itself with the historical 2% or 10% every five our portfolio. Therefore, whatever as least as has the contractual rental escalations, we've been using 2% 152% annually for a long time I think inflation may have an impact on the <unk>.
Rental growth and as I said <unk> seen a dramatically change overnight in the industrial World where is in Canada is 3% of the United States, It's tracking 4% on annual escalators.
Good morning America, two to recap the most of our property on our office as long term lease.
<unk> does have contractual rental bumps are common saying, they're not linked to inflation, but they do have contractual rental escalators, yeah, 10% every five years or 2% annually whatever the case, maybe none of them are annual escalators based upon CPI the industry doesn't even have that not even in industrial do you see that youll see again, a higher level of $3 to 4%.
But you never find annually contracted based on CPI.
I think can find tenants are very receptive to that formula in America.
Alright, Okay, two more quick ones from my them at all.
In terms of the targeted 3%.
Our growth in 'twenty two.
Could you, perhaps break that down by vertical.
Much of that would be as a result of lower expected bad debt expense in 'twenty two versus 'twenty. One and then secondly, you got 3% essentially your long term annual target growth.
The <unk> portfolio.
Okay.
Thanks, Marion Larry I'll try and answer that question.
Adam.
Basically most of aircraft will be coming from the residential portfolio. We target we are targeting on the residential portfolio significantly higher per center.
Which will be offset by the rest of our portfolio, which is going to be slightly below the 3% call it office and industrial around 1%.
A lot of industrial and office has over has contractual rental escalators.
Will affect cash baton affect <unk>.
They only affect <unk>.
And on <unk> on <unk>.
Overall, 30% is a reasonable overall.
The overall portfolio.
Okay.
And then my last question just in the past you provided some disclosure on the Jackson part.
That's helpful.
May have missed it this quarter, but it's Sean.
Got it.
Thats helpful.
No good question.
We did not provide the disclosure Jackson cost basically is for Q4 was operating.
Close to stable operating income.
No need to adjust for that however, I do want to caution going forward into 2022.
A lot of operating a full stabilizing.
Most of the lease up of ethanol Jackson Hawk happened in Q2 and Q3.
Concessions given when that lease up occurred in terms of free free rent months to the tenants.
Some of that occurred at the beginning of the lease and some of the whole curve to end of the lease. So we are expecting in Q2 and Q3 of this year 2022, and there will be a slight drop off from our current level of Jackson Pollock achieved in Q4, just that those concessions come up in Q2 and Q3 as far as.
Overlapping costs as Felipe mentioned.
The residential is.
Fully stabilized.
We are the retailers has been slower due to COVID-19 and so that is not operating at near stabilized yet.
But probably lumpy stable off till the end of 2020, well I'll give you an update on river lending just on the point of.
The reason that Larry has mentioned the concessions go over period of time is because we didn't want to have.
Rolls what the tenants are competing with each other which typical industry. So wondering incentivize tended to think longer term leases. So we don't have expiries banging up against each other that we staggered the concessions depending on what it was a year with two or three year lease and Thats why youre seeing that go into the future longer than they normally would have in the case of a landing as Larry said the risk.
<unk> totally stabilized it's Lee.
Rents are obviously hugely significantly higher than originally forecasted originally we had $2 40.
<unk>.
Going back when when we do it at our projections and were hitting for it's for US right now so way way higher the office. Thank God is.
Is doing very very well, we have $3 five floors of office in total lets call. It 140000 square feet of top floor is now leased long term 20 years.
Two the accounting sorry, 10 years to the County, that's Florida number seven and part of six four and number five is now leased fully on a 20 year basis to Jackson Memorial Hospital one M.
Which is a 17000 square foot floor is.
<unk> basically been approved and done to Jackson Memorial not not proved not gone through.
The board yet as I went through the board one board member that Covid, which seems to be the story of life right now.
The meeting was delayed to February 24th and the final little bits and pieces that are left the partial of the sixth floor and it's right now a bidding war between.
Three tenants that are in the area that has to move because of billings being demolished. So we expect the office building be fully leased within the next I don't know.
90 days or so at least all everything other than maybe a slight part of the sixth and it'll take us the first tenants moving into the county Thats in March of this year paying rent Jackson, who will start the construction.
The leasehold and around 30 days or 45 days once plans are approved and we have permit so I expect the rest of the office to be up and fully paying rent by Q4 it towards the end of the year for sure the retail.
Now all of the restaurants based on the river has done at least construction is it's an expensive build out.
It's a very high profile, it's very heightened demand River river restaurants base today. So at least is leased to quality tenants. The build out is going to be expensive as I said.
You can have the anchor tenant which is large the oldest restaurant chain in America coming in Theyre, taking their flagship which is a 17000 square foot store comprised of.
Riverfront pace ground mezzanine and rooftop and that'll be commencing construction, probably in 45 days all of the restaurants based on the river should be occupied by the end of the year. It's fully leased as I said it just a question to buildup in the balance of the retail spaces.
Substantially leased or under LOI again, it should be it's totally stabilized by the end of the year.
Sure.
Okay. Okay.
Alright, thanks for the color and the details and a partial one looking forward to the property tour.
H&R ordinary.
So we're dying to take everyone there.
Sooner the better I'm just waiting for as you are currently operating love to show you the properties, it's really it's protection.
Thank you.
Okay.
Your next question is from Matt <unk> with National Bank Financial your line is open.
Good morning, guys.
Just just quickly Larry going back on the.
The Jackson Park impact.
In terms of that higher cost in Q2, and Q3 can you give us a sense as to the quantum of that number because I did notice sequentially. The JV costs came down quite a bit.
Quarter over quarter.
Yes, Matt.
It will be somewhere in terms of the overall annual basis somewhere between five and $6 million lower than.
On an annual basis, we'll take a follow up to 6 million U S.
Thanks, Tom for the concessions that are coming due in Q2 Q3.
Okay. That's helpful.
With regards to the U S multifamily development.
Can you give us a sense as to the Capex outlay.
Those projects ultimately will start throughout the course of this year.
Maybe next vintage say unexpected spend for the next two years on that.
Development.
Okay.
We'll leave you ought to take it.
Yeah sure. So excluding the Cove, which is a which is kind of a different animal in of itself. The five in the sunbelt, we're actually launching west loved Midtown base side.
West London based on it sorry, West Love in Midtown are being launched in about 30 days Bayside should be within the next 60 days.
And then in the fourth quarter of this year I think we launched Sunrise and citywide.
Or would you have five active developments by the end of this year.
As it relates to.
I'm sorry, so as it relates to total spend for 2022, I think obviously the sequence of you're asking how much we're going to spend in 'twenty two or what is the total construction budget for all five.
If you could give both in kind of the ramp up as to how that construction process looks and the capital outlay looks.
Sure I mean, Larry chime in or whatever you want but as it relates to kind of the spend for 'twenty. Two we're looking somewhere in the ballpark of about $150 million.
23, a blend of obviously the six additional starts in addition to continuing the construction for five so we're looking at probably another $380 million.
Those figures by the way are are in U S dollars.
On total spend approximately will have the exact numbers in front of us because we haven't gone on a blended basis, but if I was to take the 2022 starts in total their construction budget is going to be somewhere.
In the realm of about.
For $400 million to $450 million.
Matter of fact, I've got the data somewhere here.
But that's that's pretty much.
The right ballpark.
Okay, and then construction timeline it seems like it's around two years to complete those projects and then I guess from a.
On capital allocation and.
Financing standpoint in terms of the asset sales that would ultimately go to fund those are you thinking of pre financing financing for the development cost itself are waiting until completion and then.
Selling assets thereafter.
Yes, so matt or all of it.
Great questions first of all let me let me just circle back so I have the data in front of me, it's about $408 million for the five assets that are launching in 'twenty two.
As it relates to financing frankly, we have a ton of Optionality and I think we're exploring all avenues as a as of right now.
I don't know that we've landed on one frankly because of how dynamic but frankly how.
Plentiful the financing options are for.
Our developments.
The point of the construction period, which I thought was really interesting, which is a departure from our past is that.
The full recognition of the F&B of the asset is really done upon receiving the certificate of occupancy and so I know that we were once upon a time asking ourselves when does that full value recognition happened is we're looking at a gantt chart of all of these 11 starts.
Obviously delighted to see.
Them impacting NAV in a positive matter probably towards the fourth quarter of 2024.
So we lease up the lease up for the <unk> sorry, the 2022 starts.
Actually begin next year.
So by the end of 'twenty three we will have 11 development projects, we're going to be nearing the end of the three of the five launched in 22, but we're also going to be in the middle of our lease up for the three that were launching within the next 60 days.
So by the end in other words by the end of 'twenty four sorry by the end of 'twenty three early 'twenty four I expect the completion of some of these assets. In addition to the full recognition.
The fair market value and an important contribution to <unk>.
Okay sounds like you've got a lot of exciting things ahead of you on that front.
Just quickly on the Oakville.
Industrial asset obviously, it's a strong market.
Can you give us a sense on the timing of when that should be into the same property NOI.
I would say with negotiating with three.
Three players right now Youre right. The market is very strong we initially had it under contract.
Around nine it was initially granted $5 square foot when the tenant rollout went to $9 and the <unk> was that we lost and right now right now we're circling more like $14 a square foot I think youll see it leased up within the next 120 days and then occupancy dollars 60 days thereafter and theirs.
The problem with the asset.
What happened was what was that.
Name that you know leased it up we had some issues we have rezoned.
<unk> zone are parking excess parking and make it part of the building we got through all of that and that tenant couldnt wait around that so, but meanwhile tend to pay for all the costs. So the downtime was paid for by the tenant and I will jump back in the market. There is no problem with the asset. It is state of the art and as I said it should lease in the $14 range.
Okay.
That's good.
And then last one for me.
You don't have much in the way of lease maturities. It sounds like at least Q1, you should have very strong same property NOI growth will have to adjust for some of the stuff on Jackson bark, but.
Is there anything we should be concerned about it seems like you've got a.
Pretty good profile from our same property NOI growth on the residential and industrial side and the office is stable retail stable and nothing in the office or retail that we need to worry about in the next 12 months to 20 out enough.
No there's really nothing nothing that we learned about in weeks not months.
2021, and two and that's why we say we're confident we can sell the assets back to Mario's initial question. We really are these are assets that are bite size. They are high quality tenants long term lease and they are good properties, but will have no problem selling selling them and.
Interest rates are low, but I don't think that hoping impairment to our reference values.
Okay, great and congrats on finishing a busy year and it looks like you've got a few more ahead of you. So.
Thank you Matt.
The next question is from Jamie Shen with RBC. Your line is open.
Yeah.
Good morning.
In your MD&A.
Reference made to the 52 distribution, resulting in a payout ratio of 45% to 55%.
And just kind of.
It would imply an <unk> between 95 to $1 16. So wondering how do we think about that number is that a run rate or.
And what kind of assumptions are embedded in that comment.
Yeah.
Hey, Jeremy it's Larry.
Good question Lee <unk>, our distribution at about 50% with kind of give you the best guidance as we can expect it to be between 40% payout ratio to be between 45 and 65%. Obviously there is a lot of moving parts between.
With the potential dispositions may happen.
So.
I'll give you any further are critical to any further clarity.
That's our expectation.
Okay.
Okay, along with other comment Kevin on the call.
Up until now.
Don't forget too.
And it ends on where how we redeploy.
Proceeds from dispositions and the <unk> development its not accretive it goes into and we're selling a 3% cap versus the 7% cap is going to have a huge impact and that's why it's almost impossible for us to.
To answer that question accurately.
Also the dispositions I think I'm going to buying back our units saw theres a lot of moving parts, but overall, we're just giving you the cost the cost curve.
Alright, we can't even tell you haven't even as a reminder.
No no Thats fair Thats why I was wondering like what what's in that what are the assumptions embedded in those two goalposts.
<unk>.
It is a range, but again on one end are you assuming a lot of asset sales or is that just.
A rough target that you have.
You think youll hit at some point in time.
Okay.
A target based on certain assumptions.
I don't think its appropriate to kick out into all the details on how much dispositions, we expect to sell loans may or may not happen.
But information.
Canadian net as I had mentioned the timing of disposition is going to be very much geared to the use of proceeds and how much of our NCI V. We actually at home. So we cant we cant just sell in record cash we have ample liquidity as you well know right now to really do no dispositions. So we're going to sell it in an orderly basis when the opportunities are to get above market.
Or when we have a strong use of proceeds so it's very very difficult for us to answer that accurately if we knew the answer we give it to you.
Okay fair enough.
Just on the multi res development.
Clearly you have an active pipeline and the development yields are pretty interesting.
Are you seeing any any cost pressures at all.
It's eating away at those yields.
And then second comment on that as you mentioned the properties are now being value without Lisa discount.
I was curious as to kind of what you're seeing out there in terms of how investors are underwriting rank growth in this market.
Hi, Jimmy through two great questions. The first is yes, obviously, we're seeing a lot of upward pressure in some of the prices, specifically lumber and the availability of labor.
But I would say that we've accounted for all of that in our yields and then some and so I don't want to.
But I think we can withstand.
A normal plan increase up until we saw it obviously, our GNP contract at which point the burden for these cost overruns now shifts from us too or.
Nationally recognized general contractors that we select in our respective markets.
Joe I'm, not while I am seeing what youre seeing.
I'm not all that worried because of again the cushion, but also not to mention the fact that we are underwriting conservative rents and so kind of dovetailing into a second part of your question that rental growth that we're noticing across the board, we've only partially underwritten development.
Development yields and so I think all in all net net we have enough of a cushion there to give me the confidence in obviously sharing goes development yields.
As it relates to my comments on.
No lease up for discounts and how people are underwriting Roe growth.
Yes.
The amount of equity frankly that is entering our space on a monthly basis.
That seemed to increase sorry decrease which is constantly.
Increasing and increasing and so what that ends up happening is ultimately there is a very limited supply of available opportunities in the demand made it so that everyone is rushing to.
To buy assets income producing or not.
As far as what their underwriting on rental assumptions, frankly, I wouldn't be able to speculate as to what are the other groups are doing but suffice it to say that.
Sure most groups or underwriting a healthy renewal and new lease.
Increases above and beyond frankly, the historical averages that we've seen and that probably translates into why we're seeing.
Record level low cap rates.
For available U S multifamily, especially on the class a space.
Got it.
Thanks, guys.
Okay.
The next question is from <unk> <unk> with CIBC. Your line is open.
Good morning.
Question.
Union.
<unk> got excellent development, just wondering if you can see.
More of those kinds of deals in the pipeline as part of the residential.
Or is the thought to primarily.
Yes.
Paul.
In our Redevelopments.
Okay.
So im sorry, it didnt come out clear can you repeat please.
Yeah, just wondering about the union.
Acquisitions in the quarter.
And we should see more of those kinds of deals in the pipeline.
Oh, I see union space our iconic.
So will you.
Opportunistic.
We have a division run by Matt Kingston that goes after it was actually doing all of the re intensification projects in Toronto for example, or the <unk>.
In Vancouver, we have the <unk> tower thats being intensified over there as well. So that is this level of expertise. We haven't made the commitment to go with residential in Canada and Thats why we didnt want to get involved in different growth nothing wrong with different growth. Obviously, it's a great asset. We just didn't want to make a comment that would be building residential vertical in Canada. So this is a sale of <unk>.
Leaseback, it's not dilutive to us and as such affords us the luxury of buying at wholesale before the process of.
The resulting is going to happen.
That's not the issue.
But it allows us to buy $75 available until later on in a couple of years now at $125 a square foot and the <unk>.
Three years when the lease is up we expect the value to us to increase substantially at that point in time, we will elect to either to sell or develop but definitely no commitment to develop will be will you be seeing for these properties with the opportunity arises where we can buy it at a wholesale pricing not dilutive to <unk>, then we will consider them.
Great. Thanks.
Just wondering about.
The cap rate on the <unk>.
The decline in based on last quarter and its funding advances our results.
Rental housing.
Gotcha.
Any color there would be helpful.
Okay.
Okay.
I'm sorry.
Youre not maybe it's not coming in clearly would you mind repeating the question a little bit louder.
It's not a question louder as <unk>, sorry, I apologize.
We haven't seen profitably.
If for some reason the smell of muscle.
Okay, let's try again hopefully better.
One was around the slight move in decline under multiyear ice cap rate.
And just wondering assumptions behind that or does it stay on based on the all around rent growth or any specific transactions that you can speak to.
Yeah, Okay. So thank you Frank.
Sorry, Philip I'll, just start on the historical and we can give a forward looking maybe a little color on what youre seeing in the market I think the decrease in our cap rate versus two to Jackson. Paul currently happening is achieve full occupancy.
The result of.
The decrease in our cap rates Q and now Q4, Q3, and then Philippe maybe you want to give some color on what you're seeing in capex for the market.
Sure I mean, I think this ties into the answer I gave previously.
Believe to to Jimmy but.
The demand for multifamily is is obviously record level high cap rates are definitely in the threes now the issue is we've got two things cap rates have compressed very very quickly and so we did not want to be overly aggressive with some of our assumptions, which is why we applied the current cap rate that we have all of the eye for us well recognized.
The thing that it probably will need adjustment at some point in the future, but frankly, the other mitigating as this increase in <unk>.
Interest rates and so if this were to continue at the rate hikes were to materialize, what does that mean for cap rates on a going forward basis.
Frankly, there was a little bit too much volatility in our opinion regarding cap rates and so we're trying to be prudent with a <unk>.
Some may say overly conservative cap rate applied to our toward <unk>, but.
But right now cap rates are definitely in the well into the threes.
Not a not the fourth.
Okay. Thanks for the color I'll turn it back.
The next question is from Jenny mom with BMO capital markets. Your line is open.
Thanks. Good morning, So just continue on the multifamily development I'm not sure if I missed it but did you disclose the yield on the 2022 projects.
In other words will it be similar to what we've seen and I'll talk about the current development project from that low 6% range.
Hi, Jerry Yes, I believe in the latest publication of last quarter's publication, we did apply.
<unk> yield those development yields remain.
Generally speaking unchanged.
I don't know that there are low low sixes I would say on a blended basis, there, let's say a shade under six.
Okay.
Okay. So when you look at the 2022 starts and you guys have been selling some of the partial interest in the development. So the six that are slated to start this year all at a 100% is it fair to say that that suggesting that these are sort of tail to keep them.
And really it was the partial interest in looking at Sally.
Yes.
The modus operandi or at least that the investment pieces behind the partial developments, where frankly optionality.
Was the opportunity at no cost to us so no promote to the developer.
The tag along and to benefit from their expertise in gateway markets, specifically on the West coast.
And frankly get a better feel for the market identify whether or not we wanted to expand in those markets and what we've I think I've mentioned this on our previous call. We quickly realized was the appetite for those assets versus frankly, where we can redeploy that equity, but also on a risk adjusted basis. We thought it was a little bit out of whack and so we're more than happy to.
To dispose of the assets at obviously record prices.
That should that continue we would be obviously, we welcome another opportunity to.
Co developer participated in JV developments on the West coast with that group. We're currently looking at other opportunities but.
I wouldn't be surprised if we had more to announce in the future, but those developments.
The Delta frankly between the.
Going in cap rates stabilized development yield and ultimately the going in cap rates is too wide for us too.
To meaningfully expand that presence now dovetailing to our 100% developments, yes. So we're developing all of those assets with the intent.
On bringing them into our portfolio now that's not to say that all of them will fit the bill, but that's certainly the intent.
Initially.
So when we consider that against your comments about the market cap rates sort of in that 3% range and that was very helpful. Thank you.
Looking across your portfolio to see if theres any of those out of whack opportunities, where you might be able to crystallize some value like how do you consider the potential for that versus the desire to continue to build out the multifamily portfolio for H&R like are you going to strike while the iron is hot or are you going to take a much longer term view and <unk>.
Try to build up as much of our portfolio as you can and as quickly as Ken.
Yeah. It's a great question, it's something that I with our portfolio managers here in Dallas, probably meet once a month and have those conversations which we take a look at their entire portfolio and come up with a buy hold sell recommendation and explore that I would say, though in today's market, where we've got rents increasing very very quickly with very low or minimal capital.
Investment we're back in the day you have to have a significant value add strategy to achieve these returns.
I would say that now is probably not the right time to dispose of any existing assets because of the exploding. It away in other words I don't know that we would be able to sell at a price where we'd be rewarded as opposed to just managing the asset for another year or two and see where the sudden why kind of stabilizes.
That's not to say that we won't be selling your assets. We've got you don't want leverage age we're about six years old portfolio wide, but there are some assets that were built in the early two thousands those may represent on a risk adjusted basis, especially as we look at the Capex coming down the line.
May look to sell.
But again with the disposition of the U S. You have to always look at the potential 10 31.
Exchange and the acquisition, so you're essentially buying into.
The markets you are selling and so that's not to say, we wouldn't do it but I would like to see an arbitrage opportunity where I could benefit from today's market will not necessarily buying.
A fully priced asset those opportunities will happen I, just don't don't think it will come soon.
Okay, well, then maybe those that those prices aren't so out of whack.
If you think about that okay.
Okay. So there was a comment maybe this is for Larry in the MD&A about H&R.
<unk> ownership with some primary units I'm not sure I followed that so I guess my question is right now are there. Some primary units on the book and is that something that's really a technical a residual from the spin off or is that something strategic and you might be looking to hold some primary still yet to some extent on that.
Constant basis.
Hey, Jamie.
Yes, we do have <unk> units on the books that resulted from a spinoff of the.
Getting them in return for the exchangeable unit that we hold that in other words. The exchangeable units was supposed to be fixed intakes in Oregon and commerce in a sense that we have a primary units to satisfy that obligation.
Yes.
Okay. So is it just something you hold.
Anticipation of fulfilling their obligations. So it's really just like a stagnant piece of it or how should we think about it it's not it's not strategic panic.
Okay.
There is no there is no relationship between financing H&R in it's not strategic.
Okay. Okay. So this is just the technical.
Okay perfect.
And then lastly, what we're thinking about leverage you had a nice step down as a result of all that is happening in Q4 do you have a specific target leverage you're getting too.
How do you consider paying down debt versus buying back stock is.
Is the latter really dependent on pricing like how should we think about your your your target leverage stay in the next 12 to 24 months.
That's a good question, Jamie and again, there are many moving parts to it.
Wed like to keep it in the range, where it is it may trend slightly higher and then come back down to a disposition that may float up and then come back down as we sell assets.
But basically we would like to try and keep it where it is and we had lots of traffic.
Our credit rating unsecured credit ratings, we will keep our credit rating.
Okay.
It is understood that very clearly.
It is our goal.
Cape Cod will be high.
We believe that that level pretty much level.
Yes.
Okay.
Capital allocation towards buybacks that Tom I think you had mentioned it was really a function of where the stock would be trading.
Right.
Okay.
Okay, well I'll tell you, we hope it trades nice and low.
Yes.
Okay. That's it for me I'll turn it back. Thank you. Thank you. Thanks Jay.
The next question is from Sam Damiani with TD Securities. Your line is open.
Thanks, and good morning, two questions. The first one sort of following up on one of the ones that Jenny just asked on the unit count.
There was some discussion some reference to the gross up.
The MD&A.
Essentially it's about units.
Should are being issued post quarter end.
Is that true and is that basically meant to offset the CIB activity year to date.
Or vice versa.
Yes that is true.
It's a credit to the year end January .
It happened was and of course, all accolade in the circular to unit holders.
Exchangeable unit holders for tax reasons and other many other reasons.
Wanted to only have H&R units, they don't want to get the primary CNS. So while we've got primarily in order to exchange for them, we had a promise them.
Gross up of the exchangeable.
Economically equivalent to what they were before without getting primary scanner. So thats primarily.
Short answer we don't have to hold on our balance sheet, we are free to sell them and instead, the exchangeable unitholders will now get.
More H&R units than they previously had.
And that's played out in our Pepsico and events not discussion, but there's nothing that was a seminal has to do with our HIV <unk> totally related to the fact that we have capacity and we're trading at a huge discount to NAV. So it's our best use of proceeds right now.
Two quick follow ups. So the unit count for H&R is higher today than it was at year end.
The exchangeable units.
Yes are high as they went from 13 to 13 points four these are rough numbers.
$4 million to roughly 18 million units outstanding for the exchangeable unit Okay.
Okay.
And then secondly, if you have the primary units to and then sorry, just to interrupt and then obviously the regular units have decreased by the activity that we've been doing on a normal course issuer bid.
That's separate exactly.
Okay and then so is there any reason you would continue buying back stock given the the development starts that you're planning for the rest of the year I guess, so far the lack of disposition activity.
No reason.
Okay.
And just on the disposition side is there a level of dispositions by year end 'twenty, two below which you would be disappointed.
That's a really very question.
Okay.
I didn't think you might have a hard gauge to know what disappoints me right now, although I cannot share at that point.
[laughter] Hi, there now there is no answer.
Definitely going to sell something it would be disappointing.
Very disappointing we sell nothing.
And that really doesn't answer your question.
Does that answer maybe one quick one since this is those are quick.
The yields on your 22 starts.
I think you were saying before sort of a little high fives or a stick below six on your current Ed.
Thinking close to six on the 'twenty two 'twenty three starts.
Sorry are we thinking below call. It five 575 on the 22 start yes.
We've said that area, what's your question.
Just wanted to clarify thank you.
Sorry, Sam are you asking about whether or not the starts in 'twenty three are in line with our development yields for 'twenty two.
Asking whether or not.
Your comment you made earlier about sort of the snick below 6% was in reference to the 22 starts.
Yes. So it was referenced that way through starts but I would say 23 starts are going to fall in line, if not higher just given the benefit of appointment.
And increased rents.
I suspect that you're probably focusing on what everyone else is focusing which is ultimately the unbelievable value creation that these 11 stores are going to contribute to <unk> and if you take the delta between frankly, those yields and where current cap rates are.
It becomes very clear to us that that's where.
An interesting component of the value creation for the upcoming years is going to come from.
And why frankly, you could see the excitement in my voice and everyone else's.
Yes, but just a little note of caution.
Can you suggest your cap rates arent that values for the after the residential hasnt happened that quickly is just because the cap rates have come down too quickly, which means that what it was four in a quarter six months ago. It could be have a three handle honored 375, I don't know that sustainable when so fully just talking about $5 75 to $3 five to $3 five is probably not net.
Telus sustainable if interest rates rise of three and a half will go up in Canada versus the United States, which is a more mature market and I'd say its because its much smaller of Toronto, Vancouver, and Toronto and Vancouver, We really don't have a whole lot else. Sometimes you have Montreal you solved in land values go up so theres a lot of developers in Canada that prices are frothy and the profit accrue.
To the to the landowner in the United States, because there's so much more abundance Atlanta as many more cities to participate in the land values didn't go up they sell acutely as they did in Toronto.
Still a lot of room to make profit in the United States until those land values go up now in some cities Orlando Tampa, They have pretty close to doubled since pre pandemic to today, but that still doesn't take under the fact that the cap rates on a four and a half that call it 375 or something.
Don't know when we were talking in your numbers you should use a 375 is sustainable I think you should go back to your modeling in say two years. So now we're building it today of five and three quarter, we're probably going to be looking more like pre pandemic four five therefore, the if it does stay at $3 five I can assure you that the costs are going to are they going to go they're going to translate into.
Growing up in land not necessarily in building building as a commodity land is not land.
Profit always will include the land Guy.
I don't think you can use three five and I don't think we need to take down our Iris valley for three and half just because there was a couple of transactions that Blackstone bought a $3 five that's not necessarily indicative of the future.
That's good color. Thank you very much.
We have no further questions at this time I'll turn the call back over to the presenters.
Thanks, everyone for joining us today, we look forward to continuing to update you on our progress over the upcoming quarters.
Have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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