Q2 2023 H&R Real Estate Investment Trust Earnings Call
Good morning, and welcome to <unk> Real estate investment Trust 2020, Please second quarter earnings Conference call.
Before beginning the call H&R 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 our current expectations of management regarding future events and performance and speak only as of today's date.
I would like some information requires management to make assumptions overlay on certain material factors.
And are subject to inherent risks and uncertainties and actual results could differ materially from those statements and the forward looking information.
And discussing <unk> financial and operating performance and in responding to your questions. We may reference certain financial measures, which do not have a meaning recognize our standardized <unk>.
Our Canadian generally accepted accounting principles and are therefore unlikely to be comparable to similar measures presented by other recording of choice.
non-GAAP measures should not be considered as alternatives to net income of comparable metrics determined in accordance with <unk>.
The ketose of Ethernet performance liquidity cash flows and profitability.
Management uses these measures to aid in assessing the reach and gentlemen performance and 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 and the forward looking information and the material factors or assumptions that may have been applied in making such statements together with details on <unk> non-GAAP financial measures are described in more detail in each.
<unk> public filings, which can be found on <unk> website at www Dot SEDAR dot com.
I'd now like to introduce Mr. Tom Hofstetter, Chief Executive Officer of H&R.
Please go ahead Mr Hofstetter.
Good morning, and I'd like to thank everyone for joining us today to discuss our second quarter financial and operating results and strategy with me today on the call are Larry <unk>, Our Chief Financial Officer, and Emily Watson, Our Chief operating officer from our land tower residential division year to date, our portfolio team are producing strong financial and operating results across all our property.
Classes residential continues to see strong rental rate growth are well located office properties with long weighted average lease terms remain 98, 7% leased industrial properties located in key markets remain in high demand as we realized continued rental rate growth in our high quality grocery anchored and single tenant retail property portfolio, performing well providing essential services.
To their respective communities given the line of sight, we have into our current disposition pipeline and the demand we're seeing for our properties. We are reiterating our intent to sell approximately $600 million.
Noncore assets this year of which $387 million has been sold to date.
On April 20, <unk>, we just we closed on the successful disposition of 160 elegant with $277 million H&R is only Ottawa office property, comprising 973000 square feet in downtown Ottawa, given the considerable headwinds in the public and private real estate markets. We are very pleased to have executed the action. This one property represented.
16 of our 16% of our Canadian office portfolio and reduces our total office exposure, excluding rezoning properties properties to 20% on a fair value basis. We also sold four Quebec retail properties for $68 million allocating net proceeds to repay debt and repurchase units.
CIB.
During the first six months of the year, the repurchased and canceled $2 $8 million million units at a weighted average price of $10 26 per unit, representing an approximate 51, 2% discounts to NAV per unit, we tend to continue to buyback munis through the <unk> with proceeds from future dispositions of noncore assets.
As a result of our disciplined capital allocation approach, we have augmented our growth profile meaningfully achieving double digit growth in same property NOI since announcement of our existing strategy increased allocation to residential and industrial investment properties for 23, and 8% respectively in Q2, 2021% to 39% and 16% of total of 50.
5% as of Q2 of this year over this time period office exposure, excluding the rezoning portfolio has declined from 38% to 20%.
<unk> with its progress is the improvement to our liquidity position and balance sheet metrics that I will hand, it over to Larry.
Thank you Tom and good morning, everyone.
I'll start on the operating results.
In my comments to follow references to growth and increases in operating results are in reference to the three months ended June 32023, compared to the three months ended June 32022.
H&R same property net operating income on a cash basis increased by 11, 7%.
Breaking the gross down between our segments land tower, our residential division led the way with a 22, 9% increase or 15, 6% increase in U S dollars Emily will provide more details on this growth starting in <unk>.
<unk> same property NOI on a cash basis increased by 18, 6% driven.
Driven by rent increases for new and renewing tenants.
Occupancy in the industrial segment increased to 98, 4% as of June 32023.
Also same property NOI on a cash basis increased by two 1%.
The increase was largely attributable to the strengthening U S. Dollar for the six months ended June 32023.
Same property NOI from the office portfolio increased by four 5% compared to the same period in 2022.
Our office properties are in strong urban centers with a weighted average lease term of seven one years and leased to strong credit worthy tenants with 81, 1% of our office revenue coming from tenants with investment grade ratings.
I would like to point out that only 404000 square feet of leases expire in our office portfolio during the remainder of 2023.
Which is approximately 7% so the total square footage of our office portfolio.
These 2023 Expiries.
<unk> 5000 square feet at 6900 megawatts draws in the GTA, which now expires in December 2023, H&R received a termination payment of $856000 in Q1, 23 and will receive an additional $2 5 million in Q3.
H&R is preparing the site plan application for submission to the city of Mississauga for our newest single story 122000 square foot industrial building to replace the 105000 square foot office building.
<unk> approval is expected by Q4 of this year.
In addition, 86000 square feet, Sean is expiring in 2023.
The Tampa office property that was subsequently sold in August for $13 3 million U S dollars.
And lastly, retail same property NOI on a cash basis increased by nine 1%, primarily driven by increased occupancy at ruble lending and the strengthening of the U S. Dollar.
Q2, 2023, <unk> was $29 seven per unit compared to $28.04 per unit in Q2, 2022, a four 6% increase driven by strong operational performance across all segments and aided by the U S dollar.
<unk> for the six months ended.
June 32023, or <unk> 61 per unit compared to 56 cents per unit in Q2 of 2022, an 8% increase.
We are proud of our <unk> growth. Despite current headwinds head winds up higher interest rates facing all real estate classes and the current headwinds facing the office sector.
Commencing in June and January 2023, <unk> monthly cash distributions increased to <unk> <unk> per unit or <unk> 60 per annum and 11% increase over the 2022 distribution.
Excluding the special distribution in December .
<unk> Q2, 2023 payout ratios remained healthy at 51% of <unk> and 61% of AFR notwithstanding the increase in distributions.
Net asset value per unit as at June 32023, or $21.04 per unit a decrease from $21 95 at March 31 2023.
Two 8 million units were repurchased during Q2 at an average price of $10 26 per unit for a total of 29 million $29 2 million.
Our following overall weighted average cap rates, we used in deriving the fair values of our investment properties.
For four 9% overall for the residential properties, which are split between sunbelt properties at an average cap rate of 475% and gateway cities at four 8%.
$5, two 8% for industrial properties, 635% for retail properties, 736% for our U S office properties.
For eight 1% for our eighth Canadian office properties, which are advancing through the rezoning and intensification process to be converted to predominantly residential properties.
These eight properties comprised 30% of our office portfolio and.
724% for the remaining 10 Canadian office properties.
The increase in cap rate used to value our properties resulted in a downward fair value adjustment of 274 million for Q2 2023 at the reach proportionate share.
As at June 30, our office portfolio of 23 properties comprise 24, 8% of total real estate assets page 14 of our management discussion and analysis shows the percentage allocations across all segments.
Debt to total assets at June 32023 was 44, 8% compared to 44% at the end of 2022 and liquidity at June 32023 was in excess of $900 million.
In summary, we are very pleased with our Q2 results and confident that our high quality properties and strong balance sheet will continue producing good results for the remainder of the year.
With that I'll turn the call over to Emily.
Good morning, everyone I'm delighted to join you today and delivering our second quarter highlights from our multifamily platform as well as discuss some operational updates.
Market conditions continue to be favorable in terms of employment wage growth and positive migration trends.
We continue to deliver solid operating results with same asset revenue growth, excluding Jackson part from our portfolio in U S dollars increased by 10, 5% and including Jackson part 13, 7% for the second quarter when excluding Jackson Park same asset net operating income.
From our portfolio in U S dollars increased by eight 3% for the three months ending on June 32023, compared to the respective 2022 period, including.
Including Jackson Park same property operating income from our portfolio in U S dollars increased by 15, 6%.
We mentioned reports of elevated supply last quarter. However, we believe our institutional product will continue to perform well despite the short term headwinds.
By way of example, our multifamily portfolio ended the second quarter at $94, one and remained stable today for.
For context, our move outs due to home purchase dropped 19, 8% in the second quarter of 2020 to $13 seven in the second quarter of 2023.
Additionally, our rent to income ratio is still hovering around 20%, which retention around 50% underscoring the continued positive fundamentals for Sun belt multifamily.
With strong investment interest in a small number of deals that are being marketed we expect cap rates to remain low relatively speaking for the institutional quality assets in the sunbelt.
While interest rates have induced cap rate movement capital flows, which are primary component of cap rates are still very much interested in a heavy sunbelt multifamily allocation.
Based on our recent third party appraisals and a few recent sunbelt sales comp, we believe raising our internal F&B cap rate by 25 basis points to 475% is appropriate and supported.
On the development front Lane tower, West La and Dallas, Texas is still schedule is still on schedule and on budget and recently drive in the rates on <unk> III.
Exterior windows and doors are currently being installed along with exterior seating and waterproofing being installed for a considerable portion of the development.
Also in Dallas, Texas Land tower in Midtown is on schedule and on budget and recently completed concrete work, including the parking garage.
<unk> has commenced and currently is on level two and the first turn.
We are progressing through different phases of design, drawing and permitting on the remainder of our sunbelt development pipeline and expect to receive more building approvals as we progressed through the year.
On the operational front as we approach normal seasonal performance in pattern following historical high growth. It makes at Paramount to focus on improving efficiencies and expanding NOI margins <unk>.
Consistently identifying best practices isn't one of my primary goals and a major part of my leadership strategy let.
Let me share some of our value add initiatives.
Our smart platform is deployed across almost 90% of our portfolio and provides efficiencies to our onsite teams such as electronic locks leak detection and the ability to control thermostat and vacant unit. Additionally, it generates an approximately 30% return on investment and amenity revenue.
We've installed over 200, and unit washers, and dryers, which yield over 55%.
Tom Gallagher yards are popular amenity and have installed over 120 with an anticipated 40% return on investment.
In summary, the land tower platform continues to achieve positive results and progress and I'd like to say, thank you to the land tower team for their commitment in helping facilitate H&R is repositioning plan, while delivering top tier results and with that I'll pass a lot of the conversation back to Tom.
Operator, you can now open the call for questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by one on your Touchtone phone you will here with me Tom from Technology and your request.
By using a speaker phone please lift the handset before pressing.
One moment. Please for your first question.
Yes.
First question comes from Jamie Shen from RBC capital markets. Please go ahead.
Yes. Thanks.
So my first question would be on.
On the tower business can you talk to what sort of a lease spreads you are seeing on new and existing leases and how you see that trending.
It's about half the back half of the year.
Hey, Jamie good question.
Going into Q1, and Q2, we had much bigger spreads on from a renewal front in Q3 were really coming off of the anniversary dates of their really higher leases and so the first half of the year, we came into the year about 5% loss to lease spread.
With it really.
Probably a 7% 8% renewal renewal increase the second half I expect that to be closer in the 2% to 3% range for the renewal because we are really closer to that spread for our new releases within a 3% range. So.
I would expect 2% to 3% in Q2 in Q3.
Okay, and what about on the new lease.
New leases I expect to be flat.
Thank you.
Maybe one maybe 1% to 2%.
But with the construction pipeline and are in our markets in Q2, Q3, and Q4 I expect those to be relatively flat.
Okay.
You also mentioned a few deals in the CSM, though that would support your cap rate can you share with some of those some of those deals are.
Yeah, there's one Dallas in one Tampa I mean, the volume is really down as I'm sure you've read really truly 70% down as far as the transaction volume, but we did have a deal trade and a Tampa deal trade that we watched it at a four seven range.
Okay.
And then maybe maybe turning to the.
Office and I think so.
The Allergan.
Property sale.
Didn't notice.
The BTB was extended to kind of any thoughts there.
Feeling pretty good, but then coming up with the dollars.
Yes.
Hi, Jimmy we've seen near term sheets already so we're pretty confident that it's imminent that it will happen this quarter.
Okay.
And then maybe in generally in terms of office financing, Tom you had mentioned before.
To get a deal done.
Banks are there for financing.
Does that environment like.
Has it changed at all is improving at all or what are you seeing.
I don't think its improving I think its the other way around I think it's getting worse I think banks are putting pins down almost because the United States and Canada, so that the.
What youre seeing in both countries as Youre seeing to move real estate.
You can see the last atria deal is a good example of that.
The sellers the vendors to providing financing to facilitate the deal. It solves the problem of the question Mark and getting the financing and flex the rates, which has also been very volatile. So I think the answer is it's really really difficult to get rolling.
Only the best sponsors are going to get to as you will know United is a nonrecourse.
World and therefore, it's basically pans out.
The transactions I am seeing in both countries are undertaking right now.
Okay.
Okay.
And then maybe lastly, just on the.
Office rezoning.
We made some progress.
Are there any assets that are.
Do you think we'd be and if you had been in a position to start thinking about selling.
And then maybe willing to that thinking about the wind for deal you did with Oak Street can you replicate a deal like that with some of the assets that you're currently working on.
I didn't quite understand the question is it sounded like it was twofold.
And for a deal is a credit tenant lease deal.
It's not a rezoning issue it could be resulting from the new buyer, we haven't had the option to purchase it back and that was the reason we put it in that options for exactly that reason if in the during the term of the extended lease term. The next 12 years. The rezoning. It takes place and if it is higher value. That's why we preserved yourself there.
Help ourselves the right to buy it back.
Our buyers of that transaction, we are in the credit lease business than on the residential business.
For the most part.
That type of a transaction is.
Is saleable.
It depends on whether you're a general question does not specific to our portfolio, but it would really be the present value of the cash flow and some residual and underwriting that and generically not again not applicable to our portfolio since we've gone through.
Covid and post Covid and very few leases were long term leases were signed over the past call. It three or four years, the least the duration of the lease terms that are remaining for most landlords portfolios are not long enough to facilitate a transaction whereby you're buying it at the present value of the cash flow plus the residual because there's not enough term left.
For the most part H&R does have a longer duration as you. All know then I would say almost all other all other landlords or throughout their portfolio, but it still is it makes it difficult to sell are predicated on the present value of that and it's very hard to underwrite what the terminal value will be because we have very little visibility into what the lease rates are going to be what the markets will look like.
510 years down the road.
Okay.
So on the assets that you currently rezoned one firewall into on those ones I guess, you can't sell that as a credit and then with development upside down the road to the scene.
Right, that's what you're saying.
That's not a credit buyer lease because those are in.
Every one of our assets were talking what front Street 100 about 155 youngsters six nine.
Bouchard.
All of those deals are predicating getting the converting into residential really unexpired of the tenant and in our case since we are so laden with long term leases to single tenants in other words, if they don't have its not a multi tenant building with a whole bunch of 2004 thousand square foot tenants, which which makes it very difficult to convert residential down the road, we're looking to the expiry.
The major tenants at which point in time rezoning will be completed and you can put it sell it.
We will develop it is residential at this point in time until the developed until the rezoning is completed it would not make sense with doubled assets.
Okay.
Okay. That's it for me thanks, Thank you.
Yes.
Thank you. The next question comes from Sam Damiani TD Cowen. Please go ahead.
Thank you. Thank you. Good morning first question, maybe back to you Emily on.
Land tower with the dynamics, you're expecting in the second half, we did see occupancy come down a bit.
In Q2, do you see that continuing in the back half of the year and is what you are seeing sort of the softness more a result of the increased supply.
Weaker demand or combination of both.
Definitely not demand we are seeing an increase in demand actually over 22, so that that's good for the strong fundamentals, but the.
The supply is going to be some headwinds really between now and when I think into 2024, we had 50000 units deliver year to date and just in our markets and our Sun belt markets that we operate in and went head to head with about a little over 6500 of them.
And we in the they only absorbed 30000 in the first half of the year, so going into the second half of the year. We have 55000 that are anticipated to be delivered that will go head to head about 9000 of those.
So we strategically really kind of traded occupancy in the first half of the year to get the renewal increases while we could because we knew the second half was going to have a little choppy waters going forward.
Do you anticipate really getting our occupancy at 95% and then trying to increase our retention to 60% over the 50%, where we have just to be able to have a hunker down effect. If you will between now and the end of 2024 and kind of ride out any headwinds that might come our way.
Oh, that's great. That's very helpful. Thank you.
And maybe one for you Larry just on the on the debt stack with the weighted average maturity now under three years or is there any.
Plan or a path to terming out few Reits overall debt over the next couple of years.
Good morning, Sam.
The reason.
Maturity of short term cost.
Quickly.
Because we've been selling assets and paying off the debt.
Not refinancing back at five and 10 years, then everything's can because youre not getting that weighted.
The back end of that financing and everything is just cutting too a lot sooner. So there's no plan to refinance everything we'll do it year by year as it caused depending on how the proceeds from our sale.
And proceeds will come in will be used to just keep our debt levels. The same on assets so adverse.
Metrics.
But from what we have in the pipeline of what's coming up.
No. That's just the $350 million unsecured debenture in January 2024, and that's really big maturity that we have that we'll be looking to refinance probably towards the end of the year.
Other than that it's a short term mortgages, which are all low loan to values.
We're pretty confident we will have no problem refinancing them all using our lines of credit which are in excess of $900 million.
To pay some of those some of that back.
In the short term until proceeds are available from Phil Hawkins.
Okay, great. Thank you and last one for me is just on the office occupancy do so based on your comments.
Do you see occupancy remaining stable through the balance of the year in the office segment.
We have a very small lease rollover schedule for the end of 2024 really so theres a couple of floors here or there, but nothing significant to the answer to your question is it should remain stable.
Great. Thank you I'll turn it back.
Thank you. The next question comes from Mario Sorry at Scotiabank. Please go ahead.
Hi, good morning.
Just coming back to land tower in more of a clarification question. So I believe.
New lease spreads and the renewal spreads.
For Q2, specifically would.
Would they be similar to the.
78% renewal and kind of flat to 2% from you that you highlighted for the first half of the year.
Yes, basically and the flat the renewals were seven nine I believe.
And I expect them in fact August I think we got 6%. So there is still probably in that 5% range for the beginning of Q3 and then the expected 2% 3% for September through the end of the year.
Got it.
And the new leases flat basically.
Okay.
<unk>.
During COVID-19.
Proactive in siding.
As many two year leases not necessarily as you could but it was elevated so when you talk about Q3 being a reset quarter is essentially the benefit.
Those two year leases coming off does it.
Terminate in Q3.
It's really nicely dispersed actually it's a great question, we didn't have an overwhelming amount as a percentage of the portfolio. So I don't think youll see it overall, I'd say, probably 3% to 5% of our portfolio took a step on this two year leases.
So and they were a little staggered throughout 'twenty three so yeah, I don't I don't anticipate that to really be any significant.
Headwinds on our ore thankfully windfall on being able to capture the loss to lease there.
Got it okay.
And then just maybe a couple for Tom on the disposition of $600 million target versus.
About 400 million to date can.
Can you give us some color in terms of.
Where are the incremental 200, or so is expected to come from whether it be by geography by asset class.
Asset classes would be office.
Geography that would be too Kelly.
Our two assets in the United States. So we won't go geography.
Got it okay.
And then.
Just a follow up to Jimmy's question.
The capability.
Willingness to sell let's say residential density.
All of the requirements necessary to start construction is that simply look structurally its youre not able to do that or do you feel like you're leaving too much value on the table doing it.
Alright, and advance the lateral leaving too much table just to just to qualify the point that you made it's not.
Till you can start construction until you complete Tony.
Other words, there's three components to this there is getting the zoning done there is getting the tenants out and therefore at that point in time, demolishing and going forward subject to the market being right at that time. Once the zoning is done then the rest is easy then it's just a question of the market conditions.
With maximize pricing until the zoning is complete we would be leaving too much on the table.
I might add also that at this point in time in the cycle as you I'm sure you're aware the residential land values are depressed and we will not be selling into this market right now we fully believe that for the <unk>.
Properties that we have the quality of the properties that we have and that would be an inappropriate time to put them on the market.
Wait till the market recovers.
And even though we have some residing in place lock on 145 Wellington.
Plan is really we have some office component in that rezoning for some office space and we're going back into the city to try and switch that out into fully residential so even though we have some zoning is in place we try to do better on them and therefore operating to sell them at this time.
Okay that makes sense, Tom what would you estimate.
Residential land values are down for your types of outlets from from peak levels peak.
Peak levels for downtown Toronto were $3 25, a foot and again its like everything else, there's not a whole lot clearing so minus 875.
Okay.
There's been very few very few trades don't forget.
A lot of it has to do with the size of the deal.
Nothing is really going on the market now either but I think thats a fair answer $3 25, and you can probably liquidator to 175.
It's not a whole lot different than any other sector out there, there's very little liquidity in the world and so that's one.
That's why the decision is even if he could have cleared 175, but we will still we believe that there is on the supply demand side.
We'll be a shortage of high quality residential properties that were talking about the downtown Toronto and whether they go back to the office or not it seems like they want to live downtown So I do believe that the value is will we.
We will circle back to $2 75, plus is not too distant future.
Okay, Great I appreciate the position in the answer.
Hey, guys.
Thank you.
Thank you. The next question comes from Matt <unk> at National Bank Financial. Please go ahead.
Good morning, guys.
Just to follow up on Jimmy and Marios question with regards to the office repositioning.
Has your sense changed or evolved at all in terms of office replacement and what the city would be able to grant or willing to grant on that front residential was.
Yes, I'm going to hand that over to Matt Kingston, and he's actually I don't know what I'm talking about as you've probably seen this as well so.
Why don't I hand, it over to him.
Morning, Matt.
I think.
We have an application at 69 Young Street, where we were not replacing office, which is a little different than 145, 55, and three times and I'll say, we are feeling the difference. So it has always been a hard line from the city you have to replace all of it we're starting to actually see some progress.
And we've seen a few other.
Examples Kingston has a property at <unk>, where they were successful reducing that number significantly on the office replacement.
Reserve properties at $2 77, Willington West Similarly was able to reduce the amount of office replacement. So the city is starting to get it there.
So they are parliamentary.
In terms of their thinking, but we do see an opening and as such we're going to try and see if we can do better.
And remind me what what is the timing to kind of go back I know, you've you've firmed up the density which was the important part of it but what's the timing to go.
I'll go back to the city and go through that process, yes to that point or so 310 front with our counsel, we got our approval last week.
55, young we manage our settlement conditions in Q1.
69 youngest headed to counsel in October with a positive staff report at 50 excuse me 145, Wellington was done last August . So all four of those are critical firmed up and their approval for us to go back and we're going to attempt to be back in Q4 for Q1 latest next year.
In terms of approval because we've dealt with all of the new shelf, what's the absolute height of the building how much density what does it step back all of the stuff we normally hang on.
Difficult to say it'll be significantly less time, but we're hoping by kind of mid 2025, we would have new approvals in place.
Thats downtown trials that you can talk a little bit too Bouchard in.
And.
Pardon me for Quebec, It's a refreshing process. So at Bouchard, we're hoping by the end of this year, we've got new bylaws in place for that property and for <unk>.
Which is three seven to 707 Kingsway, we're hoping to have our entitlement finished by Q3 of next year.
Okay. That's helpful.
And then.
I can't remember the timing on Prince Andrew, but you were waiting to win the lottery or not won the lottery on at this timing basis. There is there any update at this point.
Land use change Matt.
Matt you may or may not have heard that announcement on Wednesday, which was not the most flattering announcement regarding our administered municipal paired with housing and his chief of staff as a result of that.
The any discussion on official plan amendments has grinding to a halt so we believe that we're still progressing well, but the problem is timing. So it's not a question of B.
The substance of what we want to get done. It's a question of when we can actually get it done.
But they are they are kind of firefighting mode.
Yes, I can imagine it was only a couple of billion dollars, but.
Just just.
Switching gears to the <unk>.
U S multifamily side.
Emily.
Your sense that the markets that you're in is where you want to continue to be at this point I thought you did a small land acquisition I don't know if its meant for ultimately owning.
The the rental residential or if it's meant to be a play on kind of getting at.
Value on development in the San Diego area, but do coastal markets fit into kind of your view as to where.
Atlanta or wants to be longer term.
Yes, I'll take that one.
Let me just take that one.
It's land here, but not land Paris, we have a joint venture with Lyft core Qualcomm Qualcomm from Winnipeg led of course from Vancouver, We've had a long term relationship with them.
The literal Qualcomm the reason I say, it's not land power is because they tend to Atlanta, our banners guide we're not banner.
Those are built to be sold not built to keep.
That was at play we entered into a while ago us and had certain conditions on the land, which was achieved we don't plan to be.
Stay in those markets at all.
Scott Sorry long Beach.
With short line, which is now 90%.
Occupied would've been on the market of the market would have been stronger and it would have been sold by now so the answer to your question is it's not long term. This is all public we'll let her all meant to be sold they are experts in that market and that's why we use their guidance.
West Coast market similar to the New York market, which was not our expertise either and that's managed by the tishman not under Atlanta or banner either.
Okay.
I guess, Tom do you like those markets long term as rental markets would it makes sense eventually to go into them or is the focus going to be kind of sunbelt at this point for <unk>.
Yes.
Well the different buckets.
He answered the question is long term Emily's business and land towers, the sunbelt and that's going to be her focus on her and her strength going forward at the device Division.
The virus why yourself across the countries a big a big dip.
Demand from our knowledge base and the capital base I don't think we have the capital or the knowledge and to do go to go into those markets answer to your question is at this point in time, it will only be strategic with taking a one third position or something like that when we see value and where we've made a lot of money in the past, but I don't think Atlanta, Harrison and head into those markets not because the market does.
Margins are good or bad it's just you can't be everywhere.
Okay fair enough. Thanks.
Yeah.
Thank you. The next question comes from Sam <unk>.
Right.
Please go ahead.
Okay.
Good morning, just going to touch on capital allocation first so.
Obviously buybacks have resumed in the quarter and have also.
Some could you develop on land in the U S. I'm just wondering how do you prioritize allocating capital as you get proceeds from your.
Future asset sales.
Good morning, and welcome back.
Proceeds will be first used to repay debt to keep as I said before our debt to asset ratio and long.
EBITA ratio in lawn and then the balance of the Nevada to other between the developments that we have on the call that we already have on the go we have not committed to any further development other than the ones that are currently under construction.
And then besides that then will be used to pay back to buyback units.
That is kind of the all of them, but just just.
Give me a clarification the two land deals that youre looking at were not because strategically we decided we want to buy land. Those are entered into a couple of years ago and there were certain milestones of which we put down a hard deposit and the vendor had to go ahead and achieve the milestones of zoning.
They did so today not because of value or anything else at the pieces of property, but we would not allocate capital specifically answering your question to further acquisitions of land.
Today post cover to where we are in the world today again, those re engined into a couple of years ago.
Okay, that's clear.
And just more of a housekeeping question for Larry on the capitalized interest in the quarter or would that be a good run rate for the balance of the year.
Okay.
Okay.
Semi yes that capitalized interest.
More or less continue on the same pace as we had it in Q2.
Okay. Thanks, I'll turn it back.
Thank you.
Thank you, ladies and gentlemen, as a reminder, should you have any questions. Please press star one.
Next question comes from Jenny MA BMO capital markets. Please go ahead.
Thanks, Good morning, everyone.
Good morning.
I wanted to ask about your calling in land I know you just mentioned in our last question that you haven't committed to any future developments, but.
What would you need to see what triggers do you need for any development there to commence.
And if you were to start today do you think you'd be able to replicate the kind of yields you got on.
On the meta Vale developments.
Hi, John It's Matt Kingston in terms of getting the ability to proceed. We're currently tied up because of the $4 13, and <unk> extension. There is a sort of a moratorium on all our land that we have remaining except for three acres of land.
We wouldn't proceed with those three acres because we'd want it to be a much bigger piece in there is once this moratorium with we would have a bigger contiguous piece to develop so we're just sitting on those three access acres for now in terms of the balance we are in active discussions with the MTO and the region to say that we believe.
They are at a point, where they're starting to scope down the corridor. We are exploring the options of expropriation and trying to see if we can get the land.
At least partially sold now that theyre starting to finalize their plans for the highway.
And we're also exploring possibilities of temporary servicing or servicing solutions that would allow us to break free. So there's a there's a planning context because of the highway which is holding us up and Theres a servicing context.
Which is linked to the plan.
So we're investigating a number of different options to go with respect to the deal I'll pass that back to Tom.
In relative terms, the Mississauga lands are infill much more so than the count lapses that returns are higher.
We won't be borderlands, and the massage able in the future once it could be dual play drive and a massage world at a very very.
<unk>.
Very very low price and that's why the yields are so high the rental rates are very high because it's infill in Calvert is strong I think theres a lot of development. It is going to occur and Calvin I don't think you're going to see the same type of return.
Okay. So it sounds like it's going to be a while before we can commence on I can't call. It in.
Correct, yes.
Yes.
I appreciate the color on the.
The land values for Red's development can you comment on what you're seeing on the industrial development site in the GTA.
Land values or is that too.
Question, Yes.
They've softened.
I'll hand, it over to Matt Ryback come out against it.
I'm on vacation as soon as were finished Jenny I'm out of here.
[laughter].
Hi, Jamie I think.
We're seeing a softening of it I think.
We're lucky with our locations. So we're more focused on 6900 mirad by 'twenty slate.
Better Vale I think.
We see cotton price coming down about 10%, maybe again, there aren't a ton of trades to back things up the residential land price Tom was referring to earlier, we think it's down about 40% so relatively speaking the industrial price.
Not quite as soft right now.
But it's definitely leveling off our song let me qualify that for a second though the big trades industrial milestone for 353 $3 $2 million an acre it's hard to answer your question have they suffered a whole lot because there's almost no trades at a 100 with a 100 acre blocks and they it's not that they are not available to you on our private lives. There's just no one's buying it so they have softened.
I don't view as evidenced to any great extent to what they have been talking to the $4 2 million of the $4 million per acre, let's talk about the 160 Mcnabb, but ultimately we want to read zone. That's what it is it is John but ultimately that may be prices that was at $4 2 million eight eight to 13 acres the prices have not come up much.
Jonathan.
And Phil is still very very strong large blocks 100 acres you are not seeing the trades institutions, such as the hoops of the world.
Big pension funds, Oxford et cetera, they've already land back quite a bit of it youre seeing almost no trades right now.
Okay.
And then turning to the Red line that you were talking about I'm going to ask you to speculate a bit but I'll attempt the question anyway.
The decline has been obviously bigger than you've seen them for industrial what do you think needs to shift for the land values to recover back to that 275 that you had mentioned earlier is it about construction costs.
For interest rates do they just need to stabilize around current levels or do they need to go down substantially for you to see that what's your view on how we get those land values back in any sense of timing.
Jenny I think definitely sales are the things that need to drive it we are seeing very low new home sale, we're seeing low new home sales because the demand is down because interest rates are so high I don't think theres, a panacea I don't think its a single thing we're going to solve the issue, but definitely interest rates I think are the most <unk>.
Important construction loss on the early work things, where youre not buying a manufactured product so youre not a plumber buying a toilet.
Yes.
Our kitchen manufacturer.
On the shoring earthwork upfront works, we are seeing a softening, including foreign work, which is one of our biggest division. So we're starting to see former prices, which were $21 $22 a foot call. It four months ago are now getting quoted this high seventeens loyalty.
That's a function of the work not starting over the last 12 to 18 months and that's not changing over the next six to 12 months. So we are going to see construction cost come down that'll help us interest rates got to come down, even though where else is the investors right now they're basically anything over $700000 is not moving.
It's kind of a hard stop in terms of an end price do you see people are getting smaller and smaller with product. Our average unit prices were $6 50 last year $5 50, now we cannot get any smaller literally we were at the coat minimum. So that's no longer a lever we can pull we can just make them smaller so it has to be a function of the heart.
It's coming down interest rates softening, but those are the things that are going to help and finally don't forget right across North America, the backs that up.
Comfortable lending again, and if you're not one of the biggest banks in Canada, sorry, one of the biggest bars in Canada, youre not going to have access to bank financing in the United States. If you are the biggest borrower you're still not going to have access to.
Thanks, Jeff.
How tight it is down there.
All of these stars have to line and we're seeing a lot of polygamy in our world. We're seeing a lot of people partnering up one.
One partner to partners. So there's a lot of dilution of positions right now not a lot of sale whether on new home sales are landfill right now.
Okay, that's very helpful. Thanks.
Lastly for me.
The unsecured debenture coming due Larry can you share with us what kind of pricing or spreads you're seeing for that how it compares versus secured debt and out whether or not you'd be inclined to maybe tap secured debt versus unsecured given where interest rates have moved.
Hey, Jamie.
So do our refining today authenticate debenture would cost us around six 5% caller in.
Paul Paul.
Do a secured financing would probably be 50 basis cheaper around 6%.
So.
What are we thinking.
When it comes to renew we will see what our protein Thor seven sales.
And may not refinance whole thing, we may have some policies and only end up refinancing 250 over the $3 50 or something like that.
As the game plan for now really the same game patents before we always paid a premium to get unsecured debt to get the flexibility of being able to sell properties without any without having being encumbered and sits on the our plan is to still continue to sell properties. I don't think we want to put unsecured debt and encumbered. The properties. So we will still leave at a cost of 50 basis points more continue with the unsecured.
Sure.
Okay, great. Thank you very much.
Thanks Shannon.
Thank you. The next question comes from Eric Brown at Sun Life Capital. Please go ahead.
Hello, just two questions on my end first on the retail portfolio.
Think about moving towards your target portfolio composition, what trends are you seeing on the disposition and and what are you expecting going forward.
So our retail is very much grocery anchored but it's not grocery anchored strip centers, it's primarily single tenant our giant Eagle Echo portfolio, which is predominantly giant eagle stores single to a single stores not malls and.
Strip malls and get goes which are gas floors together with the convenience stores.
They are long term leased at least two with visibility to a very strong tenant in Canada, our portfolio at least in the metros. So these.
Grocery and shoppers et cetera. So those are very liquid it's easier to sell them, we're not in a rush to sell them the good cash flow.
There is a wide range of buyers more so on the retail investor rather than institutional investor that we can fill.
We're pacing our sales and right now our focus is still on office, we havent really pulled the trigger to telling me the retail at this point in time.
Thanks, that's useful and then lastly, just a further color on the capital allocation and payment of debt is there a specific debt to EBITDA level you are targeting.
Yeah.
We have we currently have nine five I believe is a picture of a ton.
495 in that range, we want to try and keep it around there.
We definitely don't want to go over nine eight would be a maximum maximum.
So the range that we're currently in as we would like to keep it.
Thank you.
Thank you. Thank you the next.
Thank you. The next question is a follow up from Mario Sorry that Scotia Bank. Please go ahead.
Hi, sorry, one more one more quick one on my end.
The planned conversion of <unk>.
The office industrial and Mississauga.
What types of returns should we think about on the incremental capital.
So youre talking about rents, which which budget merits drive.
That's right.
So you put them in the rent that is current and well the value of the land, which is the value of the building. Upon demolition is available land you put Atlanta current market, then you're going to be looking at probably in the range of around five five.
Perfect. Okay. Thank you.
And it's probably going to be 123000 square foot 40 feet high we would just been negotiating with ourselves as to the height, but it will probably be state of the art.
Could well be.
For us for studio space as well so it may have a higher use than conventional office again, it'll be high cube space and 123000 square feet, there's not a lot of that in Toronto.
So Barry.
Youre talking about margin on a cost basis, the yield would be around 12%.
Okay development perspective, and an ROI perspective, we think it's accretive.
Makes sense okay. Thanks.
Thanks.
Thank you there are no further questions I will now turn the call back over for closing comments.
Thank you everyone have a great weekend.
Sure.
Okay.
Ladies and gentlemen, this concludes our conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.