HRUFF Q2 2025 Earnings Call
Operator: Good morning, and welcome to H&R Real Estate Investment Trust 2025 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 and the 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 is subject to inherent risks and uncertainties, and actual results could differ materially from the statements in the forward-looking information. In discussing H&R's financial and operating performance and in responding to your questions, we may reference certain financial measures, which do not have a meaning recognized or standardized under IFRS 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 or comparable metrics determined in accordance with IFRS as indicators of H&R's performance, liquidity, cash flows and profitability. H&R's management uses these measures to aid in assessing the REIT's underlying 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 in the forward-looking information and the material factors or assumptions that may have been applied in making such statements, together with details on H&R's use of non-GAAP financial measures are described in more detail in H&R's public filings, which can be found on H&R's website and www.sedarplus.com. I would now like to introduce Mr. Thomas Hofstedter, Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstedter.
Thomas J. Hofstedter: Thank you, and good morning, everybody. Thank you for joining us today. With me are Larry Froom, CFO for H&R REIT; and Emily Watson of Lantower Residential. Larry, I guess we can start.
Larry Froom: Thank you, Tom, and good morning, everyone. In my comments to follow, references to growth and increases in operating results, unless stated otherwise, are in reference to the 3 months ended June 30, 2025, compared to the 3 months ended June 30, 2024. We have sold $64.7 million of real estate assets in the first 6 months of 2025. And at June 30, 2025, we had a further $56.9 million of investment properties under contracts to be sold. As at June 30, 2025, the value of our real estate assets broken down between our segments are as follows: Residential is our largest segment at 48%; industrial, 19%; office, 18%; and retail 15%. By geography, 70% of our real estate assets by value are now located in the United States. Overall, given the headwinds we faced with multifamily supply concerns, a weak office market, inflation as well as the tariff war creating general market uncertainty, we are very pleased with our results and in particular, the 3.4% growth in same- property net operating income on a cash basis for the 6 months ended June 30 compared to the same period last year. For the 3 months ended June 30, 2025, FFO was $0.314 per unit, a 2.6% increase from the same period last year. Breaking down the 3 months ended June 30, 2025, between our segments, the Residential segment same-property net operating income on a cash basis increased by 0.3% in U.S. dollars. Emily will provide more details on Lantower's results shortly. Our Office segment same-property net operating income on a cash basis increased 2%, primarily due to the strengthening of the U.S. dollar. There's been a slate of back-to-office policies from different companies, and it seems clear that more and more employees are heading back to the office, which is positive for the sector as a whole. 87.6% of our Office revenue comes from investment-grade tenants, a testament to the quality and location of our office properties. Our office occupancy at June 30, 2025, was 96.8% with an average remaining lease term of 5.5 years. Subsequent to the quarter, we sold 69 Yonge Street in Toronto for $20.2 million. At June 30, 2025, 69 Young Street was 81.4% occupied with a weighted average term to maturity of 3.4 years. Our Office portfolio now consists of 15 properties, which includes 3 properties with residential rezoning opportunities. The Retail segment same-property net operating income on a cash basis increased by 8.2% due to occupancy gains at River Landing and foreign exchange differences. The tenants in our Retail portfolio are predominantly grocers. Our largest retail grocer, Giant Eagle, sold the GetGo leases to Mac's Convenience Stores LLC, a wholly-owned subsidiary of Alimentation Couche-Tard. Giant Eagle is still our largest retail grocer comprising 3.6% of our gross revenue and Mac's Convenience Stores now comprise 1.8% of our gross revenue. Industrial segment same-property net operating income decreased 2.4%. Industrial occupancy decreased from 98.9% at December 31, 2024, to 89.9% at June 30, 2025, due to 3 properties totaling approximately 626,000 square feet at H&R's ownership share becoming available for rent. The weighted average contractual rent on lease expiry at these 3 properties was $6.30 per square foot. This represents a significant opportunity to grow rents. In addition, the redevelopment of our former office property at 6900 Maritz Drive, Mississauga into a 122,000 square foot industrial building was completed and transferred from property under development to investment properties. This property is also currently available for lease. Industrial properties located in the GTA made up 69% of H&R's industrial portfolio as at June 30, 2025. I would like to reiterate our headline FFO per unit for the 6 months ended June 30, 2025, which was $0.61 per unit compared to $0.60 for the same period last year. We are pleased with these results as we have sold $470 million of revenue-producing properties in the 18 months since January 1, 2024. Our FFO payout ratio was a healthy 49.2% for the 6 months ended June 30, 2025, and our AFFO payout ratio was also healthy at 59.4%. Our balance sheet remains strong. Debt to total assets at the REIT's proportionate share at June 30, 2025, was 45.5% and debt to EBITDA was 9.2x. Our unencumbered property pool totaled approximately $4.3 billion. Our unencumbered asset to unsecured debt coverage ratio was 2.2x at June 30, 2025. Regarding the special committee process, the special committee of independent trustees together with its financial and legal advisers continues to evaluate value-maximizing alternatives and determine the best path forward for the REIT and its unitholders. The special committee was formed in February 2025 following receipt of an unsolicited expression of interest. Since that time, it has received additional interest and is currently engaged in discussions with multiple parties. The REIT continues to believe in the long-term strategy, including the strategic repositioning plan, and the Board will only pursue a potential transaction that is in the best interest of the REIT and its unitholders. At this time, there's no certainty that a transaction will result nor is there a defined time line for the process to conclude. During the 3 and 6 months ended June 30, 2025, H&R incurred $8.7 million in transaction costs related to the potential transaction, which primarily consists of legal and adviser fees for the REIT and the special committee. With that, I will turn the call over to Emily for an update on the Lantower Residential segment.
Emily Watson: Thank you, Larry, and good morning, everyone. I'll begin with an overview of our second quarter performance and then highlight key operational trends across our multifamily platform. Despite a continued backdrop of elevated supply in several sunbelt markets, our portfolio has demonstrated resilience driven by strong resident retention, disciplined expense management and steady occupancy across our core markets. Operating conditions across our portfolio are progressing as we expected. Our markets continue to experience strong demand for household formation driven by population, employment growth, apartment affordability and positive demographic trends. Rent-to-income ratios remain stable around 20% with renting averaging 60% less expensive than homeownership. Our high-earning securely employed renter base continues to drive strong housing performance. Same property net operating income on a cash basis from residential properties in U.S. dollars increased 30 basis points for the 3 months ending June 30, 2025, compared to the respective 2024 period. Same-asset occupancy ended the quarter at 93.7%, a 70 point decrease over the first quarter and a 90 basis point decrease change from Q2 of 2024. Same-asset occupancy in the sunbelt decreased 89 basis points in Q2 to 92.8% over the first quarter. Jackson Park ended the quarter at 98.6% occupied with 73% retention. Our sunbelt resident retention was 57% in Q2 and the blended lease trade-out for the sunbelt markets were negative 1.4% in the second quarter, an improvement of 70 basis points over the first quarter. These results demonstrate continued increasing momentum as supply decreases. Moving to our fair market value. Based on recent sales comparisons, our fair market value capitalization rate for the sunbelt residential portfolio stayed at 4.96%, which was further supported by a third-party appraisal received in Q2. Institutional quality multifamily assets located in the sunbelt are expected to continue trading at comparatively compressed cap rates. This is largely due to sustained investor demand and a strong preference among capital allocators for long-term exposure to the sunbelt, where population growth, job migration and favorable business climates support durable investment thesis. Turning to developments. Both Dallas properties, Lantower West Love and Lantower Midtown continue to outperform the competitor market absorption. Lantower West Love is currently 72% occupied and 77% leased, and Lantower Midtown is currently 72% occupied and 76% leased. Both properties have averaged monthly velocity of approximately 23 leases per month compared to industry reports of 14 per month over the same time period. On the REDT front, construction is progressing well, and both projects remain on budget with completion expected in mid-2026. Lantower currently has an additional 9 development projects in the sunbelt pipeline, totaling over 2,900 suites at H&R's ownership interest with multiple sites ready and prepared for construction. In summary, we are encouraged by strong demand as demonstrated by our high retention levels and renewal increases as well as record high absorption through the first half of the year and pronounced declining supply levels going into the second half of the year. These improving market conditions are coupled with an engaged and focused team. Lantower Residential was awarded Fortune's Best Workplaces in Texas for the second year in a row. This prestigious award is based entirely on anonymous feedback from our associates, and we are proud of their engagement and laser focus while navigating challenging market conditions. I want to thank the Lantower team for their continued commitment to excellence. And with that, I'll turn the conversation back to Tom.
Thomas J. Hofstedter: Thanks, Emily. Operator, you can open up the call for questions, please.
Operator: [Operator Instructions] The first question comes from Fred Blondeau at Green Street.
Frederic Blondeau: Just going back to the July 4 press release, you mentioned that you've been made aware of speculations, but at the same time, you formed a special committee in February. So before it was leaked out, what was the Board's views on the action plan, especially in terms of communication once the committee was created?
Larry Froom: Yes, Fred, we really can't give any more detail more than what we said and laid out in our notes. The special committee was formed in February at that time. It was formed when we received the intention of interest. We followed all the securities and laws that we should be doing. So there's nothing more than we can really say on the special committee process at this time.
Frederic Blondeau: Okay. And then maybe you won't be able to answer that one, but I was wondering if you could speak on the original unsolicited bid or bids and why you decided not to disclose them to unitholders. Were those bids deemed uncompetitive at the time?
Larry Froom: Again, Fred, we can't disclose anything more than we've already disclosed. It's a normal course to entertain dealing with the party once you receive a vote. And the path that we followed is a normal course of action that any REIT and any other company was taken.
Operator: The next question comes from Mario Saric at Scotiabank.
Mario Saric: Maybe the first one for Tom. Broadly speaking, how would you characterize the transaction, the broader private transaction market today relative to 3 months ago?
Thomas J. Hofstedter: The transaction market being not leasing, but sales, it's improved. There's a little bit more liquidity. The United States has more activity. Office is basically still 0. Residential is picking up in the United States, as Emily talked to the 5% caps. We have seen evidence of that. Industrial has slowed. Overall, the short time frame we're talking about, I would say on balance, it's pretty much the same. There's -- the United States, I would say, is much more activity than Canada. A lot of that's driven by the 1031, which we don't have over here. I would say over here, it's almost the same. United States improved.
Mario Saric: Got it. Okay. And then just on the back of that, can you maybe talk -- I know you mentioned office is 0 for the most part. But can you talk about the implications of the Hess-Chevron transaction approval on the prospect of selling Hess Tower in Houston and similarly, kind of the leasing progress that you're making there?
Thomas J. Hofstedter: Okay. So Hess, we have reached out to the -- they reached out to us actually the Hess/Chevron team in charge of it. It was informative conversation. They have, as you probably well know, laid off around 500 people from Hess, but that's not directly from our office. They have told us by the end of the year, they'll conclude what, if any square feet to be keeping in the Hess Tower. My guesstimation is that between now and then, there'll be an opportunity for us to discuss whether they want to lease buyout or whether they want to take space or how they want to handle it because we share conference facilities, we share restaurants and fitness facilities, which are much more important in the Houston market than they are in the Toronto market. So that has to be dealt with. I expect -- there has been a lot of interest on the acquisition front on the Hess. We are reluctant right now to sell the property only because people get at the end of the day, going to be waiting for the answer, what is Chevron's final intentions. And if there is a buyout, we'd want to monetize on that. So I would say that I don't have a lot of clarity. We have communication. The asset is an A asset in the market, which there's very little contiguous A space on the market. We are dealing with the subtenants to extend them. And I expect that our third will be substantially leased by expiry in June 2026. But again, long term, I would like a little more clarity from Chevron before we put it on the market.
Mario Saric: Got it. Okay. My last question, can you just maybe walk through the justification behind the fairly sizable 9% IFRS NAV drop, of which I estimate about 6% was office and land PUD.
Larry Froom: Mario, I can take that question. So if I'm really just comparing to last quarter, we had a $280 million fair value adjustment down, so that's $1 a share. And the balance of the differences also came from foreign exchange, Canadian dollar getting weaker. So when we're translating the U.S. dollar properties back into Canadian dollars, that drops. So that was the difference -- the 2 large differences in the NAV. As far as the further write-downs go in terms of the $280 million fair value adjustment that we took, the bulk of it was in our office properties and most of it came from our office reintensification or redevelopment opportunities into residential, where from last quarter, we were valuing the residential development opportunities at $140 a square foot, and we dropped that down to $120 a square foot. The bulk of the office came from there. The other differences in the rest of the sectors were kind of smaller, just maybe taking into account lower market rents in industrial dropping or longer vacancies periods for the 3 industrial properties that became available for lease during the quarter.
Mario Saric: Got it. Okay. And the $140 to $120, that's simply a function of select trades, which I don't know if there have been many or is it simply reflecting lower kind of residential properties going forward?
Thomas J. Hofstedter: Residential, there's been no trades that are at the size of square footage that we have. So we just took it down arbitrarily. There have been trades at the 200,000 square foot price ranges. Prices have come down. They're structured deals. So we had to take it down by something. So we picked an amount that's not supported by trades, but the amount supported by market conditions.
Operator: The next question comes from Matt Kornack at National Bank Financial.
Matt Kornack: Just quickly on the line of credit or operating lines of credit that you have. It seems like you've been drawing there, is that just to maintain flexibility? I mean spreads seem to have come in on an unsecured basis and the underlying is relatively attractive. So is that just awaiting clarity out of this process and then maybe do longer-term financing thereafter?
Larry Froom: Matt, it's Larry. Yes, the liquidity has been drawn down. Our credit lines have been used. We used $400 million of them to pay off the debentures that came due in June and another mortgage residential in the U.S. And yes, we're just waiting clarity on the process before we proceed with longer-term financing.
Matt Kornack: Okay. Fair enough. And then can you give us a sense as to how much natural hedge you have against kind of U.S., the assets in terms of USD-denominated debt? Or is it mostly Canadian at this point?
Larry Froom: Well, most of our secured mortgages are in the U.S., which would be in the residential portfolio. So most of the residential properties have mortgages on them. I think there's 2 or 3 properties that do not at this time, but the rest of them do have. They started out when we acquired them at a 65% loan-to-value, both through principal amortization payments have been probably drawn down quite a bit. So they're probably at 50% or lower in terms of LTV today. And then again, the rest of our credit facilities and debentures are all in Canadian dollars on the Canadian side. So it's more corporate debt on the Canadian side and most of the mortgages would be on the U.S. side.
Matt Kornack: And then this quarter, it seems like there was a sizable fee income item from the development fund. Is that onetime in nature? Or should we expect kind of ongoing higher fees from that platform?
Larry Froom: Right. Our trust expenses were lower this quarter due to the third-party fees that we earned. Third-party fees earned, we earn property management fees, which are pretty much consistent. But the other kind of fees that we earn from all our joint venture partners, which are like leasing fees, development fees, which may be consistent and financing fees. So the leasing and financing fees could jump around quarter-to-quarter. This quarter, the REDT did contribute an extra $2 million for a financing fee. So that was unusual, and there was one other unusual item in the rest of the third-party management fees totaling about $1 million. So I would say in total $3 million is variable was higher than last quarter, put it that way. But they do jump around depending on when leasing is done and when financing is done.
Matt Kornack: Perfect. That's helpful. And then maybe 2 quick last ones. One, there was no disclosure on lease termination income. So I'm assuming there wasn't any. And then maybe on the industrial portfolio, it seems like there's a big mark-to-market opportunity there. Obviously, the market is a little bit slower from a leasing standpoint. But can you give us a sense as to how you see the lease-up taking place, maybe a bridge or timing-wise in terms of how we should see occupancy in that segment improve over the next, call it, 12 months?
Larry Froom: Sure, Matt. There was no significant termination fee income. I don't think there was any for Q3. As far as the lease-up -- sorry, for Q2 being contracted, yes, thank you, guys. Those termination fee income for Q2. For the lease-up of the industrial, I think it's an opportunity we have right now. We have a lot of interest in the 2 -- 3 new builds that we've just completed. That is on Slate Drive. We have about 500,000 square feet from the 2 properties there that we have interest in. We're hoping to be able to conclude a lease on that soon. We have our former office property that we -- is now ready for lease in Maritz that also has interest. The rest of the properties that were -- the HBC property may take more time. It's larger and an older property, so we are expecting that will take longer to do to lease up. But overall, the new properties, the new developments will -- should start to -- should have a lease and start producing cash flow pretty soon.
Operator: The next question comes from Jimmy Shan at RBC Capital Markets.
Khing Shan: Just a quick follow-up on the asset write-down. So given the lack of transaction, I guess I'm wondering if -- were your views on where the values are also informed by where the bids may have come in at? In other words, like you're using $120 a foot available for office and $140, why not $100 and why not $110? And just sort of -- what was the thinking there? And then the write-down, I think is also relating to the residential land bank. I just want to clarify that as well.
Larry Froom: Okay. I'll take that in reverse, Jimmy. Thank you. The residential land bank, I did not mention earlier. The residential land bank, we did write down. It wasn't a substantial write-down, but there are numerous land parcels that we have. So each one may be taking a $3 million to $5 million write-down added up to the $50 million write-down that we see. We valued it. On average for the residential land came out to about $38,000 per door. So that's what we're currently carrying it on the books at. As far as the -- your first part of the question in terms of the $120 a square foot, I think, Matt is on the line. Matt, do you want to give Jimmy some more color on that?
Matthew Kingston: Yes, absolutely. Jimmy, we're -- as Tom was saying earlier, the trades that we're seeing are pretty few and far between. And the only one that was around 260,000 square feet that transacted this year through Colliers was a private developer who sold to Quarterra at Queen and Dufferin. It was an approved site fully baked, and that traded for $117 a foot. Total deal size was just around $27 million. And that we think -- obviously, that's not as large as our properties, and it's also not as good a location as our properties. But we're seeing very long terms on things. We have had people approach us. And I think that, that dollar per square foot just talking to colleagues, talking to other people, that seems somewhat appropriate, but it would include long terms. So we think we have very well-located things that carry a higher value than the Queen and Dufferin, but the size of them creates a discount. and then the likelihood of a transaction with no terms is 0% today. Somebody would want to see a large VTB.
Khing Shan: Okay. So hearing all of that, I guess it's fair to say that your views on where the values are, where you've marked it at were not informed by where the bids are, overall in nature?
Matthew Kingston: No, I think they are, Jimmy. I think we're being reasonable with what we're putting our values at. It's just difficult because people with projects as good as ours are not trading them today, like us. We're not willing to take that large a discount.
Khing Shan: Okay. Sorry, what I meant was...
Thomas J. Hofstedter: Jimmy, the differential is -- it's not condo, Jimmy. Our lands are primarily condo or mixed. What's trading is really residential rental. Residential rental is lower, of course. So for residential condo, you're going to have to wait for the condo market to come back somewhat.
Khing Shan: Yes. What I meant was when I said bids is when in terms of the unsolicited bids and the different proposals that you're getting from different parties as part of the special committee review, those values that have come in, whether it's the specific -- whether it's in the office in Toronto or other parts, where you've ultimately marked those assets today are not -- you haven't taken those proposals and bids into consideration?
Matthew Kingston: Correct.
Khing Shan: Okay. And then the $8.7 million have been spent on legal and advisory fees, it's not a small number. Is the special committee work, is it relating solely to the review of the proposals that have come in? Or is the work wider in scope, change in strategy or anything like that?
Larry Froom: Jimmy, I'll take that. I can't really answer much more than what we said. The fees that we spent to date, $8.7 million consists primarily of legal and adviser fees for the REIT and the special committee. The REIT and special committee will continue to seek value maximizing alternatives and determine the best path forward for the REIT and its unitholders. But just as a comparison, for the $8.7 million that we spent to date, I looked up yesterday, I think InterRent had $6.5 million spent to June 30, and they still probably have a way to go, and that's on a $4 billion company with assets of $4 billion. If you look further back to Cominar, they spent $43 million on banker and professional -- sorry, on professional fees, and that is on a $6 billion company. So $8.7 million, I think, is kind of in line.
Khing Shan: Okay. Last question. The various asset sales we've been speaking about in the past, whether it's Brooklyn, Caledon and ECHO, are those initiatives sort of on hold until you're waiting on the outcome of the strategic review? Or are these still ongoing?
Thomas J. Hofstedter: We slowed them down, let's put it that way. They're not on hold, but we have gone slow.
Khing Shan: Okay. And sorry, last one. You mentioned there's no defined time line on when the process will conclude. If and when it is concluded, I'm assuming there will be a press release to that effect.
Larry Froom: Of course.
Matthew Kingston: Yes, obviously.
Larry Froom: 100%.
Thomas J. Hofstedter: You'll definitely be the last to know, Jimmy. Don't worry about it.
Operator: The next question comes from Sam Damiani at TD Cowen.
Sam Damiani: First one for me, just to sort of expand on a little bit of the discussion with Jimmy there. Some of these transactions or files, ECHO, Gowanus, Caledon, whatever, they're not on hold, but Tom, you slowed them down. How exactly do you slow these things down? Can you be a little more specific?
Thomas J. Hofstedter: Well, we have bankers for ECHO that we've talked to. We have proposals from them. We have not contracted with them. And we have on Caledon, as a good example, again, we've slowed it down. We're not actively trying to go ahead and negotiate the land values with the -- on the highway extension. Hess, we've parked it until I said to the end of the year, at least until we have clarity from Chevron. So those are the big plays. And basically, we hope that this process ends sooner rather than later. Otherwise, we will have to go on with business as usual.
Sam Damiani: That's my next question. Absent any proposed transaction, whatever way you want to describe it, like in what ways do you think over the next year or so, the strategic plan would move forward most meaningfully?
Thomas J. Hofstedter: If we didn't sell, then we would hopefully engage to sell the properties we've been talking about for a while. We would enter into an agreement with an adviser to sell ECHO. We would consider selling Hess. We would consider ramping up to clarify the values on the 413 on the Caledon lands. And those are the big numbers and potentially expedite Gowanus.
Sam Damiani: And you didn't mention Gowanus earlier. I mean, is that -- are you slowing that one down, too? Like what's the sort of status there, I guess? If you're able to...
Thomas J. Hofstedter: We've been working on this -- we've been looking at this. The special committees are working for quite a while right now. So hopefully, we're getting near the end of this. We don't have a time line, as we said, but hopefully, we're getting close. So I hope to be able to resume business as normal one way or another in short order.
Sam Damiani: Okay. Just last thing for me is just on the NOI in the quarter. Was there anything unusual contributing to NOI? I know there's no lease termination fees, but just curious if there was anything unusual contributing? And then secondly, with those 2 or 3 new industrial vacancies that ceased paying rent sometime during the quarter, how much rent did you get in the quarter from 77 Union or the HBC warehouse. Did those rents commence -- cease at the end of the quarter or at the beginning of the quarter?
Larry Froom: Or the leasing on Union and Metropolis, we received about -- booked in the quarter, we booked approximately $600,000 of our net operating income in the quarter from those 2 leases. And your first question, I've already forgot. I'm sorry, can you please repeat?
Sam Damiani: Yes. You've already addressed the absence of lease termination fee income contributing, but was there anything else unusual that contributed to NOI in Q2?
Larry Froom: No, there was nothing unusual that was a onetime item, if that's what you're asking.
Operator: The next question comes from Tal Woolley at CIBC Capital Markets.
Tal Woolley: Just wanted to ask about Lantower. Maybe you can just speak to market conditions in Texas and North Carolina, and how you see sort of occupancy evolving there over the next few quarters?
Emily Watson: Yes, it's actually progressing exactly kind of how we anticipated it, which really correlates nicely with the supply coming down in those markets, in all of the sunbelt markets actually specifically. So if you remember, 2024 was the biggest deliveries, about 130,000. In 2025, we had 90,000, but 55,000 have already delivered, and we only have 35,000 to go for the rest of the year. So we see those -- we see the effect of that. In fact, we started the year in a gain-to-lease position, and it flipped to a loss-to-lease position in Q3. So I think that we will continue on. I think we'll end the year at a positive lease trade-offs and positive NOI for the year for the portfolio as a whole, just getting some of that absorption behind us. And fortunately, demand is strong in all of our markets. We have positive migration. And even though wage growth is moderating to kind of what it used to be, it's still positive in all of our markets. So I think we'll just continue to get stronger under -- our feet underneath us. And then 2026, like I've kind of repeatedly said, is going to be a much better year for the multifamily markets in the sunbelt.
Tal Woolley: Do you have like a market occupancy number where it's like you feel confident that it's like at that point, like we hit 92% or 93% and then you feel very confident trade-outs improve?
Emily Watson: Yes. We've been kind of holding steady at 93%. We're 93% today. So I think that, that will actually grow in the third quarter and the fourth quarter to maybe 93.5% and then 94% and then 26%. I think you get back into the 95% range without giving -- I mean, we could be in the 95% range now if we wanted to lower our rates, but we want to keep our rent roll strong. So -- but yes, I think we grow from the 93% where we've been to a little bit stronger by the end of this quarter and then get into the 94% and the 95% in '26.
Tal Woolley: Okay. And then just on the industrial portfolio here in Canada, I apologize, I was on another call over at the start, but if this was addressed. But just any material capital needs you think in order to release some of those vacancies? Or is it just a matter of finding the right tenant?
Thomas J. Hofstedter: The capital, I don't think we have -- the capital would be we want to take, for example, 100 metropolitan and divide it into multi- tenant. But that's not our first choice at this stage of the game where we don't expect to have to invest any real capital in any of the properties. It's just a typical re-leasing and commissions.
Operator: We have no further questions. I will turn the call back over to Tom Hofstedter for closing comments.
Thomas J. Hofstedter: Thank you, everybody, and enjoy the rest of your summer.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.