HRUFF Q3 2025 Earnings Call

Operator: Good morning, and welcome to H&R Real Estate Investment Trust 2025 Third 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 reflect 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. Tom Hofstedter, Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstedter.

Thomas Hofstedter: Thank you, and good morning, everyone. With me today are Larry Froom, our CFO; Emily Watson, President of Lantower Residential. We get a lot to talk about today. So I think I'll just jump in and hand it over to Larry, followed by Emily and then Q&A. Larry?

Larry Froom: Thank you, Tom, and good morning, everyone. As at September 30, 2025, the value of our real estate assets broken down between our segments are as follows: Residential is our largest segment at 50%; industrial 19%; office, 16%; and retail 15%. By geography, 71% 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, the tariff war creating general market uncertainty and a weaker Canadian economy, we are very pleased with our results and in particular, the 2.1% growth in same-property net operating income on a cash basis for the 9 months ended September 30, 2025, compared to the same period last year. For the 9 months ended September 30, 2025, FFO was $0.90, same as the 9-month period ending September 30, 2024. An amazing result considering net property sales of approximately $500 million over the 21-month period from January 1, 2024 to September 30, 2025. Breaking down our same-property net operating income on a cash basis between the segments, Residential was down 3.4% for Q3 2025 versus Q3 last year and was up 1.2% for the 9 months 2025 versus the same period last year. Emily will provide more details on Lantower's results shortly. Our Office segment same-property net operating income on a cash basis increased 0.5% for Q3 versus Q3 last year and was up 1.5% for the 9 months 2025 versus the same period last year, primarily due to the strengthening of the U.S. dollar. Our office occupancy at September 30, 2025, was 96.9% with an average remaining lease term of 5.3 years. Our Office portfolio now consists of 15 properties and comprised 16% of our total portfolio. Retail segment same-property net operating income cash basis increased 5.3% for Q3 2025 versus Q3 last year and was up 7.3% for the 9 months 2025 versus same period last year due to occupancy gains at River Landing and [ ForEx ]. Industrial segment same-property net operating income decreased 7.5% for Q3 2025 versus Q3 last year and was down 1.9% for the 9 months 2025 versus the same period last year. Industrial occupancy decreased from 98.9% at December 31, 2024, to 89.9% at September 30, 2025. During the quarter, we leased our newly constructed 122,000 square foot industrial property at 6900 Maritz Road. This lease will commence in December 2025. In addition, a further 108,000 square feet of vacant industrial space was leased with these leases commencing in Q4 this year and Q1 next year. Our FFO payout ratio was a healthy 50% for the 9 months ended September 30, 2025, and our AFFO payout ratio was also healthy at 61.3%. Our balance sheet remains strong. Debt to total assets at the REIT's proportionate share at September 30, 2025, was 47.3% and debt-to-EBITDA was 9.3x. Our unencumbered property pool totaled approximately $4.1 billion. With that, I'll turn the call over to Emily for an update on the Lantower Residential segment. Emily, please go ahead.

Emily Watson: Good morning, everyone, and thank you for joining us. I'll begin with an overview of our third quarter performance and the operating environment across our multifamily platform before turning to market trends and development progress. While the broader economy continues to navigate a mixed landscape, including slower job growth, rising tariffs and fiscal uncertainty, our portfolio once again demonstrated its resilience. Occupancy, collections and resident retention remained solid through the quarter, and we saw steady leasing momentum even as pricing power moderated across many sunbelt markets. The quarter underscored the strength of our operating fundamentals. Our residents remain gainfully employed, wage growth has held firm around 4% and affordability remains a competitive advantage. With average rent-to-income ratios around 20%, that positioning gives us access to a wider and financially stable space, supporting consistent collections and healthy renewal trends. We are seeing early signs that the most supply-heavy markets are beginning to rebalance. Deliveries of new competitive units are declining each quarter and forward-looking forecasts show an expected reduction of roughly 54% or about 79,000 units in 2026 compared with 2025 levels. As the pace of completion eases and job growth normalizes, we anticipate regaining pricing traction and achieving more balanced fundamentals across our footprint. Our diversified presence across high-growth markets, combined with a deliberate focus on expense discipline and technology adoption continues to support performance through the cycle. Even in areas where lease-up activity remains elevated, we've taken proactive steps to preserve occupancy and mitigate revenue drag through targeted concessions and digital leasing efficiency. From a long-term perspective, we remain confident in the structural underpinning of our business. Housing affordability challenges continue to steer demand toward quality rental housing and with less than 10% of move-outs tied to home purchases, retention remains high. Taken together, we believe the ingredients are in place for a gradual reacceleration in revenue growth through 2026 and beyond. Our operating results reflect both resilience and realism. Some same-property NOI from residential properties in U.S. dollars decreased 4.6% on a cash basis for the 3 months ending September 30, 2025, primarily due to the decrease in rental income in H&R's sunbelt properties, including higher concessions being offered to tenants and higher operating expenses, including repairs and maintenance, leasing and marketing and utility expenses, which were partially offset by lower property taxes and insurance expenses. Same asset occupancy ended the quarter at 94.6%, an improvement of 50 basis points from prior year and 90 basis points from Q2. Same-asset sunbelt occupancy closed at 93.8%, up 40 basis points quarter-over-quarter, supported by steady renewal demand and moderating new deliveries. Same-store blended lease trade-outs were negative 1.6% in Q3 with new lease trade-outs negative 8.9% and renewal lease spread at 4.4%. October trends improved further to a blend of negative 1.2% with new lease negative 9.6% and renewal at 4.7%. While industry broadly continues to experience slower rent growth, our fundamentals remain intact. Demand is underpinned by population inflows, resilient employment and the enduring affordability gap between renting and owning, which today sits near all-time highs in favor of renting. These conditions reinforce our conviction the durability of multifamily performance even amid softer near-term pricing. Innovation continues to be a differentiator for us. Our AI-driven leasing platform ensures 100% coverage of calls, e-mails and text as nearly 1/3 of all inquiries are initiated outside of traditional office hours. Our centralized platform has allowed the days between application to lease sign dates to be cut in half and the time from lease approval to lease execution has decreased to 3%. At the same time, rigorous identity and income verification protocols have reduced bad debt in half post centralization. These tools allow our teams to focus on higher impact relationships and revenue-generating activities, effectively amplifying our workforce productivity. We also continue to make headway on portfolio-wide WiFi initiatives, which improve both resident satisfaction and margin potential. We have one community scheduled to go live with property-wide WiFi by year-end with an additional 6 installations planned through 2026 that are projected to deliver an estimated 86% return on investment. Our sunbelt portfolio fair market value is supported by a third-party appraisal and recent market transactions, thereby maintaining a weighted capitalization rate of approximately 4.97%. This level remains consistent with Q2 and reflects our ongoing institutional confidence in the sector. High-quality multifamily assets across the sunbelt continue to trade at cap rates, driven by the region's compelling long-term fundamentals, including robust population, employment growth, business-friendly environments and durable migration patterns that underpin lasting value creation. Turning to development. Our new Dallas assets continue to progress well. Lantower West Love is 83% leased and is expected to stabilize by April 2026 as supply pressures ease in the market. Lantower Midtown is 82% leased on track to stabilize in early Q1 of 2026. Both communities are outperforming competitive market absorption, averaging 21 leases per month versus industry averages of roughly 14 per month since initial move-ins. Each was completed on time and on budget, underscoring the discipline of our development execution. Our REDT projects remain on budget. We are on schedule to receive first move-ins at Lantower Bayside in Tampa in March of 2026 and first move-ins at Lantower Sunrise in Orlando in April, with completion expected in mid-2026 for both assets. In addition, Lantower currently has 9 sunbelt developments in the pipeline totaling approximately 2,900 suites at H&R's ownership interest. Multiple sites are fully permitted and ready for construction, and we are advancing design, drawing and permitting on the remainder. These projects reflect our conviction in the long-term growth of sunbelt markets and our ability to capitalize on favorable land positions as construction costs stabilize. In summary, our third quarter results highlight a portfolio that remains fundamentally sound, operationally agile. We've maintained stable occupancy and record high collections and continue to invest in technology and innovation that expands margins and strengthens resident loyalty. While near-term market conditions remain mixed, the long-term setup for multifamily housing is compelling, moderating new supply, favorable demographics and strong affordability advantages relative to homeownership. We expect these factors, coupled with disciplined execution and our culture of innovation to drive sustained growth in NOI and value creation as we move into 2026. Finally, I want to recognize our exceptional Lantower team. Their focus, adaptability and commitment to excellence continue to be the foundation of our success and our ability to navigate evolving market conditions with confidence. And with that, I'll turn the conversation back to Tom.

Thomas Hofstedter: Thank you, Emily. Operator, please open the call for questions..

Operator: Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. And the first question comes from Sam Damiani at TD Cowen.

Sam Damiani: Obviously, a disappointing outcome. I wonder if you could talk about the stages of the various sale transactions that aggregate $2.6 billion, the difference between the assets that are held for sale and the assets that are not.

Thomas Hofstedter: So I guess it's a precursor to everybody will be asking the same question. We're not going to get into details of what we're selling. We're not because we're currently in negotiations to try to conclude them. We have confidence that they will get done. Some have been approved by the Board, some haven't. So that's where we have a list of assets held for sale and the others that are not in there because we just haven't had approval from the Board yet. So stick with us, what we're really saying is that we hope this is all finished by the end of the year, which is short enough, hopefully sooner than that, because we are confident that will get done, but we're in the final throes of it. So I really can't get involved into any details on this. It's sensitive to the negotiations that we're having with the post-buyers.

Sam Damiani: Okay. And what about the use of proceeds, Tom? I mean, it would be obviously selling over.

Thomas Hofstedter: Yes, good questions. The use of proceeds, what's the quantum of the use of proceeds? So I can't -- obviously, we pay down debt, we have a debenture that's coming due. So that's priority #1 would be pay down debt. If you do $2.6 billion, you have excess funds, and we really haven't addressed that nor at the stage to identify what the -- how we'll use the proceeds because we don't know what the proceeds are. So again, same answer. You have to stick with us for a couple of weeks, hopefully, no longer.

Sam Damiani: Yes, it's a theoretical question. Obviously, you've stated the plan. And so I was just wondering what the priorities are if you $2.6 billion.

Thomas Hofstedter: Yes, pay down that, number one, get our balance sheet in order. And then if there's any excess funds depending on the quantum, obviously, an NCIB would be high -- maybe giving back unitholders and an NCIB would be high. Okay. Larry, do you want to jump in too or...

Larry Froom: I think Tom said it, I mean, there's quite a bit of proceeds that will come in and it would hopefully come in, in stages. So the first sales for sure will be going to pay back down debt. And then as we get further down and we're comfortable with our balance sheets and everything, then we'll look and it will be a Board decision then what to do with the excess cash? Do we buy back units or do we distribute to our unitholders.

Sam Damiani: Okay. Last one for me. Some of the dispositions are clearly some higher cap rate assets and even deleveraging is often dilutive. Just wondering on your thoughts about the sustainability of the current distribution.

Larry Froom: So you are correct, Sam, that it would be dilutive to FFO as the sales because some of them are higher cap rate sales, and we've taken the write-downs before that. So -- but our FFO payout ratio is only 50%. So we have a lot of room to work with. And I think the distributions are quite safe right now.

Thomas Hofstedter: And any scenario, I can envision the distributions being challenged. I don't think that's the issue. I think we have plenty of cash. It's just a question to distribute and pay out. Debt is obviously number one. But after we do that, as I said beforehand, it's NCIB or distribute. Under no scenario, do we see any challenge to cutting distributions.

Operator: The next question comes from Fred Blondeau at Green Street. .

Frederic Blondeau: Just one quick for me. The fair value adjustment is quite sizable. I was wondering if you could give us a bit more color on what would be the breakdown of the adjustment between that $2.6 billion that's for sale and the core portfolio?

Larry Froom: I mean if you look -- you're quite right, we've taken sizable write-downs -- not only this quarter, but in the 9 months, $830 million. To help you give you a sense of size, I will just comment on the assets that we have marked as held for sale, that is $865 million there. We probably comprised almost the majority of that -- of the write-down this quarter. So we had $482 million, and most of it was in office through Hess, Front St. and [ Shepherd ]. So most of that write-down from the office came from there. It wasn't solely there. There were other office properties that were written down. But I'd say just over 50% was from that.

Operator: The next question comes from Mario Saric of Scotiabank.

Mario Saric: Just a couple of questions on the process. Firstly, is there any -- are you willing to provide any color on the pricing level of the nonbinding bids that were received during the process?

Thomas Hofstedter: Again, the answer is going to be no. We were subject to confidentiality, and we really don't want to get into there because it's complicated. It depends on the mix of the scenarios, the players who were involved in and why -- and it never got to the final stage anyhow which was accept the special committee. So I'd rather decline from answering that question.

Mario Saric: Okay. And then I guess, somewhat related, did the Board ever consider kind of putting the bids received to unitholder vote? And if so, I guess, what are some of the drivers behind not doing so?

Thomas Hofstedter: The committee did not get to the stage where they had -- the answer is no. They not up to the stage where they had an acceptable offer to present at a price that they were would suggest going forward with.

Mario Saric: Okay. Maybe switching to the asset sales. On the $2.6 billion that are expected, do you have a sense of the potential required kind of special distribution if they were all to be completed within a calendar year?

Thomas Hofstedter: You're talking about taxes.

Larry Froom: Yes, there would be substantial Canadian sales there, obviously. I mean the retail announced is part of it. The Canadian retail is definitely part of it. So there would be a special distribution that would be required to be made. But again, I would just say we will give more details as each sale becomes firm, we will put out more detail -- full details of the disclosure of the price, the NOI we expect to lose from those sales and potential tax implications.

Thomas Hofstedter: I might add that the tax implications are not for 2025. The would be closings, although we have nonbinding agreements we expect sometime this year, closing would take place in 2026.

Mario Saric: Okay. And then I guess you talked about the mix being up for debate. But if we step back before the strategic review was announced and the potential kind of bids coming in, the intent was really for the organization and for the REIT to become more focused on U.S. residential and industrial. When we look at the $2.6 billion that's under consideration, would it be fair to say that you would substantially make your way towards that previous objective by doing so?

Thomas Hofstedter: Yes. I can't get involved too great details, but obviously, what will be left with either 1 of the 2 buckets you mentioned or one of the buckets, but definitely office would be brought down and retail will be brought down. In other words, this is somewhat in line with our original strategic plan, but I think the completion of this initiative, the strategic plan will be fine-tuned.

Operator: The next question comes from Jimmy Shan at RBC Capital Markets. .

Khing Shan: So just on -- when you did the full auction process, you mentioned there were parties that was interested in some specific assets. So of the $2.6 billion essentially comprised of those assets in which you got interest in?

Thomas Hofstedter: Yes. .

Khing Shan: I'm sorry. Was that yes.

Larry Froom: The answer is yes.

Khing Shan: Okay. All right. So are there any residential or industrial in -- that's currently under negotiation to sell?

Thomas Hofstedter: Again, as I mentioned before, we really don't want at this time to get involved in that level of detail. But again, as I said beforehand, we hope to have this all wrapped up soon enough.

Khing Shan: I guess maybe the broader question is kind of what is the go-forward strategy? Is it to stick to the original strategy, sell what you can and just trying to step back and say, okay, what is -- what does H&R look like on a go-forward basis? .

Thomas Hofstedter: Well, I guess the overall strategy was a declutter. We were too many divisions. We mentioned that the overall strategy was to get more focused on industrial/U.S. residential. They're healthier -- although they're not necessarily healthy, they're healthier asset classes than office. So the original strategy was declutter, and that's exactly what we will be doing. How far are we going? Will it end up being an industrial REIT or a residential REIT or both? I don't know at this stage, again, again, it's a little too early to tell. But the overall goal was to become less of a diversified REIT, and that's for sure what we will succeed to do.

Khing Shan: Okay. And then in the past, you've talked about condo land for condo development being pretty tough. I mean you do have 145 Wellington, you do have the Front St. ones. I guess what's changed?

Thomas Hofstedter: Well, it's interesting. What changes is 2 things. The office market got better, the residential market got worse. So our initiative to rezone our commercial properties was not for the here and now in either was to have some -- when the market does improve some optionality is whether it's office or residential. At this stage of the game, it looks like the office market is recovering faster and the winner of the races are going to be remaining is office rather than residential. I would say that in all cases other than 55 Young, the status quo, whether it's Union St. or Front St. or 25 [ Shepherd ] -- sorry, or 145 Wellington is always going to be commercial rather than residential.

Khing Shan: And then on the use of proceeds, I know it's hypothetical, but in the past, you've been averse to doing substantial issuer bid, but it does look like it's going to be a decent sized number. Would you contemplate doing that?

Thomas Hofstedter: I don't think so. We haven't run the Board give, but our objection to a substantial issuer bid is you can probably achieve the same goal by doing an NCIB at probably 17% less. I was never a fan of it. I'm still not a fan of it, but we can have offline in discussion convince me otherwise.

Khing Shan: But it's safe to say that beyond paying down the debt, there'd be a [indiscernible] to a buyback.

Thomas Hofstedter: You can do a special distribution cash instead of an SIB and you wouldn't have to worry about excess money in your bank account.

Khing Shan: Okay. Sorry, last question, just in terms of -- since the original solicited bid wasn't -- or didn't get to the finish line or wasn't presented to the unitholders, like what did the special committee consider to be acceptable in terms of terms and pricing?

Thomas Hofstedter: I wasn't on the special committee. I don't know. The experience tells me there was a moving target. If you had a real offer that was really acceptable that they can bring forward, I can maybe answer more, but they never -- they didn't have that at the end of the day. But again, I wasn't -- I was not in the special committee. I don't know what the answer to that question is. I'm sure it was a range.

Operator: The next question comes from Matt Kornack at National Bank.

Matt Kornack: Just with regards to the tax implications, I understand if you sell Canadian assets, you can kind of push that through to unitholders in a special distribution. But for the U.S., if you can't take advantage of the 1031 exchange, do you think there would be a cash tax component?

Thomas Hofstedter: There would be a minor tax cap for minimum tax, but we have tax loss carryforwards. So we'd be utilizing those. I don't see any U.S. tax leakage -- any material tax leakage.

Matt Kornack: Okay. And then just in terms of the quarter itself in terms of the sequential NOI, Larry, was there anything seasonality-wise in terms of the NOI reduction or there would have been a recovery or something to that effect? I know the portfolio has changed. So there may be a little bit more seasonality in it, but I was a little surprised with the move there.

Larry Froom: No, there was -- I think this is a normal run rate. When I say normal run rate, I mean, we saw residential was down a little, and that's showing some weakness. But other than that, which is expected to recover, other than that, there was nothing unusual. .

Matt Kornack: Okay. And then going back to the sale, I know you aren't talking specifics, but could you give kind of a broad sense as to what the disposition cap rate would be? And then also in terms of where your line of credit is in terms of current interest expense on that?

Thomas Hofstedter: Well, listen, I'm not going to give specifics and without that, it's pretty hard to answer your question. If you have an office building that's leased hypothetically, obviously, and it falls off, it's not a cap rate discussion. In many cases, it's the present value of the residual cash flow plus dollar at the end, which represents by the pound. So cap rates would kind of be a useless discussion if I can't identify and not willing to identify the specific asset that we're talking about. And you're talking about Lantower, you can talk about a 5% cap and that's easy. In the sunbelt, you use 5.25%, whatever number you want, you can't do that in office. If there's a 7-year WALT and it all comes to a balloon at the end, that's going to be substantially different than something that has a longer-term cap rate. So I can't really discuss cap rates. But we will give you all the color in a couple of weeks, hopefully.

Matt Kornack: I understand the dynamics there, but we don't have the same level of detail that you guys do. So more based on...

Thomas Hofstedter: No, I know. Fair enough. But not giving the asset, it's very hard to give you -- have an intelligent conversation as to the impact without identifying the asset.

Matt Kornack: Okay. Fair enough. But Larry, just in terms of the variable interest rate, where would that stand today on your line of credit?

Larry Froom: Well, we disclosed that the average weighted rate is 4%. But the variable rate today is on our credit line, just about just 3.9%, something like that.

Matt Kornack: And presumably, you have a lot available there, which is good. You have the flexibility to pay it down. What would be the next kind of pieces of debt that you would pay off with the proceeds?

Larry Froom: Well, we've got $250 million coming up next year in a bank term loan. So that will be the next. We have another debenture later on in next year. That will be the next to be hit to be taken off the debt list. And from there, we will see.

Matt Kornack: And is it mostly unencumbered portfolio or the $2.6 billion slated for sale?

Larry Froom: Well, I can tell you that the assets held for sale that we're showing of $860, whatever, $5 million, that's totally free of any debt. It may be pretty much totally free of debt and the 2.6...

Thomas Hofstedter: Well, in a nutshell, our Lantower and our industrial divisions have debt on it. The rest we don't have debt on it. So Larry is trying to answer your question as best as he can. But if it's not in the Lantower and industrial buckets, it's debt free for the most part.

Larry Froom: Sorry, Matt. And just a correction on what I said. There is one mortgage on our assets held for sale, and that is on the Front St. property. That's about [indiscernible] million.

Matt Kornack: Okay. Last one for me. And again, maybe that's too specific, but it sounds like these skewed to more Canadian asset sales. So you're becoming predominantly a U.S. REIT. Is that a fair point after this? Or how should we think about that?

Thomas Hofstedter: Well, I'll let you answer the question. We are right now.

Operator: Next question is from Sam Damiani at TD Cowen.

Sam Damiani: Just a follow-up. I believe, Tom, in an answer a few minutes ago, you said that you don't see any material tax leakage from U.S. asset sales. Is that correct?

Larry Froom: That's correct. .

Sam Damiani: So that would suggest that the sales that are being contemplated are not those with inherent gains. Is it fair to take that away from that comment?

Thomas Hofstedter: Well, yes and no, you have tax loss carry forward. So I don't know. That would not be correct. I don't believe what you're saying. You can have the gains, but we wouldn't be paying the taxes on them. We have significant tax loss carry forward.

Sam Damiani: Okay. And then just the other one for me. I'm not sure this may have been asked, but the fair value marks taken in Q3, I think the language was to reflect the bids for the stuff that's held for sale, the $865 million. Does primarily, sorry, of course. So how much of that would still need to be taken based on the remaining $1.7 billion of the $2.6 billion planned?

Larry Froom: Not, very little. If any, I don't think -- I think we've marked down -- as I said, we've taken our hits and we've taken them now and in the previous quarter. If we were to do the $2.6 billion, we would not be expecting to take anything major on that.

Operator: The next question comes from Tal Woolley at CIBC Capital Markets. .

Tal Woolley: One of the questions I've been trying to get an answer for investors about is that I think like when we're thinking about the process that there probably could be some agreement on what asset values are that there might not be that wide a bid-ask spread, but the problems sort of come up in affecting the transaction and that there are maybe transaction costs or tax implications that we can't see from the outside. You guys have the deferred tax liability on your balance sheet, but it's just -- can you -- is there any sort of sense you can give around what beyond that might be the cost? We've seen this come up with other diversified REITs going through processes like Cominar in the past.

Thomas Hofstedter: I don't really understand the question.

Larry Froom: I don't think there'll be -- it depends on the price, obviously, for deferred tax, how much ends up paying. But assuming it was even at our fair market value that we're holding it at, all that will be paid is the deferred taxes on our balance sheet. So that would end up becoming payable if everything was sold at the prices we are carrying them at. Other hidden costs would probably be like change of control payments and that kind of thing, which are normally not substantial in any deal. And I don't think ours would be any different in that -- to that effect.

Operator: Next question comes from Mario Saric of Scotiabank. .

Mario Saric: Just one quick follow-up. You mentioned that the $2.6 billion will be effectively done in stages. In terms of communication with the market going forward, coming back to Jimmy's question a little bit in terms of what is H&R going to look like over the next 2, 3, 5 years? What is the expectation for communication with the Street in terms of updated strategy, where you're going versus maybe just individually announcing the asset sales as they come up?

Thomas Hofstedter: So the assets they come up, first of all, just for clarification, it will be lump that will be done by the end of the year rather. Closing will be probably over the first quarter, Q1 2026. So you'll have a pretty good handle on what in totality we're selling. You'll have a pretty good handle on -- we will announce at that point in time, but that was before the years out what our revised strategy is pending on the actual completion of these sales. So it's pretty hard to answer these general questions without -- in a vacuum because $2.6 billion is lumpy enough that it will formalize our strategy going forward. So I'm sorry for being evasive all the time, but it really -- you're going to know soon enough. You don't have to wait for 2026. One way or another, we expect by the end of this year to give you the answers to those questions.

Mario Saric: And just to clarify again, Tom, I think you mentioned that you don't see a scenario unfolding in which the existing distribution is unsustainable. Is that correct?

Thomas Hofstedter: That is correct. That is correct. Under no scenario do I see that being the case.

Operator: Next question from Fred Blondeau at Green Street.

Frederic Blondeau: Just a quick follow-up. It looks like the REIT will be quite different, of course, in '26 than what it is now. I was wondering if you -- we should expect some sort of management restructuring or major management changes or any announcements in that regard that before the end of the year or in the beginning of next year?

Thomas Hofstedter: Not the end of the beginning of next year, could well be depending on how -- in other words, hypothetically, let's assume that we become 100% Lantower and life changes. And obviously, management -- the need for management over here changes. I think we can't answer that question again until we formalize the sales, formalize the strategy and then we'll see then management will follow with the residual what's left in our company.

Operator: Next question from Sam Damiani at TD Cowen.

Sam Damiani: I really appreciate this. But just trying to get some clarity and certainty on this $2.6 billion. I mean your comments, Tom, are pretty clear. You're very confident and you're telling everybody to wait and you're going to hear all the details by the end of the year. But what can you tell us today that gives us comfort that, that's -- that this is kind of a done deal in terms of getting across the finish line, getting these agreements signed and binding and then closing in early next year?

Thomas Hofstedter: So just to be clear, one way or other, we're going to conclude that whatever this quarter, whether it happens or happens, I'm not develop telling you that it's going to happen or won't happen, but the special committee is done. They're closed up for shop. It now is back to the Board. We either execute on these deals or we don't. We have a pretty good understanding throughout this lengthy process of our company and where to go from there. So I think we'll be able to give you a high degree of comfort by the end of this year, by the end of December as to what the future strategy is going to look like, what our cash position is going to be and if there will be any further sales.

Sam Damiani: I guess, but on the $2.6 billion specifically, are you saying just there that there is not -- like there's a chance that they're not -- like they don't get signed, they don't close. Is that what you're saying now?

Thomas Hofstedter: Well, the signs get closed, there's definitely a possibility that it doesn't -- the deals don't happen. In this world today, in real estate, the deal is not done until it's done. You know that. It's a very tough environment out there.

Sam Damiani: Yes. And so this is sort of the direction...

Thomas Hofstedter: None of the players that we're dealing with have the deals that this helps you are contingent on financing. They all have their equity, they all have -- they don't need any debt or they all have their debt done already. So none of those -- it's not confidentiality, it's just getting to the finish line.

Sam Damiani: Okay. And the path that the REIT is on now, having wound up the special committee, like this $2.6 billion of asset sales, this is not the finish line. Is that right? There's still further asset sales to achieve to get to whatever this goal is.

Thomas Hofstedter: That I can say definitively, yes. That won't be done through the special committee, but there will definitely be a formalization of the strategy, whatever that is to conclude -- to get there will involve future sales.

Operator: Next question from Matt Kornack at National Bank. .

Matt Kornack: One quick follow-up, and I don't know if you will answer it. But are management or insiders part of the bidding for any of this $2.6 billion .

Thomas Hofstedter: No, they are not. .

Operator: Next question from Jimmy Shan at RBC Capital Markets. .

Khing Shan: Sorry. Two more quick questions. So just going back to the $2.6 billion, I guess what determines an asset that makes it to the assets held for sale versus not?

Larry Froom: Jimmy, we put the assets held for sale in that category because they've already been approved by our Board. The rest of the sales have not been approved by the Board yet.

Khing Shan: Okay. So the determination is Board approval only. And why were they not approved by the Board yet?

Larry Froom: For IFRS, it's a bit more. It's approved by the Board and highly confident that they will conclude within a year. That's the IFRS mandate of putting them into that bucket.

Khing Shan: Okay. And so the other assets that are not on there, what -- I guess, it's just a matter of timing being not approved by the Board?

Larry Froom: Yes. There's still negotiations and pricing hasn't been finalized.

Khing Shan: Okay. And then in terms of the full auction process that was done post July, can you give us a sense of kind of how many parties looked under the hood and sort of how far did the parties get far -- how far did they go?

Thomas Hofstedter: How far did they go in what? -- due diligence?

Khing Shan: In terms of like how many parties were left at the table if there were any when you did the full auction process or is there none at all.

Thomas Hofstedter: This has always been -- we're a diversified company. This is diversified. As it's diversified. I don't -- I think it's fair to say that it would be very hard for one player to come up and absorb the entire company. This was always a club deal. And there were various players within the clubs in and out as the asset composition changed. Towards the end, the player that was -- there was -- I don't know, round numbers, very generally speaking, there was 4 or 5 that looked at the entire company, but there were club deals in different partnerships. There was one that was much more -- spent more time and remain there throughout. But at the end of the day, there was no -- at the end of the day, there was nobody there left for the entire company at a price that the special committee wanted to take forward and bring forward to unitholders. And needless to say, this whole exercise has taught us, I guess the conclusion is that the sum of the parts are greater than the whole. And in a diversified company, it's a club deal anyhow, maybe it's better off just to do it by ourselves. That's one of the options we have. So we don't have to go to our strategy, be industrial, residential being residential being industrial. We could just continue to sell and achieve a higher price. I think that's something you can't abandon, but that's definitely the potential. We'll get clarity -- again, we'll have clarity on that before the year is out.

Khing Shan: And to Matt's question, was management part of any of those such club deals?

Thomas Hofstedter: Sorry, I couldn't hear what .

Khing Shan: Was management also part of some of the club deals that may or may not have happened in the past?

Thomas Hofstedter: Management were there, management was there to plug some holes where we didn't have a player. But at the end of the day, management was not there. Well, there was no deal at the end, but management could be there if there's -- for example, in all cases, there are certain assets that just nobody wanted or we needed in order to finish off a price for everything, management could step in or would step in. But at this stage, again, that management is not there at all. There's no necessity for management to be there. We're not giving you one price. There's no bidder for the entire company.

Operator: We have no further questions at this time. I will turn it back over to management for closing comments. .

Thomas Hofstedter: Thanks, everybody. Stay tuned. We hope to be back with you years out. Have a good day.

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.