H&R Real Estate Investment Trust

Good morning and welcome to H&R Real Estate Investment Trust's 2020 First 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 reflects the current expectations of management regarding future events and performance and speak only 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 our website and on www.cdar.com. I would now like to introduce Mr. Tom Hofstetter, Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstetter.

Good morning, and thank you for joining us today. I'm Tom Hofstetter, CEO of the REITs. I'd like to welcome everyone to the call. Joining me today are Larry Frum, our CFO, Pat Sullivan, COO of Primaris, and Philippe Lapointe, COO of LandTower. Let me address the current environment, which includes a great deal of economic uncertainty, significant changes in our day-to-day lives, and unfortunately, significant pain and suffering for those directly and indirectly impacted by COVID-19. Our first priority is the safety and well-being of our employees, tenants, and visitors to our properties. We are following all the recommended behaviors, including social distancing, practicing remote working, and frequently in the space, among others. Our team has been working closely with our tenants to accommodate optimal financial and operating solutions to support the success of our properties. We're looking forward to a more normal operating environment in the near future, and are pleased to report that we have adapted our working arrangements to be operating in as close to normal as manner as possible, and have even begun to reopen some of our properties that have been ordered closed. Next up, Larry will summarize our quarterly and annual financial results. Pat will then provide an update on our retail portfolio, followed by Philippe, who will update us on our multi-residential portfolio, and finally, I will include some closing remarks. Over to you, Larry.

Thank you, Tom. Good morning, everyone, and thank you for joining us today. Starting with funds from operations, FFO, Q1 2020 basic and diluted FFOs was 45 cents per unit compared to 45 cents per unit in Q1 2019. Included in net income and FFO were lease termination fees of $200,000 in Q1 2020 compared to 6 million in Q1 2019. For the quarter, normalized FFO was 46 cents per unit compared to 44 cents per unit in Q1 2019. We view this as quite an achievement given that we have completed approximately $1 billion of asset sales over the past 15 months compared to approximately $206 million of property acquisitions during the same period. Our office portfolio occupancy at March 31st was 99.3% and committed occupancy was 99.8%. Excluding the lease termination fees mentioned previously, the same asset property operating income from our office portfolio increased by 1.2% over Q1 2019. Our industrial portfolio's occupancy at March 31st was 98.9%. The same as the property operating income from our industrial portfolio increased by 2.8% over Q1 2019. Construction is continuing in Caledon, Ontario on the 343,000 square foot industrial building we have leased to DataPost for 10 years. Occupancy is expected to commence in Q4 2020, and as a result of COVID-19, we have temporarily suspended all other industrial construction. Same as the property operating income from our retail portfolio decreased by 2.1% as compared to Q1 2019, mainly as a result of Q1 2019 benefiting from certain 2018 final tenant billings. Same asset property operating income from our residential portfolio in U.S. dollars increased by 33% over Q1 2019 due to properties including Jackson Park that were in lease up last year. Excluding these properties in lease up, same asset property operating income increased by 8%. Included in our net loss for Q1 is a fair value adjustment on real estate assets of $1.3 billion. This is by far the largest fair value adjustment to date. These adjustments are a result of our regularly, quarterly R4S value process and include the following two trends resulting from COVID. One, an acceleration of challenging conditions in the retail landscape impacting the market pricing of retail properties. And two, energy sector challenges that have impacted the credit quality of many companies operating in this industry. and the related impacts on property market fundamentals in markets significantly influenced by energy industry employment and profitability. The IRS fair value of H&R's retail portfolio has been reduced by approximately $660 million, with the changes relating primarily to inputs into the forecasting of cash flows, including normalized vacancy rates, market rental rates, tenant retention rates, and releasing assumptions. The revised inputs into discounted cash flow models have resulted in lower fair value market values and higher implied overall cap rates, in particular for our enclosed mall properties. The average fair value of H&R's office portfolio with significant energy sector tendencies has been reduced by approximately $680 million. These properties are generally subject to long-term leases and as such there have been limited changes to cash flow models but more significant changes to the discount rates. While there have been very few recent transactions for comparable properties, our valuation team used prudent assumptions reflecting pricing signals observed in oil prices and the energy sector corporate credit markets. These fair value adjustments have hit our portfolio in Alberta the hardest, as shown by the decline in fair value in Alberta of approximately $900 million. from $3.2 billion at year end to $2.3 billion at March 31, 2020. The fair value adjustment was the primary reason for our net asset value decreasing from $25.79 per unit at year end to $22.26 per unit as at March 31, 2020. Management of the Board strongly supported taking a more proactive approach to updating fair market values to ensure prudent financial reporting practices. Should retail industries' plans recover and or energy industry conditions improve, we will have the opportunity to update fair values. As at March 31, 2020, debt-to-total assets was 47.9% compared to 44.4% at December 31, 2019. The increase in debt-to-total assets is primarily due to the fair value adjustment discussed previously. In February 2020, H&R repaid all of its Series P senior debentures upon maturity for a cash payment of $125 million. In March 2020, H&R repaid all of its Senior Series F debentures upon maturity for a cash payment of $175 million. There are no further debenture maturities this year or in 2021. Our next venture maturity will be in May 2022. And as at March 31, 2020, H&R only had $116.3 million of debt maturing during the remainder of 2020, consisting of $64.8 million in mortgages and the balance from a secured line of credit from a Canadian bank. Subsequent to March 31, 2020, we bolstered our liquidity by securing a $425 million line of credit from a syndicate of four Canadian banks and secured a $100 million mortgage, secured by a previously unencumbered property. This new credit facility and mortgage were arranged following the onset of COVID and demonstrate H&R's strong access to capital. Rent collection has been a key focus during the pandemic and one we believe we have performed well while also accommodating the needs of our tenant partners. To date, Our rent collections for April amounted to 85% and rent collections for May amounts to 80% currently. I will now turn the call over to Pat to give an update on our retail division.

Thank you, Larry, and good morning. During Q1 2020, retail showed a decline in NOI of 2.1% as compared to Q1 2019. U.S. retail showed a 5.4% decline during the quarter, primarily due to Q1 2019 benefiting from certain 2018 final billings, while enclosed malls showed a 1.2% decline attributed to a large tax refund received in Q1 2019 and timing associated with capitalized costs. Primaris was poised to have a solid year of growth in 2020 due to a number of development projects coming online. In Q1 2020, Best Buy opened a new store at Sunridge Mall. Marks opened from 19,000 square feet at Macalester Place. And over the next six months, approximately 140,000 square feet of large format national tenants is scheduled to open from the redeveloped Sears boxes. Our redevelopment work and re-merchandising efforts over the past few years were beginning to be reflected positively in our property sales performance. For the 12 months ending February, same-store sales were $549 per square foot, an increase from the $545 per square foot for the period ending December 2019. For the month of February, same-store sales showed an increase of 5.4%, with the notable increases being realized at properties in BC, Alberta, and New Brunswick. Since the declaration of the pandemic, we have undertaken significant cost-cutting initiatives. Small common area expenses were reduced by almost 40%, and capital expenses were slashed by 35% with only necessary capital spending being completed this year. We expect to maintain cost control protocols in place throughout the remainder of the year and plan to apply cost savings towards rental arrears and outstanding deferred rents. Collections for rents in our enclosed malls are generally higher than that stated by other enclosed mall owners due to the fact that our malls typically have a higher weighting towards essential services and a lower fashion component. We recognize the challenging times faced by retailers and have worked diligently to communicate directly with as many as possible. We have been pleased with the contributions made by small and medium-sized business within our portfolio during the month of April, but this has been somewhat diminished in May as many wait for clarification on the government rent assistance plan. Within the Primaris portfolio, we believe there may be a significant number of tenants that qualify for the government small business rental assistance program, However, until such time as the program details are fully defined, we cannot quantify the weighting in our portfolio. We recognize that each retailer has a unique financial situation and ability to endure this chaotic period, and we are working with each accordingly. Moving forward, our rental collections today will improve if we negotiate payment terms for tenants, and we expect that in addition to rental deferrals, there will also be abatements, which is a requirement of the government program for small business. We fully anticipate that there will be retail failures as a result of this pandemic, and there are significant concerns by retailers regarding sales volumes returning over the balance of the year, especially while government protocols remain in place. In this regard, we anticipate many retailers will need rental assistance following reopening, but until retailers are open and operating, we are uncertain as to what will be required, if anything. Over the past few weeks, several of our properties have reopened for business, Specifically, both our malls in Winnipeg, which opened May 4th, and both properties in New Brunswick, which opened May 13th. Malls in Winnipeg opened initially with 30% of stores operating, and since it has become about 50. While in New Brunswick, 35% of stores opened this week. Our malls in Alberta opened yesterday. However, Calgary malls opened with restrictions. Specifically, restaurants in Harris Lawns to Dodd opened until May 25th. Our mall in BC opens May 19th. We have no definitive timeline for our five remaining malls in Ontario and Quebec to reopen. We have been working in accordance with public health authorities and have instituted a number of protocols, including elevated cleaning, signage-promoted social distancing, limiting the number of entrances open, limited hours, and enhanced safety procedures in loading and garbage areas. In addition to our efforts, tenants have instituted their own measures. In the short term, we expect these measures will negatively impact sales, specifically for service providers, such as Harris Lawn, that are not able to fully utilize their space due to social distancing requirements. Nevertheless, early feedback from tenants that have opened are positive, with many reporting comparable sales higher than the period last year. In closing, retail has faced significant challenges recently with this current crisis being the most difficult period retail has faced in our generation. The significant work we have undertaken to redevelop, re-merchandise, and reposition our market-dominant assets will be of tremendous benefit when this crisis abates. This crisis will likely accelerate the trend towards store rationalization due to e-commerce. However, retailers continue to communicate the importance of bricks and mortar stores for their success. We are confident that our assets, where typically the only major enclosed mall in the respective region, are well positioned for the long term. Thank you, and I'll turn it over to Philippe.

Good morning, everyone. We've got some notable updates for this quarter related to the last few tumultuous months. But before I begin, I'd like to express my gratitude to our land power teams, who through all of this turbulence have been able to secure above industry average rental collections and mitigate some of the negative fallout from COVID-19. So, let us begin with collections. Unsurprisingly, COVID-19 has and continues to have major implications to our business, especially in how we operate our properties. Thankfully, Landtower executes several early strategic initiatives, which so far has shielded our portfolio as much as possible from the impending economic shock felt throughout our U.S. markets. Collections were top of mind as we were approaching the inevitable layoffs, and so we enacted a few strategies that supported our collections percentage, and just as importantly, assisted our residents through this unpredictable period. I am incredibly proud of our teams as those proactive strategies have been successful to date, as evidenced by a receipt of approximately 97% of expected collections for April and over 93% as of yesterday for the month of May. We expect May collections to mirror April by receiving nearly all of our expected rents as we look forward to our summer high leasing season. For comparison, the National Multi-Housing Council's rent payment tracker which is currently tracking 11.4 million apartment units across the U.S., recently released that 80.2% of residents have paid a portion of their May rent by May 6th. LandTower had collected approximately 90% of its rent by the same day, illustrating our success in securing rent payments and underscoring the quality of our renter base. In addition to the collection incentives that we've implemented, in anticipation of the press operating performance in the near term, We've implemented numerous cost-cutting measures at the property and corporate level. These measures include renegotiating nearly every service and maintenance contract, eliminating non-vision critical expenses, pausing all elective capital expenditures, internalizing marketing responsibilities, and pivoting to online and digital leasing. On the financial front, our same asset quarter and operating income increased in U.S. dollars from $16,514,000 in the first quarter of 2019 to $21,964,000 in the first quarter of 2020. This equates to the same asset quarter-over-quarter operating income growth of 33%, which is artificially high due to the inclusion of Jackson Park's lease-up statistics. When excluding lease-ups, our same asset quarter-over-quarter operating income growth equates to 8%. This 8% quarter-over-quarter operating income growth is primarily due to rental growth and the stabilization of a few of our assets in our portfolio. While much has changed over the last few months, some occurring themes have surfaced within our industry. Namely, we've realized the effectiveness of virtual self-guided leasing. In large part, thanks to our marketing department, Landtower was one of the first operators to market this leasing option right before COVID-19 substantially impaired our ability to lease units in person. And we are delighted to announce that it received resounding success. In light of this, we're looking to take advantage of this paradigm shift in how leasing is executed by utilizing technology to decrease our leasing costs and increase our leasing capacity. It is our belief that what started out as a tactic stemming out of necessity and safety has identified the obvious next generation of efficient apartment leasing. As such, we'll be pursuing the testing and implementation of certain specific technology enhancements to a few Lantau properties to better gauge their ROI. As evidenced by early efforts and in confirming with some of our US publicly traded multi-family peers, Tech packages have proven to be a major success, not only from a maintenance and management perspective, but also from a resident satisfaction and leasing desirability point of view. We want to be intentional with the potential capital investment, and our goal is to bring our portfolio to the cutting edge of property tech, thereby increasing our competitive note within our markets. We look forward to sharing more updates about these initiatives in the coming quarters. On the development front, the Pearl in Austin, Texas, is on track to commence pre-leasing in August. and deliver later this year. Nightingale in Seattle, Washington is estimated to commence pre-leasing by the end of this year and will deliver in the first quarter of 2021. Phase one of our Hercules development in San Francisco has started virtual leasing and phase two has started construction in the first quarter of 2019 and is expected to be delivered in the second quarter of 2021. Lastly, Shoreline Gateway in Long Beach, California is on schedule and expected to be delivered in the summer of 2021. The last few years, we've been approached by strategic investors, mostly consisting of pension funds, gauging our interest in leveraging our LandTower platform and expertise into co-investing in acquiring more multifamily properties and multifamily debt. While we did not believe the plan was right for a variety of reasons, we are now closely reviewing those opportunities with the ultimate goal of creating an asset management platform within LandTower, whereby our strategic investors would co-invest significant capital alongside our seed capital. As with most recessions or lulls in economic activity, value-creating opportunities eventually emerge. And this period is no different, and while it is very early, we have several very interesting opportunities in our pipeline that merit further review with our partners. As always, we remain very judicious with our investment selection criteria, and we'll be closely analyzing our markets to determine which sectors within our asset class yield the most accretive risk-adjusted investment returns. And with that, I will pass along the conversation back to Tom.

Thank you, Philippe. Before we begin our Q&A, I'd like to highlight a few items. Firstly, our fair value adjustments. As you all know, the IFRS fair value process provides a fair bit of latitude. Our approach has always been that if our IFRS fair value is meaningful, it needs to be responsive to changing market dynamics and as objective as possible. As Larry mentioned, this quarter included a significant reduction in fair value, reflecting both retail industry headwinds and energy sector challenges. Some may argue that there haven't been enough transactions to convert any change in values. Our valuation team have concluded that while this may be true, both the retail and entry sectors have been struggling prior to the pandemic, and it is reasonable to expect those trends at the very least to continue. But in reality, they have accelerated during the pandemic, as would be expected. We feel that writing down valuations to reflect current market conditions is not only appropriate, but is also required in keeping with conservative best practices disclosure policy. Let me remind everyone that fair values are reviewed every quarter, and should market conditions change, you should expect a corresponding change in fair values. The fair value process is actually relatively straightforward. Ask yourself if you think market values have changed, and the answer is yes. You should expect the fair values to change to reflect that. End of story. Two, second. our change in our distributions. The choice to reduce our distributions was not an easy one. We have had many, many discussions over the past several weeks on the topic. We know that there will be many opinions and questions about this decision. Let me explain this decision as simply as possible. We've been working hard to evolve H&R over the past few years, and we have looked at potential transactions and potential courses of action that led the conversation back to the REITs distribution. Our payout ratio has been on the high end of the range. and that has often complicated these decisions. Management and the board have been balancing the objectives of one, reducing the payout ratio with two, recycling capital into higher growth assets and other short-term value options that improve the quality of the REITs. With the onset of the COVID-19 pandemic, it became clear that there would be both a short-term impact on the income of the REITs retail portfolio and also need for more capital to support expected tenant turnover over the next few years. Once we reached the decision to reduce our distribution, We considered all eventualities, looked at required distributions for tax purposes, and wanted to make sure that our new distribution was set at a level that is sustainable in all the scenarios we considered. Again, this was not an easy decision, but after much deliberation and discussion, we are very comfortable that this action is in the best long-term interest of H&R unit holders and helps the court to grow the business. I'm sure that there are a lot of questions, so I'll wrap it up in a second. The COVID-19 pandemic It's had a dramatic impact on virtually every aspect of our daily lives. It's created many challenges and a lot of uncertainty. Tough times lead to tough decisions. We are confident that we've made good decisions that will benefit our unit holders. We have a lot of great things going on in the portfolio, and we're excited about the future. And with that, I'll turn the line over to the operator for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Sam Damiani of TD Securities. Please go ahead. Your line is open.

Thanks, and good morning. Just wanted to start off with the IFRS value reduction. I don't believe there is, but could you just clarify if there were any external appraisals or advice received to result in the $1.3 billion reduction?

Hi, Sam. Larry. No, there were no external appraisals in the assets that we wrote down.

And what about just sort of advice externally?

Sorry, I didn't hear that.

Did you receive any professional advice of any kind, I guess, you know, leading you to these numbers?

Sam, who do you recommend we ask? Do you want to ask an appraiser who basically... We spoke to our auditors who get their support, obviously, and we spoke to the industry who are in the industry. Who do you actually expect us to ask? We expect us to give you an appraisal on Calgary office market, which hasn't been a trade, which we mentioned beforehand. So the reality is, if you look at retail across the board, not only Primaris is going down, but even all retail, no one's going to buy the sector right now until the end of the pandemic. So you've got to make a decision. What's a relatively fair value for that asset? considering that you gave yourself an appropriate length of time to market that asset. So let's assume that's six months. But we don't know if the six months is going to go during that pandemic or it will be post-pandemic or what the story is. So you all have to write down your assets or be honest with yourself and reflect there has been a decrease. But the question is, what is that number? So it's a tough decision to make. There's been discussion in the industry as much as we possibly can. It's very hard to arrive at a consensus.

So your DCFs have changed to reflect a higher discount rate but also lower cash flows.

Do those lower cash – No, Tim, that's not obvious. It does not reflect a change in cash flows. It reflects a change in the discount rate. In other words, in retail, the difference is you can look – what a crazy little look in the back going backwards in your previous run rate and use a cap rate on that, an IRR discount rate, or whatever you want to do. We actually look forward in the retail to look at pre-pandemic and hopefully post-pandemic to realize that the vacancy rates will probably increase somewhat. Assuming we're at 95%, they'll probably go down to 91%. You can expect that to be probably in a lot of sectors. And the rental rates will probably have gone down as well. If you look at a residential building, for example, if you take the same cap rate, which is probably the wisdom that we're hearing in the marketplace is that the cap rates will be maintained. But the vacancy allowance goes up. The vacancy allowance goes up from $95 to $90, effectively taking down your IRS value by 10%. Now, you have changed the cap rate, but you have changed your NOI. Retail industry, not the office industry in our case, because we have more or less long-term leases. The BOA has 18 years, Canada has 10 years, NASA has 7 years. So there's not a term over there. It's more or less reflective of the discount rate for the residual, the IRR residual.

Understood. In your comments about the distribution, you talked about some CapEx required for tenant turnover in the mall portfolio, clearly. Are those CapEx numbers reflected in the Q1 IFRS value reduction?

Yes.

They are?

Okay. Obviously. That's part of the reason for the distribution. But the distribution is not only a question of what the immediate capital needs, because as Larry's pointed out, and we all know, we have substantial lines available for that. It's just going forward, nobody has a clue how long this is going to last, and there will be a lot of opportunities. Besides the fact that you're going to need them for defensive, there's offensive reasons as well. So we'll be very cautious with our distributions and with our appraisals. But again, let me remind you that we can always increase those things going forward. We don't have to decrease them again. So we've gone through the levels where we think we're safe. We don't want to have a discussion with the UABC recorder as to what's going on in evaluations for Calgary office, or let's talk about how there's deterioration in the retail environment, even post-pandemic. We've ridden down to a level that we're pretty comfortable. We've taken a hit, and from there on in, we have substantial, we've hit the bottom on those aspects, and we have substantial growth in all the other sectors, the industrial, residential, and the office sectors that basically says, this is the bottom, guys, from here on it should be up. Remember that the next time our IFRS value is down to, after weighing down to $1.3 billion, it's going down to $22.26, which is still a very, very comfortable high valuation also to where we're trading right now.

Just a quick second question is on the bow. What is your intention with respect to the maturity of the bonds over the next three years?

We have a few alternatives which we're currently working on. We're talking about extending those bonds. We may be paying off those bonds. We have time on those bonds, and quite frankly, we don't have pressure on those bonds because, as you well know, those are secured by the asset alone. So we have another, what, 13 months until expiry of the first bond, and there's three tranches of those bonds. So we're going to watch the situation out there with oil and gas, watch our interest, creditworthiness, and we have time and opportunities to deal with it in the next 13 months.

Thank you. I'll turn it back.

And our next question comes from the line of Jenny Ma of BMO Capital Markets. Please go ahead. Your line is open.

Thanks. Good morning. Just to continue on the topic of the IFRS value change, within the office sector, can you comment on how much of that was related to the BO specifically? And I'm also wondering if the discussions that you've had a few months ago with regards to the sale informed any of the valuation changes you made to it.

So in actual fact, we didn't because we were very long advanced with the sale process when the COVID hit and that shut it down in a second. And then you had negative 40 bucks on oil, which basically put the nail in the coffin on those discussions. So it wasn't reflected really of the fact that we were first sale, have had some solid interest, and then the market fell off. It's more or less reflective of where we are right now, and where we are right now is questionable on the gas level. It's very interesting to see how it's gone from a minus 40 just a few days ago to, I don't know, what is it, 27 or 28 bucks? So that's a fast improvement. You still have around 35 bucks, I believe, is the number that Oventa is using as a brief, even though they are hedged for balance of the year. We can't really discuss individual asset appraisals. Obviously, we did that. That would be really distorting the process of valuations for the analysts if they take one asset and say, this is the value of that asset, and they don't have enough information to value the rest of the portfolio, so it's not really the proper way to go. You have all the information which management has, and management can make an assessment on IFRS valuations with all the tools and with all the knowledge, or we have to give you batches, and that's what we tend to do.

Okay. So, turning to retail, I mean, I guess I need all the details with the assumption, but how does the the occupancy rates, the expected market rents, how does that sit relative to where the portfolio is at today? Is it still above those metrics or at or below? Just want to get a sense of where that ranks.

Sorry, I don't really understand the question. You're asking how the address value for the Closed Malls was achieved? Was I right, guys?

No, no, I want to know the assumptions that went into the fair value change and how those compare to where the metrics are today as far as occupancy and rent.

Oh, there's nothing. If occupancy is 30%, quite frankly, that's good relative to the enclosed malls, which, as you all know, ranges between 10% and 20%. There's no bearing on that at all. I don't think anybody's been still buying assets predicated on no NOI, very little NOI.

No, no, occupancy. Occupancy and rent. Like, are you still expecting rent to decline more than where the portfolio is at? And same with occupancy? Sorry.

Well, take restaurants as an example. A restaurant is paying you a growth ratio of 10%. He's going to open up slowly. He's going to open up with physical distancing. And as such, his business is going to be hammered. So if it's a mom and pop, you're going to have to go ahead and defer. It's not going to be deferred in the future. It's going to be a reduction in rent going forward. You're also going to have on-lease rollovers in the next few years. Take Yorkville as a great example. They've got a great alley. A lot of tenants are going to want to pay $2 a square foot. They're going to have to support it. And they've also had to go ahead and retool their balance sheets to accommodate the repurchase inventory with a lot of the existing inventory being obsolete. So I do believe that The rental rates will be coming down. I believe our rental rates will primarily be coming down less so than the high-end malls, quite frankly, because we're the, as Pat has mentioned, we're the only or the primary mall in its marketplace. Our growth ratios never were high. We're always supportable. So to answer your question specifically, the rental rates will come down, have to come down. It was always expected to come down somewhat, and the vacancy rates will go up. Those tinkering with those numbers, with those vacancy rates going up and then the rates come down, was the exact result of the decrease in the IFS values for Primaris.

Okay. And then with regards to the $1.7 million of cost related to failed acquisitions, can you give us any color on that? Was that related to Lantower or another asset class?

Well, when I say that Philippe is going to answer the question, I'll give you a hint.

So I can handle that. So depending on what day we use for COVID actually materializing, we had an acquisition that we're in the middle of due diligence. We had a non-refundable deposit. It was a $66 million deal, a lease up in Orlando, beautiful asset. We're incredibly excited to have it. But quite honestly, given what we are seeing coming down the pike as it relates to COVID, but also its impact on number one, lease ups in terms of traffic counts, but more importantly, what it did to the Orlando economy. We thought it would be much more judicious to simply bail. We have an excellent relationship with the seller, which is Carlisle. We've done three or four acquisitions with them. I have no reason to believe that we would not be able to resuscitate the deal at some point in the future, albeit on a much lower basis. We just thought it would be more appropriate in terms of just stewards of the unit holder's capital to essentially bail out of that transaction. And if the next – if the seven weeks past that were any indication, we are convinced we did the right thing.

Okay.

Is there – That's not a reflection on the overall residential value. The value has decreased in the overall land power portfolio. That's a reflection of the fact that Disney closed down, and this is a Kissimmee asset, which services that market. So the immediate impact is not a cap rate discussion, more or less it's leased up in a very tight environment where with no visibility as to when the tourist attractions of Orlando are going to open, the leased up period would be too long, and that's one of the reasons we dropped it. I don't think you should extrapolate from Orlando that Dallas is the same category as Orlando.

I would agree, and Jenny, what I would add to that is in light of our collections in April and May, Generally speaking, all of our properties have done very, very well, much better than our industry average. But there's been no weakness as of right now in the Orlando market from a collections perspective for our stabilized deals. We just weren't enamored with the idea of going into a lease up at that point in time.

Okay. Is there anything in the land power pipeline on the acquisition or disposition side at this point?

No.

Okay. And then my final question is with regards to the new financing activity. I'm not sure if I missed it, but was there a rate provided on the $100 million mortgage and the $425 million credit facility?

You didn't miss it. We didn't provide it, but I don't think it's a material, so I can give it to you. It was 3.8% on the mortgage, and the credit facility is just policy because it involves our bankers. We do not get the rates on that.

It's indicated the term on the financing for the mortgage for 10 years.

Okay. Great. Thank you. I'll turn it back.

Our next question comes from the line of Neil Downey of RBC Capital Markets. Please go ahead. Your line is open.

Hi. Thank you. Good morning. Tom, you went very much through the decision process in terms of why you decided to cut the distribution in half. Can you maybe add some color as to how you arrived at what the magnitude would be, down 50 versus some other percentage?

Yeah, it's not as sophisticated as you would hope. The reality is we toyed between a number of 40 and 50. And since we don't know where Bethlehem is going, quite frankly, there will be a recurrence. We definitely know we don't want to have to come back again. There's no mathematical formula I can give you to answer that question. It was a comfort zone saying we're trading where we're trading at. Our IFRS value is 2226. The market was, you know, we were mid-double. This is 15%, 16% return. Obviously, the market perceived that there's going to be a discharge cut. We basically went to the high end of the range again, $40,000 to $50,000. All the tax considerations, $50,000 is the magic number, because $50,000 is the magic number. That put that bar up, the high-end bar, and put the tax considerations at $50,000. And we just let it go ahead and cut it down. You can always increase it, but you can never decrease it again. We don't know where the world is going. So again, not a science, but a range, and we took the upper end of the range.

Okay, super. So circle back a little bit on the office fair value marks, and I fully appreciate that you shouldn't be giving us values for individual properties, but maybe just flushing out sort of directionally or which assets were affected. It sounds fairly transparent here that the bow was part of that mark. Yeah, what about in Houston, HESP?

Yes, TransCanada and the boat. You know the level of non-recourse debt we have on the boat. And you know the TransCanada has 10 years left to term. It has six plus years of term. You know that in every oil and gas marketplace, I'm just giving you a formula. If you figure it out, you probably did already. In the oil and gas marketplace, by definition, you're above market because the net effectives are always going to be lower than the face. And the face is always going to be in case of a category that makes the 18 or 20 bucks net effective. Sorry, face, but that's not net effective. So we took our starting point as going to be $760 million expiring in June 2021 on the VOS side. And then you can add something to that to reflect some value of the cash flow over and above the debt, the non-recourse debt, and the rest just allocates between Porta Heston, obviously then to TransCanada Pipeline. TransCanada Pipeline, when we did the deal selling at a 5.15 cap to Hoop a couple years ago, At the beginning, actually, of the decrease of this, the whole meltdown in Calgary, we brought down the rents by doing the blend in the same with TransCanada. So TransCanada's rents are not crazy out of the market. For the hand statistic, you should know that 300,000 square feet was put on the sublet market around a year and a half ago or so, and they sublet most of that space. So if they're not occupying an entire building, they have sublet some of the space. They would be looking to do a long-term blend and extend on that. Then COVID hit, and that's where it sits. Allocate to TransCanada the most, then head to vote most, then head, and then TransCanada, as you would have done anyhow.

Yeah. Okay.

And in TransCanada, does it relate to the fact that there's sub-tenants in there because... No, TransCanada has sub-tenants in there, and quite frankly, the TransCanadas are taking up the space as it comes back. That's never been an issue. In TransCanada, not really. We lost much dollars on that at all. The space has always been fully occupied and fully leased. That's not the issue. I think this is their head office. They're comfortable in it. They've been giving back space in other buildings. One of the buildings they gave back space in, for example, was Telus Tower, which we sold, but they were in there. They're just leaving there right now and backfilling back into TransCanada Pipeline Tower. Avon's fifth, the old SO building, they have space there. They're giving back. So they're going to get totally back into the TransCanada Tower, and it's always had sublet space. The sublet space is not space that was bothering them, which is it was more or less space that they used for their flex, for their space that they move in and out of to accommodate their growth. So that's never been a worrisome issue for them. They never once requested us to take back space. And they did a blend that extend, don't forget, on the entire building.

Yeah. Yeah, that was a good deal for the REIT. Just, you know, on the, I guess, the top 10 tenants specifically, you know, there's a high degree of creditworthiness. There's lots of term on those top 10. Have any of those tenants, you know, whether it be in the last two weeks or a couple of months, made any sort of approach or request for changes in rental terms or reduction in rate or anything like that?

So I'm just looking at the book right now. Aventive, Bell, Hess, New York, Giant Eagle, Canadian Tire, TC Energy, of course, and Lowe's. And finally, Kell, the answer is no.

Okay.

Thank you. Lowe's, in fact, we actually did blend and extend. I think we have around 15 Lowe's or something like that. We did brand new blend and extend for 15-year terms on those Lowe's. We just actually did another one recently. So that's put to bed. Kell's Communications, we know we sold the calorie assets. None of those tenants have asked for any form of abatement. Okay. Nor would we have given them. Or the girls, sorry.

And our next question comes from the line of Gordon Nichols of CIBC. Please go ahead. Your line is open.

Thanks very much, but my question was answered. Thank you.

And thank you. And our next question comes from the line of Matt Kornack of National Bank. Please go ahead. Your line is open.

Good morning, guys. With regards to the distribution policy going forward, would the view be that at this point, as things normalize, and who knows what the new normal looks like, but that you'd potentially keep more retention of capital in the REIT going forward as opposed to increasing back to the level where you were before?

Well, you know, we evaluated every single quarter, so we'll see where the world goes. Let's get rid of the pandemic first, but you'll definitely end up seeing us not having no focus to going back to where they were, just because that's the way we were. It'll be predicated on the conditions and the situation at that time, our FFL payout ratios, and how management and the board feels what's appropriate at that time. But we don't have a goal to say, this is the pandemic, we cut it by 50%, next quarter pandemic's over, everybody's back, no more physical distance, we're going back there. It'll be predicated on the situation on a quarter-by-quarter basis.

Fair enough. And then with regards to LTDs on your mortgage insurities, they still are pretty reasonable for the next three years, 2023 shot up. So I assume there was a fair amount of value adjustment there. But presumably the mortgage markets remain open and there's potentially up financing potential coming out of the mortgages.

There's definitely potential coming out of the mortgages without question. The balancing act that we have to do is predicated on the unsecured market because we all want to increase the level of our unencumbered pool. So we balance between what is open as far as unsecured versus what's available unsecured and that balancing act will always continue. As you well know, the unsecured market is starting to open up again. All REITs, I can assume, would rather do unsecured if they can just because it's so much easier. And it's hard to dance on both of them because the demands are different for both of them. The unsecured world likes an unencumbered pool as much as possible. And if we can, we'd like to go ahead and continue in that vein.

And presumably the rating into the agencies and your bondholders like the fact that you're retaining an extra $200 million a year. And there's been a few unsecured issuances in the market that have been well-received. How do you think of that in terms of how much you're carrying on your lines of credit versus the reduction in your unsecured book?

There's no question that the unsecured world opens up again, and it's – It's easy to access, to legalize, to basically bring down those lines. And I guess the moral of the story is if you look at the United States more than Canada as an example, look at time and properties as a class example. Even though it's stocks hammered, it's in the mall business, it always had substantially unencumbered lines. The lines are basically there to give the financial support to the unsecured, but the primary source of financing is the unsecured. So lines are there to use, but not to use as permanent debt. Unsecureds are there for free. And security.

And I guess time will tell, but I'd assume your spreads will likely come in as a result of this move. And then on the LandTower comment with regards to leveraging JV commitments from other partners, would that require potentially selling portions of your existing assets, or is that all on new commitments?

No, that does not. We have the $20 million that would now feed up, and our lines, our cash, our availability – We'll be able to, we'll be accessing that, but we're not thinking of doing 50-50 co-venturing with an NSF acquire, which with accessing under capital to asset management, property management to grow that platform.

Yeah, I think, Matt, the comment was more to the fact that, you know, I can't recall if it was you or some of your peers, but we get asked from time to time about the, obviously, there's a tremendous upside for multifamily. We get I get calls from several pension funds asking us what our interest is in leveraging our platform and leveraging our expertise. And as I alluded in the speech, it is too premature and candidly for a variety of reasons we didn't get the promise right. I think now we're going to take our time. We're going to answer those calls. We're going to review all of our options. And if and when we elect to go forward with this, it will be in a controlling entity but with a minority investment. because ultimately that's the play, right? It's the leveraging the expertise that we've been able to develop in the last six years and are what I like to believe to be our very strong track record. Okay, great. Thanks, guys.

And our next question comes from the line of Mario Siric of Scotiabank. Please go ahead. Your line is open.

Hi, thank you. So just following up on the land power discussion, Just to be clear, going forward in terms of this partnership with the pension funds, the plan would be for H&R to do a small co-invest in these funds going forward.

Is that correct? Yeah, I think the plan is for that. Like I said, I think it's premature to discuss the details of what that's going to look like, only because, candidly, what we've discussed in the past has been very, very different, and everyone has their own construct. But in no case would it be a major capital investment on our behalf. At the end of the day, the reason why we'd be doing this is to lever the platform, not to lever our capital to the benefits of the asset management platform.

Got it. And it sounds like to the extent in terms of funding that co-investment, it wouldn't come from seeding a percentage interest in existing assets, but rather buying your small interest in new assets going forward.

Yeah, and Mary, I appreciate you asking the question. I just think that as of right now, it's too premature to answer that question in a definitive manner.

Okay. Just maybe higher level, like in these discussions that you've been having with the pension funds, our understanding in the private market is that pension funds and sovereign wealth funds have pretty much shut down in terms of private investments. Are you getting the sense that they're coming back and reviewing potential investments transactions and are investment committees considering alternatives today?

It's a great question. Yeah, it's a great question. I think it's a little bit early in the COVID timeline, but I would say anecdotally, there's definitely the recognition in the market that multifamily has been and will continue to be a very resilient asset class. And I think for those who were unaware or didn't have that appreciation for it, they certainly do now. And so I think it's more stemming from that basis than anything else that people were realizing or pension funds or endowments or whoever else we're talking to. It's the recognition that as of right now, especially going through COVID, we're collecting 97% of our revenue. Knock on wood, we see no reason to believe that that's going to abate. Our tenant base is incredibly strong. We love the Class A multifamily space. It's actually showing up to be one of the most resilient within our U.S. multifamily environment. So I think it's less of money being unfrozen, but more so just a general acknowledgement that this is a prized asset class and one that's eliciting a lot of interest.

Got it. Okay. And then my second question just relates to Primaris, and I may have missed it and you may not be willing to share it, but I thought it was out there anyways. With the reduction in the IFRS value, are you going to give a sense of what Primaris is being run at on the books today in terms of fair value?

Sorry, Mario, you came out a bit broken. Are you asking what the total value of Primaris would be, fair value on our books?

Yeah, I'm asking if you're willing to share what the total Primaris fair value and then the net equity that is in your $22.56. IFRS NAV is today.

Because we haven't put that into our MD&A or financials, we've just broken it out into retail. You can figure out our retail as a total is in our MD&A, but it's not broken out any further than that.

Okay. Thank you.

And there are no further questions in the queue at this time. I will turn the call back over to Tom Hofstadter for final remarks.

Thanks, everybody, for joining us. Enjoy the long weekend. Stay indoors and binge-watch television. Have a good one.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. We now disconnect.