H&R Real Estate Investment Trust

Good morning and welcome to H&R Real Estate Investment Trust's 2022 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, 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. It 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 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.cdar.com. I would now like to introduce Mr. Tom Hofstetter, Chief Executive Officer of H&R. Please go ahead, Mr. Hofstetter.

Good morning. I'm Tom Hofstetter, and I'd like to thank everyone for joining us today to discuss H&R's first quarterly financial and operating results and to provide an update on our transformational strategic repositioning plan. With me on the call are Larry Frum, our Chief Financial Officer, and Philippe Lapointe, the week's newly appointed President. Our strong first quarter financial results mark a pivotal moment in the continuation of our strategic transformation and the servicing of the better value within our portfolio. Following the successful spin-out of our enclosed shopping center division and the sale of the Bow and Bell office campus, our portfolio today is significantly more concentrated on higher growth asset classes within strong urban markets. Since the launch of the REIT's transformational strategic repositioning plan, we have spent considerable time meeting with many of our unit holders and are encouraged by their helpful comments and feedback regarding our strategy, our team, and our disclosure. We recognize that we have an opportunity for better and broader communication in addition to continuing to demonstrate meaningful steps to arrive at our capital allocation goals. As we move through our repositioning plan, increasing our allocation to the REIT's U.S. residential platform, I'm thrilled to announce that Philippe Lapointe has accepted the role as president of the REIT. Philippe's leadership capabilities and achievements in the creation and development of the REIT's residential platform make him exceptionally well-qualified to further contribute during our exciting phase of transition and growth. Philippe will continue to oversee our growing residential platform, as well as have a more influential role in investment strategy, capital redeployment, and investor relations. Our portfolio of high-quality properties with long-weighted lease terms and credit-worthy tenants holds great value. This quarter, our net asset value per unit increased to $21.06 as same-property net operating income quickly rebounded and surpassed our projections, while cap rates continued to compress in our industrial and residential portfolios. This added value is captured in our $1 billion in favorable fare adjustments over the fourth quarter, equating to an increase of $3.36 per on a per-unit basis. Capital allocation is our top priority, and at this time, one of the best uses of our capital is buying back our units, which are trading at a substantial discount to net asset value. Year-to-date, we have bought back 13.7 million H&R units for $178 million at a weighted average cost of $12.96, representing a 38% discount to our net asset value per unit of $21.06. We plan to continue to buy back our units if the significant discount persists. With today's strong quarterly results, we are on our way to creating a simplified, growth-oriented company that will serve a significant value for our unit holders. And with that, I will turn it over to Philippe to discuss our residential platform.

Good morning, everyone. I'm delighted to be on this call during these monumental changes to discuss our residential updates over the last couple of months and to go over our first quarter highlights. Starting from a high level, as you've heard from Tom, we've continued to execute on our strategic plan by redeploying capital into our residential development pipeline while managing the remaining divestitures of our legacy assets. Before I launch into our updates, I would like to take a moment to comment on our residential platform's founding and its ensuing growth. Since our residential platform's founding in 2014, we have steadily increased our footprint in the U.S. dumbbell markets via timely acquisitions. Those acquisitions were funded with recycled capital from dispositions of other non-residential assets. In essence, a near identical strategy as our ongoing repositioning plan. That very recycling of our capital is deeply embedded in our corporate DNA, and I would humbly submit that over the last eight years, this formula has proven to be quite accretive to our unit holders. As such, and in light of a recently published strategic repositioning plan, we would like to reiterate that the remaining steps of our plan are a continuation of that exact process that has brought us much success. And on a more personal note, therein lies the main reason why I'm very motivated to move into the role of president of H&R REIT. I'm very optimistic about our future and of the upcoming value that we intend to create for our unit holders. And so thank you for indulging me for a moment, and let's jump into a review of yet another quarter of strong multi-family fundamentals. When excluding Jackson Park, same property net operating income from our portfolio in U.S. dollars increased by 11.1% for the three months ending on March 31, 2022, compared to the respective 2021 period. When including Jackson Park, same asset property income from our portfolio in U.S. dollars increased by 31.2%, for the three months ending on March 31st, 2022, compared to the respective 2021 period. As we have seen in previous quarters, we are continuing to experience substantial rental rate growth in all of our U.S. Sunbelt markets. By way of example, our new lease trade-outs for our entire portfolio, excluding Jackson Park, was approximately 12.4% in the first quarter. This represents nearly an entire year of double-digit increases of new leases across our entire portfolio. And for additional context, we are still observing comparable elevated renewal rates as of the date of this call. Moving on to Jackson Park, we continue to see positive trends in the amount of traffic, renewal rates, and number of leases executed. At the end of the first quarter, Jackson Park's occupancy was 98%, and the percent of residents renewing their leases hovered in the mid-60s percent range, which represents a renewal rate of over double that of Q1 last year. Furthermore, in March, the team signed the lease for the last remaining retail space at Jackson Park, bringing retail occupancy to 100%, an anecdote that we believe marks the full return of the city. As for River Landing, Atlanta River Landing, the property has continued its strong performance. As of the end of the first quarter, the property was nearly 95% occupied, and for the month of April, new lease rates increased 32.9%. and renewal lease rates increased 19.8% compared to previous leases. River Landing continues to outpay for performance budget and we're preparing for future fair market value increases as we capitalize on these outsized rental rates. As previously mentioned in our disclosure, the first quarter saw a material increase to our fair value and I would like to cover the adjustments to our residential fair market values. In a nutshell, compressing cap rates coupled with continued double-digit NOI growth have supported substantial increases to our multifamily values. Our valuation cap rates are supported by an independent appraisal and several market research reports. Furthermore, our valuations are also supported by multiple recent U.S. multifamily reprivatizations. The market recognizes that Sunbelt Multifamily has proven to be a recession-resilient asset class, with many years of strong historical fundamentals underscoring the strength of the asset class as a long-term investment. Additionally, due to the shorter-term duration of the leases and the additional disposable income available to renters during times of wage growth, multifamily represents one of the best inflation hedge investments, furthering the appeal to private and institutional capital. The fair value cap rates paired with the demonstrated organic NOI growth supported a fair market value adjustment of over $500 million this quarter. On the JV development front, we are pleased to report that the Pearl in Austin, Texas was successfully sold after a very active sale process. The return calculations equate to a 3.15 times return on invested equity and a 41% IRR for the REITs. In Hercules, California, phase two of our development named the Granite Bayfront received its final certificate of occupancy in March of this year and is currently 43% leased. Lastly, Shoreline Gateway, Long Beach's tallest residential tower, 35 stories, has seen strong renter demand since receiving its final certificate of occupancy in late 2021. The asset is now 47% leased and is achieving higher rental rates than originally budgeted. On the wholly owned development front, we expect to break ground on at least 11 distinct projects in 2022 and 2023 in our Sunbelt markets. In 2022, we expect to break ground of five projects, West Love, Midtown, and City Line, all in Dallas, Bayside in Tampa, and Sunrise Phase One in Orlando, which represents on a combined basis 1,661 apartments. First, I would like to provide an update on LandTower West Love in Dallas, Texas. We're happy to announce that we broke ground on this five-story, 413-unit RAP development last month, and we expect to turn the clubhouse and commence leasing of the first units in approximately 18 months. Also in Dallas, Texas, is LandTower Midtown, a five-story, 350-unit RAP development with direct frontage to the north central expressway, and is expected to break ground this quarter. Our third Dallas development, Lantower City Line, a 295-unit, five-story rep development in the City Line mixed-use development is expected to break ground in the fourth quarter of this year. The 186-acre City Line development includes major employers like State Farm's regional headquarters that employs over 10,000 employees and with walkable access to a Whole Foods market. In Tampa, Florida, we are wrapping up the building permit for a development called Land Tower Bayside. This development will consist of 271 units and is expected to break ground this quarter. Lastly, in Orlando, we are currently designing Phase 1 of our Sunrise development. The 332-unit garden-style development is located within a short drive of Disney World in the I-4 commercial corridor of Orlando. We expect to break ground on this development in the fourth quarter of this year. In 2023, we intend to break around at least six more projects in our existing markets on land sites that we either currently own or are under contract, which combined would be an additional 2,200 units. We expect this pipeline to grow as our in-house development team leverages its relationships and local expertise to secure institutional quality development opportunities. LandTower has processed and fostered partnerships with best-in-class brokers, consultants, architects, and engineers, allow our platform to scale to support the needs of our repositioning plan. We are currently under contract and pursuing rezoning on multiple tracks across Florida and Texas, and so we look forward to provide more color on our expanding pipeline and recent projects additions next quarter. Lastly, as part of our ESG commitment, we are pursuing an NGDS green certification on all new developments. LandTower's pursuit of a silver or better rating from this nationally recognized green building certifier represents our promise of providing sustainable, energy-efficient homes to our residents and to our communities. Lastly, in alignment with our past initiatives ever since our founding, we have welcomed two refugee families from Ukraine into one of our communities in Florida at no cost to them. And in the first quarter of this year, our employees donated, with a dollar-for-dollar match from H&R, over $17,000 to UNICEF Ukraine, and we continue to look for additional ways to help the cause. In summary, we are excited about the future value creation opportunities at H&R Reef, and I look forward to contributing even more to those efforts in my capacity of president. And with that, I will pass along the conversation to Larry.

Thank you, Philippe, and good morning, everyone. Before I review our financial results, I would like to highlight four disclosure enhancements we have made this quarter. The first is a portfolio summary on page six of the MD&A, with a concise, centralized, consolidated table of property stats and metrics. This is H&R at a glance. The second is a summary table of net operating income located in our press release. The third is the REITs balance sheet on page 14 of the MD&A which proportionately consolidates equity accounts and investments. And the fourth is the REITs income statement on page 29 of the MD&A which proportionately consolidates equity accounts and investments. We will continue enhancing our disclosures going forward, and I invite suggestions for further improvements. As Tom mentioned, we are excited to report our results this quarter, which have already begun to reflect the rewards of the strategic repositioning plan we announced last October. After shedding $4.7 billion of higher risk and lower growth assets in 2021, we are well on our way to streamlining our portfolio and aligning ourselves for higher growth. That growth is clear from our Q1 same-property net operating income cash basis, which grew 19.1% compared with the same quarter last year. Each division contributed to the growth, with LandTower Residential leading the way with a 31% increase in same-property NOI cash basis. 31%. If you dig deeper and exclude Jackson Park, which was leased up last year, growth was a very healthy 11%. As Philippe has already discussed, LandTower Residential continues to see significant increases on new leases and renewals. Same property NOI cash basis from office properties increased 24.3%, primarily due to the burn-off of Hess Corporation's rent-free period that expired in June 2021. Our office properties are located in strong urban centers with a weighted average lease term of just under nine years, leased to strong investment grade tenants. I would like to point out that we have only 40,000 square feet of office leases expiring during the remainder of 2022. Retail same property NOI cash basis increased by 5.3% for the quarter driven by the lease up of River Landing Commercial. Committed retail occupancy at River Landing is now at 90%. And lastly, industrial same property NOI cash basis increased by 4.8% for the quarter, primarily due to increased occupancy and contractual rental escalations. Subsequent to the quarter, we leased the vacant 314,000 square foot industrial property at 2121 Cornwall. H&R has a 50% ownership interest in this property. For the remainder of 2022, we have just under 500,000 square feet of industrial leases expiring at an average rent of $5.12 per square foot. We look forward to reporting further strong NOI growth from our industrial portfolio as the rents in these properties continued to increase. Overall, FFO per unit was $0.28, and ASFO per unit was $0.26 for Q1. Based on our distributions of $0.13 per unit for the quarter, our ASFO payout ratio was a very healthy 50%. During the quarter, H&R completed independent appraisals for 23% of our real estate assets. We are seeing continued rental rate growth and cap rate compression in both the U.S. residential and industrial sectors, as has been evidenced by many significant transactions over the last quarter. As a result of the independent appraisals and what we are observing in the markets, we realize favorable gains on the fair value of our real estate assets of $1 billion. Philippe has already described the U.S. Sunbelt residential markets and how cap rate compression along with robust rental growth contributed to the portfolio's large increase in value. On our Canadian industrial portfolio, cap rate compression and continued growth in market rent were confirmed through 53 independent appraisals received during the quarter. The 53 appraisals amounted to 57% of the total value of our industrial portfolio. Land and property under development were affected primarily due to industrial lands and two properties under development in California. We obtained an independent appraisal for the Industrial Land Bank in Caledon, which reflected the values of comparable land sales in the area. The fair value increases resulted in our NAV per unit increasing from $17.70 per unit at December 31st to $21.06 per unit at March 31st and also improved our leverage from 46.6% at December 31st to 43.1% at March 31st. We finished the quarter with cash on hand of $103 million and $828.5 million available to be drawn on our lines of credit. And so, in summary, we are very pleased with our Q1 results Our high-quality portfolio of properties are positioned to produce strong operating results going forward. And with that, I'll turn the call back to Tom.

Thank you, Larry. H&R is flush with liquidity, and we are very confident in our plan and the direction that we are going. We are rewarding our unit holders for their support and patience and are increasing the distribution by 5.8%. We have significant embedded growth in our properties that gives us the confidence for the distribution increase announced today. The heavy lifting our teams have completed to date is beginning to bear fruit as is evidenced by our strong first quarter results. With an increased asset growth profile and Philips joining the executive team, we are moving towards our goal. We will endeavor to continue the cadence of our work and will perform this year, executing against our strategic repositioning plan. Management and the board remain fully committed and are actively evaluating opportunities to increase unit holder value and address the significant discount at which our units trade. Founders, management, and members of the Board and their families collectively own more than $300 million, or approximately 9% of the equity of H&R REIT, providing strong alignment with the shareholders in pursuit of the REIT's objectives. Looking ahead, we will continue to enhance our communication of our strategic repositioning plan in addition to demonstrating meaningful steps to arrive at our capital allocation goals. Equipped with a strong balance sheet, significant liquidity, enhanced portfolio concentration to large primary markets with strong population and economic growth, and a deepening of the executive team's bench strength, we are very well positioned to drive forward our repositioning plan. We now be pleased to answer any questions from the call participants. Operator, please open the line for questions.

Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. Our first question comes from Jenny Moth from BMO Capital Markets. Please go ahead. Your line is open.

Hi. Good morning. And congratulations on a very strong quarter and fully fund your promotion.

Thank you, Jenny. Much appreciated. Morning, Jenny.

I want to touch on the IFRS cap rate moves. When we look at what they were throughout 2021, particularly in the U.S. Multifamily Division, they were fairly stable. But we've seen market cap rates for U.S. Sunbelt multifamily properties decline throughout that period. So I'm wondering the move that you guys made on that division, is it a big catch-up move that really factors in the market move from the past 12 months or so, or is it reflective of just the past three months and the transactions that you've seen in the market on the M&A side?

That's a great question, Jenny. Frankly, it's less so a catch-up and more so the result of some very substantial transactions that occurred towards the back end of Q4. And it took a bit of time to have an economic read-through of where the fundamentals were, but also pricing. They weren't three multi-family pure plays. They had a capital structure that was a little exotic, and so it took us a bit of time. But like we put in the press release, that in conjunction with an independent appraisal, frankly, enough third-party research reports clearly indicated to us that cap rates had been significantly compressed compared to where we held at fair market values. And so it was about time for us to recognize that deeply embedded value.

Just to add a little bit of color, some enactments and government enactments restrictions came off in the fourth quarter. And so we maybe were a little bit gun sharp before they came off in the COVID environment. Subsequent to that and seeing just the space of transactions that there's been just ton of transactions at these lower cap rates. We've evidenced that for the capture of that value in our portfolio.

Did you have a higher volume of appraisals on your property this year versus 2021?

In 2021, we normally do about 25% to 33% of our portfolio in a year. So yes, this quarter was a higher level. A lot of that is driven by the industrials where we are looking to do a refinancing on our portfolio. So of industrials that we own 50% with PSP and Crestpoint. So we have done appraisals for that refinancing and that was really a large part of industrial financing. And then we had an appraisal done on the land bank that we had in Caledon as well. And the other appraisals were on some of our developments on our office properties. We did nine appraisals on our office properties that we felt had intensification opportunities. And although there weren't much of an increase there, there was something there.

Okay, going back to the US multifamily portfolio, part of it was driven by other M&A transactions in the market. Does the 3.7 cap rate you guys carry now contain any sense of a portfolio premium, or is that just a weighted average of the individual properties?

No, it's a weighted average of the individual properties. But I would say we've got gateway markets that obviously have a cap rate lower than the Sunbelt market. So on a total basis, it lands around 3.7. Interestingly enough, the transactions that I was referring to traded at a cap rate significantly lower than 3.7, but the vintage and quality assets were not comparable. In one instance, the assets were built in the 80s, and in the other case, some of the assets were in tertiary markets. So, frankly, on a personal note, I believe that we're still very conservative, given where our cap rates are and where the market is. I suspect that, obviously, with the increase in interest rates, one is wondering where cap rates are. But, frankly, it's a battle of the inflows of capital versus the increase in capital and the increase in interest rates. And as of right now, the inflow of capital seems to be winning in all of our multi-family markets in the U.S.

Right, right. Okay. So when you see that kind of cap rate compression in the market, as it relates to LandTower, How should we be thinking about its growth profile? You know, acquisition built the portfolio, but are you going to be pulling back from that a bit given these kinds of cap rates and really have development drive the growth? Or would you be seeking acquisition opportunities maybe in other markets that you're not currently in in search of some stronger yields?

Yeah, so a lot of impact there. I would humbly submit that one way of working at LandTower is a spectacular growth engine for H&R Reef and for all of its unit holders. As it relates to ultimately what the ongoing strategy is, we were built on being opportunistic and seeking arbitrage opportunities between our markets, between asset types. That doesn't go away. But frankly, as of right now, we're seeing the delta between current existing products and our development yields is historically wider than it's been in a very, very long time. So for as long as that's true, I think we pivot significantly to developing and create value that way. But again, there's a decompression of cap rates and there's opportunities to play one market versus another or one asset type or one asset class versus another that will definitely take advantage of that.

And right now, we have on the book's plans for five or six development projects in the U.S.

Yeah, we have five this year, six next year, and we're under contract in negotiating the acquisition of a few more. And so there's going to be a lot of activity and a lot of value creation coming from that side of the platform.

Great. Lots to keep you busy. I want to turn to dispositions. You had previously guided to dispositions being back and waited on this year, and there hasn't been anything completed so far. Can you give us an update on whether or not that still holds? If you're confident in the dispositions that you plan on doing, and is the market shaping up close to sort of what you were expecting late last year, or have you seen any shifts in the market conditions?

Good morning. The market has shifted, but it shifted very recently. I would say it shifted around two weeks ago. I think the trades that happened prior to that would have received different pricing today. Our goal has been an organized sale process over a lengthy period of a few years. It's not a fire sale. It's not a sale that's going to be – anything has to be sold. We don't have any short-term lease expiries. We have quality assets that can be sold. So we're not going to sell just for the sake of selling. We do have $900 million of dry powder through debt and through cash to continue to go with our NCIB. We currently have seven service stations under contract for $60 million. I expect that to go hard. We have a couple other LOIs that have been signed that are subject to APS and due diligence. I expect that to go hard ultimately as well. But again, it will be organized as the market continues to shift. negatively, then we will obviously not be achieving our goals of selling. But then again, our goal is to sell not a prior sale, as I mentioned. And therefore, over the period of the next few years, we will be selling as the market is there to buy our assets. I expect with the volatility in this rate that throughout the summer, you're going to see a very, very weak market in totality. I think multi-res will be fine. Industrial will still hold up. But I think the other sectors are going to be under pressure.

And I'm sure you'll see in the latter half of the quarter, the latter half of the year, we will have more dispositions than we for sure have in Q1. Right.

But then in Q1, we never expect to have a lot of dispositions because we're sitting with too much cash as it is. And we just are off of our 2021 large amount of sales that gave us ample liquidity, so therefore we have no necessity to sell.

Tom, do you care to venture like a rough quantum of what kind of sales you think you could put under contract or complete this year?

You know, I have a number in my head, but I couldn't spell out the numbers subject to the volatility in the market. And as I said two weeks ago, I think the market had a major shift where everything's frozen. I think it's not only interest rates. It's also the sentiment of going back to work. And I don't think if you look at downtown Toronto right now, I'm looking at Dufferin Street. I'm not seeing any cars. I don't think over the period of the summer people are going to be apt to go that quickly back to the office. That shift has to occur. So it's hard for me to give you a number because there's so many variables out there that really will impact the success of trying to sell. I do think we will succeed to have a significant amount of sales by the end of the year, but I can't really put a number on it.

Okay. Well, I have to at least try to ask. Thank you very much. I'll turn it back.

Thanks, Jenny.

Our next question comes from Samaya Syed from CIBC. Please go ahead. Your line is open.

Thanks. Good morning, and congrats, Philippe, on your new and expanded role. Just wondering if you could share some of your top priorities in this new role.

An interesting question, and I think there are many. But I think first and foremost, we definitely want to improve our communication to our unit holders and, frankly, to the market. I think we've done a good job. We haven't done a great job. But that's one of the first things that I want to work on. Frankly, we've got a great story. In my mind, we have an inexplicable delta from our NAF, our share price. And I look forward to sharing the story with as many people that are interested in hearing it. because we're obviously tremendously confident in its value proposition.

Okay, thanks for that. And then, Tom, like obviously really good buyback activity year to date. Historically, H&R hasn't really gone down this path. I'm just wondering what shifted or persuaded you now to invest in your own units?

Well, that's a good question, Samaya. It's Larry, by the way. I think what changed is we really de-risked our business with selling the Bowen Farmeris in Q4 2021, and still seeing the big discounts in our units, we feel that it's a great opportunity now, and the best optimal allocation that we can make is to buy back our capital while this discount persists.

But not only that, we are loaded up with cash and capacity savings. because of our success in selling the bow and belt portfolios last year. So it's the pricing. The overhang on the stock should have been somewhat related to the primaris and the bow. Now that we have disposed of it, there should be nothing wrong with the stock rising. We do have the capacity, and therefore we're much more comfortable today relative to where we were around a year ago.

And we see good growth going forward in the business.

Right. Okay, and just the last question I had was on the retail same property growth. It's fairly strong and helped by river landing, but do you have a sense of what would be retail organic growth on a more normalized level?

Yeah, it was basically all river landing. If you back up river landing, it would be pretty flat.

Okay, thank you.

Our next question comes from Matt Cornick from National Bank Financial. Please go ahead. Your line is open.

Hi, guys. I've been waiting for this quarter for a while and glad that it finally happened. Good results here. On the capital recycling front, a lot of attention has been paid to the office and retail assets, but is there an opportunity also – I guess, to maybe churn out of some of your existing legacy multifamily assets and use the funds at a three cap to fund some of your mid five cap new developments in the similar markets?

I think we've got enough liquidity right now not to have to do that. But it's an interesting question, Matt. What we're seeing currently is there's some arbitrage opportunities between one Sunbelt market versus another. And so I think what is a more probable outcome is us recognizing a I'm using fictitious numbers, but if I can buy for – if I can sell for a sub-three in Austin and buy for a four and a quarter cap in Orlando, it seems to be an accretive exchange, if you will. And that may be something that we'll look into. But, Frank, as of right now, my biggest, I guess, reluctance in doing this also, if you take a look at our NOI growth, we're looking at double-digit NOI growth. I would be hard-pressed to sell – a known commodity for an unknown asset.

Fair enough. And then on the sort of $640 million of identified cost to complete on your development projects, how much of that would you anticipate funding with sort of standard construction financing as opposed to equity?

Hey, Matt.

So we've got our lines of credit available to be used. And we expect to use that up in the short term and then hoping that we'll have asset dispositions to replenish those lines of credit. So that's what we're planning. Those are our plans at the moment.

Just remember, Matt, that we are now down to around 42% on our debt to assets. And we are comfortable in the mid-40s, 45 as we've always stated. So we do have capacity to issue more unsecured debt at the appropriate time. And we're comfortable doing so.

And our development spend for 2022... is not that large. I mean, in Felice projects and the Lantau, probably we're budgeting for $75 million to be spent. We have a couple other projects in Canada, and that will probably be another, call it 45 million. So most likely, looking at 110, 120 million development spend this year.

The largest has been 733 Mississauga Road, which will be a $25 million spend on industrial.

Okay, so the bulk of that, those 2022 start of construction for the U.S. multifamily side, that'll be mostly 2023 into 2024. And you've got 2024 as kind of a date of completion, but is it mid and staggered? How should we think about that from the development side?

I think a good way to look at it, from the moment we move DER, so to speak, or begin construction, the first units usually come online within 18 months. And so there's going to be some cash flow contribution within 18 months of the day of construction.

Okay. And on River Landing, those spreads you gave on both new and renewal leasing are pretty impressive. How much of that is kind of, you releasing earlier on in the development process versus kind of market rent escalation. I assume it's a bit of both.

It's a bit of both. We're not offering any concessions now. We were offering concessions initially to induce a lease up. But I think it's, you know, the majority is the latter. I mean, the market is obviously very good to our assets and the competitive set as well. But I'm also very bullish and excited about the next 12 months. I think we've only seen the – the very beginning of round growth at that property.

Okay. And then two quick ones just on 649 North Service Road. Glad to see traction there. What should we think of timing-wise for that lease commencement if it, in fact, does go through?

I think it's in the later part of Q3 or early part of Q4. I'm just going off memory. And the last one. Q4. Q4.

Okay, last one for me on CapEx, Larry. There's a insurance proceeds in your redevelopment CapEx. Do you know what it would have been, X, the insurance proceeds?

Yeah, we didn't have much CapEx. X, the insurance proceeds, it would have been, I'm going to look it up. I'll get back to you, Matt. I don't know the exact number. I'll get back to you, but I don't think there's anything major there.

Okay, and I guess that's a broader theme, I guess, as well across this new entity is that CapEx this quarter has come down substantially, and you'd expect it to stay at sort of these lower levels?

Yes, I think there will be a bit of a CapEx increase. Our budget is a bit higher than the amount we spent it for Q4, but not substantially, maybe another million dollars or so a quarter. And just so you can work out the number yourself if you have it in front of you, Matt, the insurance proceeds were 12.5 million U.S.

Okay, perfect. Thank you very much, guys. And again, great quarter.

Our next question comes from Mario Sarek from Scotiabank. Please go ahead.

Your line is open.

Hey, good morning. Thanks for taking the question. I wanted to maybe just come back to the land tower and the same strong Y growth. How sustainable do you see kind of, you know, high single-digit, double-digit things during wide growth within the portfolio over the next 12 to 18 months?

I would believe it to be very sustainable. One of the metrics that I brought this up last time on our call, but one of the metrics that we've been looking at is the rent-to-income ratio before this run-up in rents and after. and it's barely moved, which indicates that ultimately there's still a lot of room, but there's more importantly what we're noticing is there's an unbelievable amount of income growth on behalf of our tenants and obviously the general population. So for as long as that's true, I'm very bullish on our rents, and even if that were to abate somewhat, we still have a ton to catch up versus ultimately their capacity to pay higher rents. Not to mention, by the way, just as an anecdote, not to mention the impact of how expensive single-family housing has become. And so as you take a look at your demand for your product, not only are they making more money, but the opportunity to purchase a home and to ultimately move out of our apartments is diminishing.

Can you remind us of where that rent-to-income ratio may be after Q1?

It's a little under 21%.

To give you a frame of reference, if you were to apply for a loan to a mortgage to buy a house, I think the maximum ratio is about 33%, at which point that's the breaking point. And so not implied that we would ever get there, but there's obviously a ton of runway ahead of us.

Okay. And then just maybe coming back to one of the original questions in terms of the IFRS cap rate, I just want to clarify that The 3.71, when you're looking at the comps, you guys are excluding the presumed portfolio premium that was being paid in those privatizations in terms of assessing the benchmark.

Is that correct? That's exactly correct. I would also add for additional context and clarity two things. Number one is at any point in time, we have about 80 to 100 assets that we're currently underwriting in our respective markets to get better assets. sense of the market and get a pulse for it. As of right now, the vast majority of the opportunities that are actionable today with today's interest rates are all at a cap rate of sub 3.5%. So is that subject to change at some point in the future? TBD, but as of right now, that's the reality in which we live in. The second, and this is more anecdotal than anything else, but we are currently selling an asset or under contract to sell an asset in San Antonio. Due diligence was actually waived late last night. Again, in today's environment with today's cap rate, that value is in excess of the value that we're holding it on our books. So in excess of our IFRS value, in San Antonio, arguably our slowest of all seven markets.

That's great. And then just maybe shifting to the distribution increase, I'm just curious how you landed upon 5.8% and how should we think about the potential for kind of recurring distribution increases going forward in relation to perhaps FFO or AFOP unit growth or is there a specific payout ratio that you're targeting? How should we think about that policy and how that's changed?

This is really a function of the great growth we've seen this quarter and the confidence in our assets to kind of continue that growth definitely for next quarter and probably into the second half of this year. ASFO's payout ratio for the quarter was 50%, so that's a very healthy payout ratio, and we wanted to increase that. How do we look at the amount going forward and what ratio you should think of? We said more or less we wanted to be between 45% and 55% payout ratio of FFO, and that's where we are landing at, and we'll continue on that path going forward.

But again, we have the confidence. We cut pre-COVID. We were very conservative, as you well know, both on our appraised values and on our payout. We have the confidence now post-Primaris. There's no more drag on us, no more drag on our stock to go and increase distributions going forward to the levels that Larry mentioned. We have no real lease expiries that are bothering us. We have no asset weak tenants at all. I know bad debt, so we're in a position to just keep on quick coupons. Our industrial rents have gone up dramatically. From January to today, we've done around 2,750,000 square feet of industrial renewals and around going from an average of 860 to 1157. That's a 52.8% increase that represents $10 million to 100% level, $5 million at our level. And we expect the industrial and the residential to continue to clip along. with the retail and office achieving its contractual rental escalations, which of course are more muted, but overall gives us the confidence to continue to increase distributions over time.

And then just maybe an associated question, in terms of, and then maybe kind of moving to asset sales, do you have a sense of the level of asset sales that are increasing capable of being achieved without having to do a special distribution?

Well, that's a little bit on the difficult side because it depends if it's the United States or Canada. So we have our plan ultimately always in the vision of selling some United States and some Canada. So we're in a balancing act of where that delta lies. In the United States, it would be 1031, and it's not an issue. In Canada, of course, it's an issue. So there's not a lot of capacity to go ahead and increase distributions. And then again, that's again why we increased the distribution now in anticipation of the fact that we will be selling assets and potentially have to do a special distribution. Like that, we were confident in the increase that we could provide to the unit holders then.

Okay. And then just maybe last question, coming back to the dispositions and kind of the pivot to a growth strategy on one hand, You have the multifamily and industrial, which are growing quite nicely, but on the other hand as well, there's growth through maybe a bit of addition by subtraction in terms of some of those lower growth asset classes that you're looking to dispose of over time when it makes sense. Tom, you mentioned the market dislocation the last couple of weeks. It might be too early, but are you seeing differentiation? within that market dislocation. So for example, for your office and for your retail assets that are very long lease duration, contractual rental escalations, which during periods of distress, I would argue maybe get a bit more value to less. So are you seeing that differentiation in the market today? And how do you think about public market volatility impacting what you're going to do on the private side?

I think, as I mentioned before, it's very, very new. This is all of a couple weeks old that the market's basically, I would almost say, taken a strong pause for everything. You've seen the office completely dry up and the retail, again, dry up. I don't think anybody's moving the cap rates to sell or to force sell. I think the markets, the capital markets are in a very strong position as far as their debt levels go, so there's no urgency. So it's almost like a wait and see until people find their levels of where interest rates are going to lie. I don't think you're going to see over the course of the summer a whole lot of transactions taking place in Canada. The United States will obviously see some more. So the answer to your question is it's too early. I don't know. I don't think anybody knows. I think what you're going to see H&R be doing, and many will gravitate to the same formula, is a lot of off-market deals rather than widely market deals. If you give the buyer the breathing room to have a take, they can go ahead and deal with an off-market with the comfort that there's not a lineup over there. And I think you'll see relationship deals. You'll see structure deals. If you look at our bow deal, that was a highly structured deal. I think you'll see that going forward as well as the market finds its place. Overall, though, I'm pretty confident we'll be able to achieve our objective to sell assets. But again, I think they'll be off-market until the market finds its place.

And just on the off-market, we've seen some REITs kind of sell assets and kind of taking back units at IFRS valuations where the stocks are trading. Do you see that as a potential possibility for you?

No, and I don't think it's a big driver. We talked about that a long, long time ago. As H&R traded to discount the NAF, We always suggest that NAV for NAV would make sense. I think the deal that you're referring to, the choice and ally deal, was structured. I think it was close enough that they could achieve their objectives from an optics perspective, but I don't think it's a driver going forward at all. I think that it's very hard to do NAV for NAVs because no one agrees on whether the proponents, the H&Rs of the world, will not agree necessarily with the other side of what the NAV is. I don't think you're going to see that becoming a big part of our sales program or the market sales program, for that matter.

Okay, and my last question, again, this may be looking out a bit too much, but just structurally speaking, the portfolio as it sits today, like the same property and wide growth has been really good this quarter, likely next quarter as well, given what LandTower is doing. Structurally, what kind of names during our wide growth do you think the company set up to deliver after we kind of get past the Jackson Park year-over-year and the Hess Tower year-over-year? What kind of structural same property and wide growth do you think you can achieve in

If you backed out Jackson Park and River Landing from our same property NOI, you'd be at 5.4% growth. So we think with Lantau Residential achieving single-team digit growth, that's going to definitely be the driver. The industrial, we're looking at great growth going forward as well. I'm hesitant to put any numbers on it, but the 5% we achieved this quarter should be going forward for the next year or two. And then office and retail will be more muted with just the contractual rental escalations coming in. Basically, our office and retail portfolios are leased long-term. And our new growth coming in from them will be the rental escalations.

Right, and don't forget that's lumpy. Retail and office are five-year, for the most part, five-year as opposed to industrial, which is now the market is one year. Annual, three to even four percent of annual escalators. The retail is the least. Retail right across the board has always been the least. It's more like contractual rental escalations, not based upon a percentage, but rather a 50 cents or dollars per square foot. for the larger box deals, and the office is contractual at 10% every five. So it's lumpy, but again, as Larry mentioned, there's no lease turnovers, there's no weak tenants, so we expect to get that, achieve that type of growth in the retail and office over time, and again, the driver being, at this point in time, residential and industrial taking us forward.

Great, thanks, Russ.

Our next question comes from Jimmy Shan from RBC Capital Markets.

Please go ahead. Your line is open.

Thank you. I just wanted to follow up on the comment about the market taking a pause. So is that also happening in the hot sectors like industrial in Canada? And so that's one. And then in the multi-res Sunbelt, it sounds like there is no pause there. So I'm just kind of curious as to how. you think people are justifying paying a three and a half cap when the cost of debt is ahead of that? Is it just the confidence and underwriting continued high rent inflation? Maybe your thoughts there would be great.

Well, the driver on industrial is very simple. You have a vacancy rate throughout North America at 2% across many markets. They're expecting substantial rental escalations and that that basically compensates for the rise in interest rates. You are seeing a lot of demand for industrial also because a lot of institutions, such as pension insurance companies, have to grow their real estate allocation, and they don't want to grow it in other sectors necessarily, so they're putting more capital into the industrial markets, which right now, for the foreseeable future, nobody sees a pause. And I would tend to say it's the same thing with the residential. The residential is powered in the United States, not in Canada, but the United States, by that rental growth, and that's compensating for the rise in interest rates. The pause that you're seeing in the market is really more in the office sector and the retail sectors.

Yeah, Jimmy, if I can answer that answer, what I would tell you as well is that obviously we'd be speculating, but from what we're hearing is folks are frankly underwriting considerable NOI growth. And so while they're in a negative leverage situation day one, obviously the performer calls for that to be the case within the next 18 months. And I think it's more a... It's more a bet on the fundamentals, and frankly, I share in that optimism. However, frankly, when we're talking about negative leverage, I hate to borrow this expression, but it's a pitch that we're swinging. We're frankly not going to swing it.

You also have to remember that when you rise interest rates, the lending world changes and the loan-to-values change. And right now, when you're underwriting in the United States more so than Canada again, When you're underwriting deals on the private side, you're layering first mortgage financing with best financing. The amount of equity will require to be greater. That will be more because the demand has shifted in who the buyers are, but the demand is so strong that I think the values will be maintained. You'll just see a whole lot of private money off the table as their funding for debt decreases and they have to put in more equity. But again, this market is so strong that it will just be a shift in players, but different players, same pricing. Okay.

Yeah, thanks for that. And then on the fair value gain with respect to the cows and the industrial land, is that maybe not too familiar? I know that you've got a couple of assets there. Can you provide some color there? Is it just excess land that's being revalued up, or is it the actual development projects themselves being valued higher? Can you maybe provide some color there?

Yeah. First of all, land, industrial land, and specifically in Canada, Toronto and Vancouver markets, even Montreal for that matter, have seen larger growth at a shorter period of time than any other asset class by far. You've seen, for example, residential to $300 a square foot for buildable square foot in Toronto, substantially higher in Vancouver. That's been a gradual increase over a large period of time. The industrial market has gone from $1.5 million to $3.5 million an acre really over a period of very few months. We bought Mississauga Road at $1.25 million an acre. We bought Slate Drive at $1.5 million an acre. And those properties are today north of $4 million an acre. A lot of the increase in the cattle in the market happened over the past six months, and it's real. It's because the users that are there, they've taken the space. In our particular case, it was also the release of the land. Unlike many of the others, our land was actually zoned for industrial land. A lot of the lands that you're seeing were subject to the release of lands into zoning that achieved those type of goals. We actually rezoned when we were subject to the highway extension, which is now at the process of probably being finished now this year, as opposed to six months ago. I could not have told you that. And as such, I expect us to achieve somewhere between $3.25 to $3.5 million per acre. I expect that the values of Slade and Mississauga Road are going to be valued at close to $4 million an acre. Just to give you a heads up on what that means in English, it means in English that you're taking our Calvin lands at $700,000 to $800,000 an acre, you're developing to a 7% cap, and by the time you factor in the current market value, industrial buildings are being built to a 4.25 cap today, which still achieves some appreciation versus their 3.75 value upon build. But you can see the profit margin has been squeezed very, very dramatically. It still supports the $3.5 to $4 million an acre, and I think what you're gonna find in industrial is because of this escalating land values, rental rates have to be pushed forward. Also, you had an increase in development charges that have almost doubled. So you're gonna see industrial rents continue to escalate in cities like Toronto and Vancouver just because the land is so expensive and the development costs are that expensive to create a yield of some profit to the developers.

Great, thanks for that, Colin. Sorry, last one. Last quarter, there was some comment about Jasmine Park having some concession costs and showing up in Q2 and Q3. Is that still the case? And I couldn't remember what the impact would be in Q2 and Q3 for that.

Yes. So there's definitely going to be concession burn-off. I would say that we're still well within the margin of 1% off of our budget. And so our projections are fairly accurate. But I think that by the end of the third quarter, we should see a significant burnout, as evidenced by the fact that we're 99% leased. Given the high occupancy rates and also the renewal rates, I would anticipate that that number comes down quite significantly in Q4 and 2023. To be additionally helpful, Jenny, our early estimates are that the concession costs are going to be lowered by in excess of 50% in 2023.

Okay. Right. But the number should not be coming down from Q1. In other words, in Q2, then the number should not be going up. If anything, it goes up in Q4 when it burns off, right?

No, we are expecting the number to come down a bit in Q2 and Q3. Just for the amount of term we have at Jackson Park, most of that term comes in the summer months. So there will be commissions that we have to pay for those leases renewing. And in addition to the burn-off of the concessions that we gave in the original lease-up during COVID, so we are expecting a decrease in Q2 and Q3 of Q1's numbers. But just to give some color, we're hoping the river landing commercial side and the retail and the office side will kind of offset the Jackson Park decrease.

Okay. Got it. Thank you.

Our last question comes from Sam Damiani from...

Hi, good morning, and thank you for, well, thanks for the question, and congrats on a great quarter. Great to hear and see results on a much more refined portfolio, and congratulations, Philippe. Just wanted to start off on the development plans for this year. It looks like the average cost per suite on the 2022 starts is about $280,000. Has that been increased to reflect sort of current market costs, and how have your budgeted yields moved, I guess, since you last cut the numbers, and how have rents moved?

Yeah, so one way of looking at our development yields is, frankly, in line with our conservative underwriting. We underwrote these rents when we published these yields when, I think, lumber was at 1,200 bucks. And I think now I haven't checked the figures, but they're sub-800. And so we've got a significant amount of cushion, the denominator of the development yield, not to mention that the numerator seems to be increasing, obviously, every week, every month, as evidenced by the growth in NOI and revenue that we've been disclosing. However, we are using a very, very conservative growth factor. for our trend yields. And so, in essence, what am I trying to say? I'm saying our numerator is conservative, our denominator has a cushion. And so, you obviously don't want to jinx us by saying this, but we've got the capacity to take on some supply chain disruptions and an increase in labor costs and whatnot, and even an increase in cost of capital, and still have a significant margin of safety for those yields.

And what would be the average rent across those Those, I guess, five or six starts that you're planning this year, what would be the typical rent per sweep?

It's a great question. I think that perhaps we can give you that information offline. I don't have it readily available, but I would tell you that because the three markets are very different, the rents are going to be somewhere in the ballpark of $1.60, $1.70. I want to give you the exact figures, and so if you want, I can absolutely share that at some point in the future on an individual basis.

And sure, okay, thanks. And the last question on this is, how does that 280,000 per suite compare to the current IFRS fair value for your land tower portfolio, excluding Jackson Park?

It's a tough comparison, Sam, because you're comparing new construction that's going to come out of the gate in two years or 18 months from now, looking forward. With legacy assets, our average portfolio age, I believe, is 2015, 2016. So it's a little bit like comparing apples to oranges. And so in some respects, it's higher than our current cost but I'm not sure what can be inferred by the delta. I'm not trying to dodge the question, Sam. I'm just trying to be upfront with you.

Well, you can't take existing product and divide it between land and building, so you really have no method to calculate the answer to that question. Right? If you have a $350,000 per unit mixed with land and building, there's no way to allocate the land and building to compare today's cost to yesterday's cost. In addition, in the residential world, The big driver between South Carolina and Florida will be the realty taxes, which has a huge impact on the overall value. So there is no answer to your question.

Well, thanks for trying. And just a last question for me is, Larry mentioned the expiries on the industrial side averaging about $5 a foot for the rest of the year. Is that all in the GTA?

Substantially in the GTA, yes. Not all, but substantially.

And how does that look for 2023, if you have that?

It's in the MD&A. I don't have it readily handy, but it's in our MD&A.

Sorry, and would it all be the GTA as well?

Oh, sorry, you're asking if it's all in the GTA. One second. Sorry, I'm actually pulling it up. No, I was wrong. 2023, the 500,000, the biggest part of it is actually in Quebec. of the 500,000 square feet expiring in 2022 is in Quebec. And for 2023, it is, we have one large one in the U.S. maturing, which makes up, I would say, 75% of the maturities in 2023.

Okay. And just lastly, when you say Quebec, is that Greater Montreal area or another location?

It's

The address is 220 Shenker. Oh, no, no, Shenker. 220 Shenker. Yeah, yeah, yeah. So it's Greater Montreal. Greater Montreal.

Very much Greater Montreal.

Great. That's great. Thank you. I'll turn it back.

We have no further questions in queue. I'd like to turn the call back over to the presenters for any closing remarks.

Oh. Okay. Thank you, everybody. And have a great summer, I guess. And a nice weekend. Bye.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.