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Edited Transcript of HR.UN.TO earnings conference call or presentation 15-May-19 1:30pm GMT

Q1 2019 H&R Real Estate Investment Trust Earnings Call

Toronto Jun 5, 2019 (Thomson StreetEvents) -- Edited Transcript of H&R Real Estate Investment Trust earnings conference call or presentation Wednesday, May 15, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Larry Froom

H&R Real Estate Investment Trust - CFO

* Patrick James Sullivan

H&R Real Estate Investment Trust - COO of Primaris Management Inc.

* Philippe Lapointe

H&R Real Estate Investment Trust - COO of Lantower Residential

* Thomas J. Hofstedter

H&R Real Estate Investment Trust - President, CEO & Trustee

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Conference Call Participants

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* Mario Saric

Scotiabank Global Banking and Markets, Research Division - Analyst

* Matt Kornack

National Bank Financial, Inc., Research Division - Analyst

* Michael Markidis

Desjardins Securities Inc., Research Division - Real Estate Analyst

* Sam Damiani

TD Securities Equity Research - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the H&R Real Estate Investment Trust 2019 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 reflect the current expectations of the management regarding future events and performance and speak only as of today's date.

Forward-looking information requires management to make assumptions or rely on certain material factors and is subject to inherent risks and uncertainties, and actual results could differ materially from the statements in these forward-looking statement -- 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 any meaning recognized or standardized under the IFRS or Canadian generally accepted accounting principles and are therefore unlikely to be comparable or similar [to] measures presented by other reporting issuers. Non-GAAP measures should not be considered as an alternative to net income or comparable metrics determined in according with IFRS [or] 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 these forward-looking information and the material factors or assumptions that may have been applied in making such statements, together with the -- 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 www.sedar.com. I would now like to introduce Mr. Hofstedter, Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstedter.

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [2]

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Thank you for joining us here today. Good morning, everybody, I'm Tom Hofstedter, CEO of the REIT, and I'd like to welcome everyone. Larry will give you a high-level summary of the quarter results as customary followed by Pat, who'll give you an update on Primaris and then over to Philippe, who'll give you an update on the Lantower portfolio. Here are the highlights for the first quarter. Firstly, we completed significant lease extensions in our core office portfolio, including a 10-year extension with our second-largest tenant, Bell Canada. We are quite pleased that these extensions incorporated rents that are now at market, annual contractual rental increases and created significant commitments to these properties, extending the average remaining lease term to over 16 years. We also extended our leases with AltaLink in [Caledon] to 20 years and [is used to] contractual rent steps every 3 years. Following these extensions, the average remaining lease term for our Caledon office portfolio is now 17.7 years. This portfolio is now 100% leased to 3 investment grade tenants with the next lease maturity not until 2031. A little color on why we did the lease extensions. As we know, customary in the Canadian market place the contractual rental increases is purely 5 years and are really reflection of what's going on with the inflation in the world at this point of time. Going back to the [Baldios] where -- written around 17 years ago, at that point in time, inflation was significantly higher or bumps equated to around 20% to 25%, resulting in the Bell lines being above market. To remove the risk, with the tenant not necessarily not renewing this space and are not renewing any or all of the space and (inaudible) market and more importantly, being able to finance these assets, we actually always do lease extensions early on in time to bring down the rents because it give the tenant some relief in that regard and get surety of tenancy term by -- through the lease extensions. This obviously increases the NAV, decreases the rent and the NOI and decreases the cap rate. The net effect on NAV is usually not material, gives us the security of tenancy and it also gives us the ability to go ahead and learn -- do long-term financing and allows us to sell assets at any point in time in the near future as there is sufficient lease terms. So let’s discusses the [Marinol] portfolio. In almost all markets, we find that the contractual rental equities over time increases the actual net effective rental rates achieved, and therefore, we always go for long-term leases. And we've been doing that for over 20 years, and that's been our style -- and that's -- as proven in the results.

Right now, Toronto is going through a boom with -- [before a] Calgary rental boom. Obviously, the cycles, at this point in time, the rental rates in Canada exceed the market's rates for -- that we are rolling the [axis] on other than suburbans, where suburban is reversed. But if you look at any portfolio over a long period of time, you'll notice that the (inaudible) is a -- will be by definition above market rents and below market rents are two Gotham office buildings leased to the New York City Department of Health is above -- is right now below market. Our Hess is above market. Our Sony building in the Culver City, California, is below market. You do have to look at the weighted average of the lease terms and the weighted average of the rental rates to arrive at the -- which is what we actually report on -- our numbers actually will arrive at what the proper average rental rates should be. But it -- by definition, it's impossible that all rental rates will be below or above market at any point in time as in the long-term lease. Moving on to development. This quarter we transferred our flagships to Jackson Park development at Long Island City to operations with the project now with 75% lease. This development is on track to deliver 6.2% yield on costs, significant NAV accretion and with what we expect to be attractive growth over time. Our next slide shows the development of River Landing in Miami, which was recently topped off with up [to 50] to commence this time next year. The retail component of River Landing is over 60% preleased with strong demand for the remaining 132,000 square feet and with the ICSD Las Vegas Commission coming this weekend, it should be a very busy weekend. We have advanced discussions on the remaining 136,000 square feet of office and are confident in the lease up prior to construction completion. And finally, within our development portfolio, we are proceeding with the development of 526,000 square feet of new industrial space in the Caledon sub-market of the GTA with construction starting next month. Ultimately, this will be followed by an additional 2.2 million square feet on the remaining portion of these lands, we expect to achieve net rental rates for the first 5 years of the term of approximately $8 a square foot, and the project should be providing us with very attractive yields based upon our [estimate for] land costs. Last Thursday, we announced the sale of the Atrium, taking advantage of tremendous demand for office property with the sale price of over $600 per square foot. This is approximately 80% above the price that's required for it 8 years ago. The sale reflects a number of factors: One, strong demand for Toronto office assets; significant near-term capital requirements of Atrium; medium-term tenant -- turnover and repositioning cost; more attractive returns on our other development and development projects; and our commitments to our industry-leading balance sheet. Last quarter, we outlined our plans for 2019 in a letter to unitholders, including exploring opportunities within our portfolio to service value through redevelopment and intensifications. We've made progress on advancing our understanding of several of these opportunities, including a number within the 1.7 million square foot downtown off -- Toronto office portfolio we continue to own as well as Dufferin Mall among others. We look forward to sharing with you more details on these opportunities as we advance these projects.

In conclusion, I'd like to reiterate our commitment to streamlining and simplifying our portfolio, raising the internal growth profile of our portfolio and enhancing the profile of H&R to its unitholders. We are heavily focused -- highly focused on maximizing FFO, NAV per unit ratio of our unitholders and are working towards continuing on the progress of H&R to achieving in this regard in 2019 and beyond. I'll now hand it over to Pat. I want to hand it over to Tom.

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Patrick James Sullivan, H&R Real Estate Investment Trust - COO of Primaris Management Inc. [3]

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Not me.

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [4]

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Oh! Larry. Okay, I want to hand it over to...

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Larry Froom, H&R Real Estate Investment Trust - CFO [5]

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Good morning, everyone. I'll give a really brief overview of our Q1 results. FFO on fully diluted basis was $0.43 per unit compared to $0.44 in Q1 of 2018. $5.2 million of lease termination fees and adjustments to [straight lining of rate] were included in 2019 results compared to $800,000 included in Q1 2018. Excluding these items, normalized FFO would have been $0.44 per unit in both periods. During the 13 months ended March 31, 2019, we sold $1.1 billion worth property compared to $460 million of acquisitions. Considering these net asset dispositions having no slippage in FFO per unit is quite an achievement. Part of proceeds from asset dispositions have been used to fund our development pipeline, which will be a source of significant growth in property operating income and FFO in the next few years. On a same-asset cash basis, Q1 2019 property operating income from Canada was up 4.3% over the Q1 2018. And on a same-asset cash basis, Q1 property operating income 2019 in the U.S. in local currency was up 2.8% over Q1 2018. These increases in same asset property operating income are a testament to our capital recycling program to sell assets with low growth potential and replace them with assets that have higher growth potential. Same-property operating income cash basis in our office segment increased by 7.2%. Excluding the lease terminations, this increase would have been 1%. The lease terminations we received of $6 million was from an office tenant, who will continue to occupy and pay rent until February 2021. Same-asset property operating income on a cash basis from our industrial division increased by 3.3% primarily due to higher rents in the Canadian portfolio. I'll now turn the call over to Pat to give an update on our Retail division.

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Patrick James Sullivan, H&R Real Estate Investment Trust - COO of Primaris Management Inc. [6]

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Thank you, and good morning. Same-property NOI for the Retail segment increased 3.5% during the first quarter and 4.5%, excluding lease termination fees. Grocery-anchored properties within the portfolio, which accounts for approximately 29% of the retail portfolio measured -- as measured by same-asset property income generated [16.3%] growth in the first quarter. Enclosed mall, which accounts for 54% of the retail portfolio close to modest decline in NOI during the first quarter, but a gain of 1.5%, excluding lease termination fees. Subsequent to the end of the first quarter, we completed a transaction Smith [Dellis] Mall Retail Plaza in Calgary anchored by staples. We will continue to prune the retail portfolio through disposition our retail assets that provides limited growth, rental growth potential. Our overall occupancy rate in the retail portfolio in -- for the first quarter was 88.8%, which is lower than 91.2% recorded in the first quarter of 2018. Occupancy was negatively impacted by the enclosed mall portfolio due to target redevelopment at Sunridge where the premises have been occupied by a temporary tenant for the past few years as well as the redevelopment of the former Safeway at Sherwood Park Mall. Including tenants committed, but not yet open, occupancy rises to 92%. Redevelopment of former target locations is essentially completed. 7 tenants operating from the area exceeding 100,000 square feet are due to open at Sunridge this fall and this will drive incremental revenue growth throughout 2020.

With respect to Sears, at the end of the first quarter, we've committed [conditional additional] transactions [in place] , representing approximately $3.6 million in annual base rent and the H&R share [or just] over 50% of rent anticipated total rent upon completion. Sears at the annual base rent of $2.3 million at H&R share. We are being selective with replacement tenants, focusing on those tenants that are prepared to pay market rents and enhance our merchandise mix. Several of our redevelopment plans include partial demolition of Sears and the addition of outparcel development. We start rental income from these redevelopment projects to start in Q4 2019 and with substantial completion of all projects in late 2021. At Dufferin Mall, we've held several [public] authorization meetings regarding our preliminary plans to add approximately 1,000 residential units to the property. We expect to make a formal proposition to the city this summer. Sales productivity in the portfolio was down 1.6% on a same-store basis and 1.7% on an all-store basis. Approximately 7% of the decline in all store sales is tied to significant sales decline posted by 1 travel agent at Dufferin Mall and 2 travel agencies at 5 (inaudible) as well as the closure of a local electronics store at Dufferin Mall and 4 tenants expanding from CRU -- small [fries] CRU and being reclassified as large nonmajors. By way of example, Shoppers Drug Mart who has been contributing significant sales at a higher productivity level than the mall sale at Park Lane Shopping Center, expanded through [indiscernible] 15,000 square feet, as such they are no longer reflected in same and all store productivity figures. On a same-store basis, softness in the electronic and jewelry category combined with the loss of -- loss in contribution from the electronics store at Dufferin and declining sales from travel agency previously noted were the primary drivers behind the decline. Nevertheless, portfolio same-store sales remained strong at $561 per square foot, and we continue to realize strong tenant demand per space within our properties. Thank you, and I'll now turn it over to Philippe.

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [7]

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Good morning, everyone. Pleased to be on this call today to share latest news from the Lantower Residential. As mentioned last quarter, the close of Lantower Waverly in Charlotte, North Carolina, marking our first acquisition in the Charlotte market. Built in 2016, Lantower Waverly is a 375-unit Class A development and one of the most affluent submarkets in Charlotte. Characterized by high-income households and A-rated public schools. Lantower Waverly is located within the Waverly mixed unit development with loft buildings and a Wholefoods Market. On the portfolio front, Lantower Residential's portfolio consists of 7,271 apartments across 22 properties when excluding the Jackson Park. If you include Jackson Park, our portfolio consists of 8,207 units across 23 properties. As we continue to actively monitor our portfolio, we are paying specific attention to our assets of older vintage. Demand matured in our respective investment lifecycle to strategically determine, which property should be sold, while reinvesting the proceeds into newer and better assets. This portfolio reallocation should enable; One, the outperformance of our projected financial returns; and second, the replacement of older assets with increasing CapEx requirements into more recently constructed properties, thus successfully further improving one of the newest portfolios within our sector.

As mentioned in previous quarters, our reported Q1 occupancy is artificially lowered due to the inclusion of the lease of Ambrosio and Edgewater in Austin and BullHouse in Austin [corners] in [Wallingbrook] . Excluding the impact of the lease ups, our portfolio's occupancy was over 92% at the end of the first quarter. In 2019, the first half of 2020, many of Lantower's target markets will experience peak apartment deliveries. In anticipation of these deliveries, Lantower constructed a program at the end of 2018 to reduce further tenant turnover and maintain the high occupancy throughout the peak delivery seasons by incentivizing our leasing staff and prospective residents to enter into 18-month and 2-year leases. We are delighted with the results thus far as we have secured over 650 long-term leases year-to-date across Lantower portfolio. Despite the nominal upfront cost via tenant concessions and leasing of tenants, we believe the program will yield higher and more stable property NOI over the next 18 to 24 months through a reduction of future concessions and locator expense in addition to lower turnover repairs and maintenance and vacancy costs. We have always managed through NOI, and we believe that this initiative will lead to NOI outperformance in 2020 in comparison to our peer set. As such, this strategic program that we tested in the first 2 quarters of 2019, and we'll closely monitor its efficacy. Following the management takeover, of our Raleigh-Durham portfolio, Lantower's property management division, Lantower Luxury Living now manages over 95% of our portfolio and will manage the entire portfolio by the end of the second quarter. The expansion of the luxury platform has enabled us to recruit the very best on-site personnel, increase recruiting reach and consequently, we believe that this will manifest itself through higher operational efficiencies and higher NOI growth. An update on the Long Island City. Construction at Jackson Park has been progressing as scheduled and the project is [substantially] complete with all units turned over to the leasing staff. Leasing velocity was very short in the first quarter, bringing total occupancy across the 3 towers to over 75%. All the managed spaces, including the 16-acre park are now open to residents. Stabilized occupancy still expected in the third quarter of 2019. And with that, I will pass our conversation back to Tom.

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [8]

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Actually, we'll open up the call -- the -- lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Sam Damiani with TD Securities.

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Sam Damiani, TD Securities Equity Research - Analyst [2]

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Just on the Caledon development, Tom, do you have any preleasing traction on those first 3 buildings so far? And I was wondering also about the cost you've disclosed, does it include a land allocation or not?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [3]

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So the first thing, I think, actually, is the industrial land allocation, and we are in discussions right now with 1 tenant for one of -- for the largest building. We're very confident on the preleasing, so obviously, the dispatch for industrial development [chances] are really great right now and we think we'll be able to achieve a (inaudible) development rate.]

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Sam Damiani, TD Securities Equity Research - Analyst [4]

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I'm sorry, did you say, it did include a land [across the] allocation?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [5]

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Yes, yes.

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Sam Damiani, TD Securities Equity Research - Analyst [6]

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Okay. And just over to leverage. Sale of Atrium, clearly is the significant transaction for the REIT, in many respects. I think last quarter, you may have mentioned a sort of longer-term mid-40s leverage target. Is that still your -- what you're thinking today over the next couple of years?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [7]

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The answer, I think is, yes. We haven't changed our opinion on leverage for many years right now. So yes, it feels like, this is all -- we should be able to bring it down again whether we're depending on our stock prices, raise equity up, so mid-40s is what we're very comfortable at.

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Sam Damiani, TD Securities Equity Research - Analyst [8]

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Okay. And finally, just over to Philippe on the new strategy of securing these longer-term leases. I think you said 650 leases executed today. That seems like a pretty strong take up in about the 6 months that you've been doing this. What sort of rent concession have you been giving up to achieve those longer-term leases? And are you pleased with the results so far?

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [9]

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Yes, no, we're more than pleased with the results. I look forward to, obviously, seeing the positive impact in 2020 as these leases were supposed to turnover, and obviously, they'll also be beneficial in the longer-term. I think that, candidly, 650 units is just slightly less than 9% of our total leases, and so we thought 91% of our rent roll that's not under this long-term plan. So that's still subject to any rental growth that we'll experience in our respective markets. As it relates to a specific question as to what the costs, well, candidly they were quite negligible. If we're offering concession, we're probably adding a couple of hundred bucks on top of it. We spent a little bit more money in training and incentivizing the staff, and so I don't have the stats in front of me, but if I were to guess, my guess is there was a great deal of money that was spent on training our leasing agents to essentially offer 18, 24-month leases and if there was any recall from the tenant [to then] , cycle back to 12 months. And we were surprised to see how little opposition there was on behalf of the tenant to accept a 24-month lease, almost at the same conditions same advantage. And for us, obviously, there's a tremendous advantage of, obviously, keeping a tenant for 24 months rather than losing them after 12 months, and so to the extent that we kept those costs low with some, no [markup] work, but ultimately we're very, very happy with the results and very optimistic as to what it means to our NOI in the future.

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Sam Damiani, TD Securities Equity Research - Analyst [10]

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And so does the same-store NOI growth within Lantower likely improve over the course of 2019? It was fairly flat, I think, in Q1.

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [11]

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Yes, I think one of the reasons, one of the main reasons that was lower is because of the impairment due to the strategy, right? And so we took all of these costs quite upfront whether it's an increase in our labor costs through training our staff or giving them some sort of incentives or increasing on the upfront concessions that we're giving to tenants. My, however, I strongly expect that Q2 begin to look a little bit better and that we're still -- [if] we decided to extend the program in Q1 and Q2 2019. So maybe your question is Q3, Q4, I would expect some healthy quarter-over-quarter growth, absolutely. And then all these.

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Sam Damiani, TD Securities Equity Research - Analyst [12]

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Sorry.

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [13]

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Sorry, go ahead.

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Sam Damiani, TD Securities Equity Research - Analyst [14]

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No. Go ahead.

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [15]

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No I was going to say -- and obviously, that holds true for the first and second quarter of next year as we see the benefit of what we're trying to do now.

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Sam Damiani, TD Securities Equity Research - Analyst [16]

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Right. And are you implementing this across all your markets outside Long Island City?

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [17]

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I'm sorry. What's the question?

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Sam Damiani, TD Securities Equity Research - Analyst [18]

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Are you implementing the strategy outside -- in all your markets outside Long Island City?

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [19]

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Yes, no, we implemented it across the board. But I will tell you that there were some markets that we are -- at the end of the day, this is a defensive play versus supply -- temporary supply. And I would say that the bulk of this program is spent probably in Texas.

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Operator [20]

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(Operator Instructions) Your next question comes from the line of Mario Saric with Scotiabank.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [21]

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Just maybe sticking to Lantower and the strategic initiative [for the 650] leases. Of the 650 leases that we're done to date, can you give us a sense in terms of what the success rate has been?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [22]

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Mario, can you please speak up? We're having hard time hearing you?

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [23]

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Okay. Just want to focus on Lantower and specifically the strategic initiative. The 650 leases that have been done to date in terms of the longer lease term, what kind of success rate is that? Does that give us 50% of the tenants that are signing on or 75%?

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [24]

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That's a good question. I think I know the number, but candidly, I'd rather double check and then send it to you offline. But if I were to guess, I'd probably say, maybe 1/4, roughly around 30%.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [25]

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Yes. Okay. And then can you give us a sense of what turnover rate in the portfolio is today versus what you would expect it to be with this initiative once stabilized?

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [26]

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Yes, I think it's going really [good the] turnover to multifamily, somewhere between, let's say, 40% and 50%. I think not to seem anecdotal, but if you're talking about Dallas or Austin or market that's somewhere [in reach of the] tenant supply, obviously this number is going to uptick. And so candidly, if we can stay well below 50% in those respective markets then obviously the strategy would have been quite successful.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [27]

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Yes. Okay. And then maybe just shifting gears to capital recycling, as mentioned earlier, you're getting a lot of the [net] proceeds from the Atrium about $385 million. You referenced kind of a lower leverage pro forma sales and then an attractive $1.6 billion development pipeline. But how would you rank the priorities of the redeployment of that $385 million over the next 12 months?

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Larry Froom, H&R Real Estate Investment Trust - CFO [28]

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Well, initially -- good morning, Mario. Initially, it would be used for the (inaudible) backlog. And then as you proceed with the developments, we'll be funding our developments.

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [29]

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Yes, we don't think we have exact number to announce in B2B, all right? It's coming somewhere in January 2. So we'll use our first (inaudible) to pay out, debentures and debt and then January 2, we'll have more debt rolling. And our (inaudible) pipeline.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [30]

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Okay. And then can you give us a rough sense of how much capital was put into the Atrium post your 2011 acquisition?

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Larry Froom, H&R Real Estate Investment Trust - CFO [31]

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Sorry, I don't have that number on hand.

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [32]

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It's not significant, though. But don't tell that to the tenants.

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Operator [33]

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Your next question comes from the line of Mike Markidis of Desjardins.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [34]

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Philippe, just on the Lantower, I just want to make sure I kind of understand. So the upfront cost for training, so that's understandable. But I'm just trying to get a sense of, you're also offering concessions to the tenants, and I would assume that it's a revenue line, and you've got 9% of your rent roll sort of under the long-term lease structure today. So given that you're going to be trying to convert more and more and you get higher incentives coming in the middle of this year, how does the healthy growth return?

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [35]

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Okay. So I guess there's still a question taken about that. Initially, at the end of the day, what we think, we ultimately manage through NOI, right? And so we focus on these expenses, some of them are expenses, some of them are put to revenue, no 2 groups looking the same. Some groups include concessions to expenses and will show higher revenue growth, but a lower NOI number. And so we find is simpler is just a stick to NOI. And that's our management philosophies. We want to see NOI growth. As it relates to where we stand, we're taking a small hit on NOI as evidenced by our muted growth for this quarter on a quarter-over-quarter basis. But candidly, going forward, the costs, like I said the turnover cost, the REM of just having the turnover cost, the vacancy cost, the -- having a few on the locator, in the system locator market having to pay tenant concession in the business in addition to leasing staff, leasing bonus. If all that goes away in the first quarter 2020 and the second quarter 2020, you're going to see very significant NOI growth on a quarter-over-quarter basis. And I suspect that if we pass [more] 12 months, and we look back today, my guess is many people would have elected to take muted Q1 2019 growth for outperformance in the first quarter of 2020.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [36]

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Got you. Okay. So the 2020 I guess just really more thinking about just what the rest of 2019 looks like as you continue to implement the program, but...

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [37]

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Yes, I think that, candidly there may be a little bit of confusion that people tend to focus too much on revenue growth from quarter-over-quarter. But candidly, once revenue growth if you're giving [us] everything away in an expense and (inaudible) your NOI.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [38]

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Okay. So if you were to think about your same property pool for '19 and '20 being ballpark-ish, what kind of growth rates should we be thinking about on a same-property basis?

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [39]

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To be honest, that's a good question. I have to go back to my estimates. We will probably have thought that this program, probably [being able to repair] NOI by 200 basis points, roughly. And so had we not gone for this strategy and not been strategic as to how we see future supply in our markets. We would have probably been in excess of 2%. And that's just ballpark, my guess is probably higher than that, but definitely not lower. And so as such, that's what I would expect, probably in the third and fourth quarter as we peel off of this long-term program.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [40]

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Got you. Okay. Just going back, Larry, on the $6 million lease termination payment that you had there, and I guess it carries the leasing out terms, terminates in 2021. Are you able to tell us what building that relates to?

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Larry Froom, H&R Real Estate Investment Trust - CFO [41]

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I think so. [$6.49] nonservice terms. But I think what they're now building on to (inaudible). They're building a new building in Hamilton for their use.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [42]

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Okay. And then, Larry -- sorry, not Larry, Tom. Certainly appreciate your commentary on the leases being above market, some leases being below market across the portfolio at any given time. You don't publish it, some of your peers do, but would you have a sense of where your in-place versus market rents for your office portfolio would be today?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [43]

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I cannot tell you also. It'd impossible for me to give you that number on the top of my head.

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Operator [44]

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Your next question comes from the line of Matt Kornack with National Bank Financial.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [45]

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Philippe, with regards to the other assets that make up, I think its $36.5 million of residential and obviously a portion of that is Jackson Park, but I think there's around USD 9.5 million in other assets, are you rolling out your strategy in the lease-up assets as well? And how should we think about that income coming online?

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [46]

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No, I think that, candidly, we'd love to roll it out to -- new lease-ups. However, on the lease-ups, we're not offering any concessions. And so -- or sorry, I should say, not anymore concessions than we'd already be offering on the lease-up. And so if a tenant comes in that says I'd rather have an 18-month lease or 24-month lease, and it's in the market where we believe supplies coming, and absolutely we would do it. But we would not be offering anything above and beyond that apart in very, very small exceptions. We used to be candid -- we're really excited about this. We saw that, candidly, we didn't know what the appetite for this would be. We thought that this would be landed with 2% or 3% of our rent roll it would be too insignificant to have a material impact in 2020. We're really optimistic and very happy once we saw there was a 9% bite. And also I think there's a probably an element to this -- that this lost on [Sony's]. The impact on the on-site team of having higher occupancy and lower turnover allows them to spend more time either from a leasing perspective, nurturing their tenants, improving the social media platform and the social media reputation, its positioning in the market. Instead [of] the management staff, it's now running around trying to deal with some of the [maintenance] and vacant units. They can spend time doing the things that just keep getting pushed down the to-do list and taking care of the asset where they may not have the time to get to it in a normalized run-off situation. So I truly believe for a variety of reasons that, candidly, we absolutely are delighted by the fact that we're taking a hit in this quarter, next quarter, for all the benefit that we're going to see in 2020.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [47]

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And then with regards to lease-up at assets, undergoing lease-up, are those tracking in line with expectation given new supply in some submarkets?

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [48]

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Yes, we're either tracking or exceeding with our property in North Carolina, what's important is just doing spectacular -- our lease-ups in Austin are doing phenomenal. We've been doing great. We're very, very happy. Candidly, a lot of credit goes to our team in Dallas. We have an incredible portfolio management team. We've got an incredible on-site management team. They get it, and that's why we're outperforming our peers in our lease-ups.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [49]

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Okay. And then Larry, can you let us know how to think about FFO contribution from River Landing and from the industrial development in Caledon in 2020? I know with Jackson Park, it was -- there's a period of downtime before you get the upside, so we -- should we think of it as a net neutral to 2020 at this point? Or are there no additional FFO?

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Larry Froom, H&R Real Estate Investment Trust - CFO [50]

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Well, construction on it completes in 2020. Then the solo-residential lease-up that has to occur after that. So there'll be some lease-up for residential...

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [51]

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If it's not a $20 million in the ballpark. I mean (inaudible) 2021 going at...

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [52]

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2021?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [53]

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Yes.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [54]

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No, that's fair. I don't think we have anything in our (inaudible) at this point.

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Larry Froom, H&R Real Estate Investment Trust - CFO [55]

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As we get closer to that time, we'll be putting out guidance.

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Operator [56]

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There are no further questions in queue at this time. I turn the conference back over to our presenters.

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [57]

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Thank you, everybody, and we'll speak in the next quarter. Have a nice summer. Bye.

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Operator [58]

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This concludes today's conference call. You may now disconnect.