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Edited Transcript of HR.UN.TO earnings conference call or presentation 14-Aug-19 1:30pm GMT

Q2 2019 H&R Real Estate Investment Trust Earnings Call

Toronto Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of H&R Real Estate Investment Trust earnings conference call or presentation Wednesday, August 14, 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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* Jenny Ma

BMO Capital Markets Equity Research - Analyst

* Mario Saric

Scotiabank Global Banking and Markets, Research Division - Analyst

* Matt Kornack

National Bank Financial, Inc., Research Division - 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 H&R Real Estate Investment Trust's 2019 Second Quarter Earnings Conference Call. Before beginning the call, H&R would like to remind listeners that certain statements, which may include predictions, conclusions, forecasts or projections in the remarks that follow may contain forward-looking information, which reflect the current expectations of management regarding future events and performance and speak only as of today's date.

Forward-looking information requires management to make assumptions or rely on certain material factors and is subject to inherent risks and uncertainties, and that 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, you may reference certain financial measures, which do not have a meaning recognized or standardized under IFRS or Canadian Generally Accepted Accounting Principles and are therefore, unlikely to be comparable to similar measures presented by other reporting issuers.

Non-GAAP measures should not be considered as alternatives to net income or comparable metrics determined in accordance with IFRS as indicators of H&R's performance, liquidity, cash flows and profitability. H&R's management uses these measures to aid in assessing the REIT's underlying performance and provides these additional measures so that investors can do the same. Additional information about the material factors, assumptions, risks and uncertainties that could cause actual results to differ materially from the statements in the forward-looking information and the material factors or assumptions that may have been applied in making such statements, together with details on H&R's use of non-GAAP financial measures, are described in more detail in H&R's public filings, which can be found on our website at www.sedar.com.

I would now like to introduce Mr. Tom 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, operator, and good morning, everybody. As is our custom, we'll knock off -- not start off with Larry giving an overview of the financials and then hand it over to Pat and Phillippe to give an overview of their divisions with -- and opening it up to questions. And on that note, Larry?

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Larry Froom, H&R Real Estate Investment Trust - CFO [3]

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Thanks, Tom. Good morning, everyone. The largest impact this quarter was the sale of the The Atrium. In 2011, H&R purchased The Atrium, a 1.1 million square foot office and retail complex in Toronto for $344.8 million. Since the acquisition, H&R had increased annual net operating income by $6.5 million, creating substantial value for unitholders.

The Atrium's IFRS value as at March 31, 2019 was $600 million. And on June 6, H&R sold The Atrium for $640 million, recording a gain on sale of approximately $34 million after deducting closing costs. The sale price equates to a capitalization rate of 4.56%. The property was unencumbered and H&R provided the purchaser with a vendor take-back mortgage of $256 million, bearing interest at an annual rate of 4.56% and maturing in January 2020.

The proceeds received, that is net of the B2B have been used to fund $102.3 million of acquisitions, $126.5 million of developments and CapEx to repay -- and to repay debt. Debt to total assets has decreased from 44.6% at the beginning of this year to 44.0%.

On June 30, H&R had cash on hand of $119 million, which is mostly used to repay $150 million of Series M senior debentures on July 23. After this debt repayment, pro forma debt to total assets is 43.5%.

As H&R has executed on its capital reallocation strategy, $1.7 billion of asset sales have occurred over the past 18 months, compared to acquisitions of $563 million. Financial results have reflected the impact of these net asset dispositions over the last 18 months. In addition, our Q2 2019 funds from operations, FFO, was approximately $5.8 million lower than the previous quarter, Q1, primarily due to lower lease termination income.

We received $200,000 of lease termination income in Q2 2019 compared to $6 million in Q1 of 2019. Normalized FFO was $0.43 per unit in Q2, down from $0.44 from last quarter primarily due to: The sale of Atrium and not fully deploying the cash from the sale; lower retail NOI, which Pat will speak about soon; some industrial vacancy, which reduced NOI; and some higher interest costs as we are borrowing on our credit line until Atrium was sold.

As a reminder, last quarter, we announced that we had extended office leases with Bell Canada in Toronto, Montreal and Ottawa, totaling 2.2 million square feet. While the cash rent payable in 2019 will decrease by $7.3 million compared to 2018, these leases have, on average, 16 years remaining with annual contractual rental increases of 1.5% per annum. This bodes well for our office portfolio, which should see good organic growth from next year.

Our industrial occupancy dropped to 97.5% this quarter. Both industrial market rental rates continuing to rise and the construction start on 3 new industrial buildings, we are excited about our industrial portfolio's growth next year. We also expect completion of developments and new lease commencements in both the retail and residential segments to contribute positive growth in FFO, as you will hear from Pat and Philippe.

And with that, I will turn the call over to Pat.

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Patrick James Sullivan, H&R Real Estate Investment Trust - COO of Primaris Management Inc. [4]

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Thank you, Larry, and good morning. The retail segment delivered steady results in the second quarter with relatively flat same-property NOI overall.

Growth in grocery-anchored properties increased by 4.2%, which was offset by a 1.9% decline in the enclosed mall portfolio. While we are clearly quite pleased with how the grocery-anchored portfolio is performing, the enclosed mall performance warrants further discussion.

Our enclosed mall delivered a decline in both same-property NOI and sales performance. The same-property NOI performance was impacted by ongoing redevelopment at several properties, including Sherwood Park Mall, with a 50,000 square foot former Safeway premises, is being redemised for 3 new tenants with occupancy scheduled for Q1 2020, as well as the bankruptcy of Payless Shoes. While neither of these significant drivers of -- the decline in NOI, same-property NOI this quarter are unusual in the mall business. They are not indicative of a trend.

In fact, we are seeing healthy leasing demand in all our properties. Primaris enclosed malls have 13 Payless stores. And in the 5 months since the surprise closure of all Payless stores, 6 have re-leased with 2 in advanced negotiations.

Our competitive advantage is to owners that manage our retail is that we require tenants to report sales. Sales reports enable us to proactively manage our relationship with tenants. We monitor sales for weakness, tailor marketing program to boost sales of tenants approaching the break point or near an expiry, and adjust our merchandise mix to adapt to change in consumer demands.

Sales were down 2.3% on a same-store basis during the quarter and 1.9% on an all-store basis. Short-term changes in our tenant sales have been driven more by remerchandising and fluctuations in sales of specific tenants at specific properties, rather than a broader retail industry trend.

Let me address 3 dynamics affecting our sales statistics being statistical calculation, remerchandising and redevelopment.

Statistical calculation. CRU same-store sales performance numbers are impacted on a monthly basis by the additional removal of tenants from the report. Tenants classified as major tenants, which typically occupy premises over 15,000 square feet are not included in our reported sales figures. New tenants are not considered to be same-store tenants until they have been off -- open and operating for 2 years. When an existing tenant relocation expands, they're reclassified as noncomparable for 2 years, unless that tenant expands to more than 15,000 square feet, in which place, they're reclassified as a major and removed from the sales report.

Over the past years, the number of tenants have been expanded to major tenant status, such as Shoppers Drug Mart at Park Place, our [Dana Park] Place du Royaume and Urban Planet at Sunridge. Within a given quarter or year, the number of tenants added and removed from the same-store calculations, combined with a broad range of sales performance among different retailers, can have an outsized impact on sales.

By way of example, a successful local electronics store occupying 1,600 square feet performing at more than 2,500 per square foot closed at Dufferin Mall in March 2018, as the owner decided to retire. The removal of this tenant had a significant negative impact on shopping center productivity. However, the well-located space was quickly re-leased.

Similarly, while the name all store sales applies that this statistic captures all stores in the mall, if not -- it captures all the CRU's tenants excluding tenants over 15,000 square feet and it can be impacted by the number of statistical factors, including a reduction in the CRU gross leasable area and the addition of nonreporting uses, such as financial institutions, medical and dental uses and vacancy.

As part of a strategic plan for our shopping centers, we have been reducing the CRU denominator in several of our properties. Since 2017, the CRU denominator in the enclosed mall portfolio has been reduced by approximately 2% with the majority being at a few properties, primarily Place d'Orleans and Place du Royaume. These 2 malls represent 62% of the portfolio decline in all store sales. However, both have shown positive productivity gains in both all store and same-store over this period. Both Place du Royaume and Place d'Orleans, I'm sorry, Place d'Orleans and Place du Royaume, had too much CRU for their respective markets.

At Place du Royaume, we have converted a CRU space into several large-format tenants, including our denim Old Navy. At Place d'Orleans, in addition to amalgamating CRU for large-format uses -- users such as H&M, we are relocating the food court at lower level and are converting the upper level into office space. We have leased 9,500 square feet of public works and have strong interest from office tenants for additional space.

Second point, remerchandising. Remerchandising impacts tenant sales. We have created a remerchandising plans for each property and the portfolio based on data from our sales reports. These plans call for reducing the amount of area dedicated to small start-shop fashion due to the addition of large-format tenants such as H&M, Urban Planet and Winners, while working towards the addition of more productive food, health and beauty and personal care service tenants. Similarly, we have noticed a softening of highly productive jewelry category in the past few years and have taken a position to maintain our strength to category where possible. These tenant changes, mix changes can reduce the CRU GLA and shift sales performance from CRU to nonreporting tenancies, impacting our tenant sales figures. By proactively managing our merchandise mix, we are working to stabilize category sales and improved productivity over the long term.

Third point, redevelopment. Beyond the regular gains of tenant turnover and tenant mix management, through replacement and redevelopment of former anchor tenant spaces, can be quite disruptive to other tenants with the vacancy and related redevelopment work reducing foot traffic, impacting tenant sales and same-property NOI. Both Target and Sears closures have weighed on mall performance. Redevelopment of the former Target locations is essentially completed. 7 tenants operating from an area exceeding 100,000 square feet in total are due to open at Sunridge this fall and will drive incremental revenue growth in Q4 2019 and throughout 2020.

With respect to Sears, at the end of the second quarter, we had committed a conditional transaction in place representing approximately $3.6 million in annual base rent at H&R share, or just over a 50% of our anticipated total rent to fund completion. Subsequent to the end of the quarter, we completed transactions with the 36,000 square foot Cineplex and a 38,000 square foot grocery store to replace the Sears store at Kildonan Place in Winnipeg. 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 partial redevelop -- development. Rental income from these redevelopment projects will start in Q4 2019 with the substantial completion of all projects in late 2021.

The first completed series redevelopment is at Medicine Hat Mall, which -- from which Ardene, Dollarama and Old Navy will open in October 2019.

To conclude on this topic, a year after softening sales, listeners might be inclined to conclude this trend is likely to continue. While there are clearly headwinds faced in the retail industry, we expect our portfolio to return to the same positive same-property NOI performance over the next year, and resume steady tenant sales.

Through the first 2 quarters of 2019, our Primaris leasing team has completed just over 200 lease transactions, which is a typical figure over the past 5 years. However, these 200 transactions represent approximately 1.15 million square feet, considerably greater than our average of approximately 700,000 square feet. With the Canadian -- within the Canadian retail portfolio, we have completed more than 70% of 2019 expiries, with average renewal rents increasing by 2.2% during the quarter.

Moving into Q3 and through Q2 -- Q1 2020, we will see significant positive rental growth from new large-format tenants opening from former vacant premises, not within the targeted Sears stores. These include a 40,000 square foot Marshalls/Home Sense at Garden City Square in Winnipeg and 19,000 square foot Planet Fitness opening at Garden City Square, and Best Buy opened a 35,000 square foot store at Sunridge.

Thank you, and I will now turn the discussion over to Phillippe.

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [5]

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Good morning, everyone. We've been active as usual in 2019, and so we have a few notable updates from Lantower Residential. Firstly, we are happy to announce 2 new acquisitions. On July 13, we closed on Lantower Grande Flats, which is a brand-new 314-unit Class A property in the coveted high-growth I-4 Tourism Corridor of Orlando, Florida. The immediate area is anchored by white collar employers such as Lockheed Martin and Darden Restaurants' headquarters and is also close to major employers in Orlando's booming tourism industry.

Namely, Universal Studios recently formally announced their new 750-acre park named Epic Universe that is now under construction. Located less than 10 minutes away from Grande Flats, Universal's Epic Universe will employ over 14,000 people, further supporting the strong fundamentals that the submarket has benefited from in recent years.

Since the acquisition, Grande Flats has performed exceptionally well for us and has maintained occupancy above 95%. We also took advantage of the recent decline in treasury yields with a 65% LTV loan, 10-year term at a favorable 3.55% interest rate. Additionally, we are delighted to announce that on July 31, we closed on Lantower Garrison Park in Charlotte, North Carolina, a 322-unit Class A property received final certificate of occupancy in June of 2019, and is experiencing a strong lease-up with over 53% of its apartments leased. We expect Garrison Park to stabilize in the first quarter of 2020.

The property benefits from 3 large business and research parks that collectively make up University City, which boasts over 75,000 jobs. Additionally, the properties are a short commute to the major local university, UNC-Charlotte. We are currently investigating early rate lock financing options in order to take advantage of the historically low treasury yields.

On the portfolio front, the Lantower Residential portfolio now consists of 7,907 apartments across 24 properties when excluding Jackson Park. At the end of the second quarter, the Lantower portfolio was approximately 93.1% occupied, excluding Jackson Park, and was nearly 95% occupied when excluding our lease-up properties, representing strong portfolio performance.

On the financial front, our same-asset quarter end operating income increased in U.S. dollars from $11,237,000 in the second quarter of 2018 to $11,520,000 in the second quarter of 2019. This equates to same-asset quarter-over-quarter operating income growth of 2.5%.

On the management front, Lantower Property Management's division, Lantower Luxury Living, now manages 100% of our portfolio and successfully internalized our 2 newest acquisitions, Grande Flats and Garrison Park. We continue to experience increased personnel recruiting power and operational efficiencies that come as a benefit from a vertically integrated multifamily platform.

On to New York City, Jackson Park is currently 99% complete with only a few remaining punch list items remaining. Leasing velocity remains strong over the summer months as 1,805 leases have been signed, representing 96% leased. Occupancy across the 3 towers totaled 87.3% as of the end of the second quarter, and we still expect stabilization to occur sometime in the third quarter.

As we've conveyed over recent quarters, Lantower has elected to focus some of its growth strategy to ground-up development due to favorable financial returns and value creation. We have added another development to our pipeline with a 321-unit Class A garden-style multifamily project in Orlando, tentatively called Sunrise. The development site benefits from a short commute to Orlando's largest employer, Walt Disney World. The property was secured via leasehold interest with favorable terms with an option to purchase the land in the future. The transaction structure enabled Lantower to lower its cost basis by entering into lease payments far lower than our cost of capital and opportunity costs, thereby creating additional value within the ground-up development. The Sunrise project with 100% H&R equity is scheduled to break ground in the fourth quarter of this year.

And with that, I will pass along the conversation back to Larry.

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Larry Froom, H&R Real Estate Investment Trust - CFO [6]

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Thanks, Phillippe. I think we are ready to open up the line for questions.

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Questions and Answers

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Operator [1]

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

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

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Just to start off on Jackson Park. I wonder if you could tell us a little more about how these new rent controls are going to impact the lease-up and the operation of the building in terms of the number of the portion of suites impacted, the rents that you can get initially on a turnover.

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Philippe Lapointe, H&R Real Estate Investment Trust - COO of Lantower Residential [3]

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Sure. I'm happy to answer that question. I think at the end of the day, the destination remains the same. It's just a matter of how we're going to get there. I was in New York City a couple of weeks ago, and I spoke to some of the most active brokers and property owners. And candidly, everyone agrees that this is far too early to make any accurate prediction as to the impact of the new law. I will say as it relates to Jackson Park, our best guess as of right now is, ultimately, we think it's going to happen. And the main driver of NOI growth is essentially -- we're going to see a situation where broker locator fees are abated, vacancy will pick up. Obviously, rents won't escalate as quickly as we originally projected, but that will be significantly abated by a compression on expenses and, ultimately, lower turnover.

And so we anticipate high occupancy at Jackson Park, very little turnover, very little broker costs, very little expenses related to turnover. And ultimately, that will be the main driver to NOI growth. So all in, as a summary, I don't think it's going to be impactful to our NOI projection, and we will get to where we thought we'd be. We're just going to go about it a different way.

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

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And just to be clear, you did change the guidance on Jackson Park, lower in terms of NOI this quarter. And that was as a result of the new rent control. Is that right?

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

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Yes, that was as a result of the new rent control and Tishman's release, our partner's forecast on the rental increases that they're projecting. But most of that, as Philippe said, we believe that it gives a lot of concessions, giving 1 month or 2 months free rent, so that, with the new rent controls, will be falling away. And we will get to $34 million of net property -- net operating income in 2020. That's the target, and that's what I just revised to. So we're pretty confident that, that will be able to be achieved.

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

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And so would it -- sorry, go ahead.

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

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No, I was going to say, Sam, without boring you with all the details, I would say that the majority of the impact of the new law will affect a different segments of the multifamily market than the one that we're involved in. And so I think that I had -- if I recall, there was 15 or 16 new segments to the law, and I think only 2 of them really impacted us.

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

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Okay. Okay. Just moving on then. The low interest rate environment that we're looking at today is very attractive, long-term lease properties with escalating rents, and credit tenants should be pretty valuable. I'm wondering, Tom, if you've got any updated thoughts on selling a partial interest of The Bow.

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [9]

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We are still and have always since day 1 worked on it. We have a strategy in place. We hope to have clarity, I would say, before the year is out, if we can actually execute on our plan.

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

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Okay. That sounds good. And just finally, before I wrap up here, the pie charts in terms of fair value breakdown, how do you see that changing in the most material way in the next sort of 1 to 3 years? What's your sort of next steps in terms of the evolution of H&R?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [11]

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Well, the big question mark is The Bow. So again, within the next short while, we'll have an answer to that and we'll get clarity. And that will bring down -- could bring down our office segment significantly. And then the question is (technical difficulty).

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

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I'm sorry?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [13]

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Do we allocate -- the question is where do we allocate the funds to, and that will remain to be seen as what is the best opportunity at the time.

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Operator [14]

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And our next question comes from the line of Mario Saric of Scotiabank.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [15]

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Just following up on Sam's 2 questions with respect to the strategy on The Bow. Does the level of interest rates at all impact your ability to execute by year-end?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [16]

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The answer is absolutely, without question. It's not dependent totally on that. Actually, when we started this -- at the route we're going, the interest rates were significantly higher. They've come down a lot. The question is what does that mean relative to the bond market versus the spread market, and we're optimistic that we'll achieve better than our projections. But we'll all know soon enough.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [17]

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Yes, okay. And then with the potential, at least partial kind of sale of a stake in The Bow, your U.S. as a percentage of overall fair value, about 42% today. So presumably, that will go up, consistent with the allocation of capital to Lantower over time. Like, how high do you feel comfortable going in terms of your exposure to the U.S. in this macro environment?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [18]

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So I think the answer to the question is really opportunity-driven. It's not an allocation, a percentage of which asset class and how much you want to expend on that. And it's really a question of the opportunity. You're right about the residential market softening. I think the better opportunity is development. But development is a slower process, so it's a slower allocation of capital. So I don't want to go the route of allocating a percentage because simply, well, I just don't know.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [19]

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Okay. And then maybe shifting gears to River Landing. It looks like the cost and treasury yields are pretty firm quarter-over-quarter. Can you give us an update in terms of where it previously stands on both the office and retail performance today?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [20]

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So the retail, we're 65% signed leases. We can go to 79% signed LOIs, and we're pretty confident that all those LOIs that are signed are going to translate into leases. And then it's bits and pieces just until after the -- we get the anchors up. All the anchor space is leased. Target -- sorry, Publix should be the first tenant in Q1 2020. The office space is not leased out. The space, we have a strong discussions, right, with 4 potentials. When that's actually or if it's going to transpire into a signed document, I don't know, but there is strong interest. Miami is a small tenant market, and we have a large floor plate. We're institutional. So we're capturing -- besides the public space, demand for space is also in high-tech space, which is coming into Miami, and has a shortage of the type of space we're offering, which is relatively high ceiling, large floor plates, very strong utilization of the space. We have good demand for our higher-end riverfront restaurants. We have approximately 17,500 square feet -- those deals -- under signed LOI, signed designs, signed off on it and just negotiating the end of the leases. So we're optimistic about the retail, which is obviously far along. And we're optimistic about the office.

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

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Sorry. Based on kind of the various -- like the retail office-resi mix, what's your best estimate today in terms of the expected spread, just in private market cap rate, 55.7%, would represent?

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

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That's a tough one. I don't know. It really depends on how we lease-up the office and how successful the retail is, and it's early days to answer that question.

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Operator [23]

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And our next question comes from the line of Jenny Ma of BMO Capital Markets.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [24]

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Just wondering if you can comment on what you're seeing in terms of pre-leasing on your Caledon industrial developments.

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [25]

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So we are not -- historically, and this is the case right now, you usually don't see a lot of pre-leasing until you have this deal up. And we're just starting construction. We are scraping right now. We won't have the steel up for another few months. We didn't expect, and it's -- we're just in discussion stages with potentials, but nothing really happens until they see that it's a real project with steel up. Otherwise, it's just a piece of land, and it's a totally different story. We're very optimistic the rental rates are going up as we are speaking. Quite frankly, we projected high-7s net, and we're projecting in the 8s right now. So we don't -- and we're not losing any sleep about it, but it's not normal for us to be pre-leasing with signed documents until this deal is up. They want to see that the project is real.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [26]

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Okay. So you're confident you'll basically start out stabilized, essentially when it's done.

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [27]

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Yes. I mean that's the market today. It seems to be that everybody is.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [28]

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Okay. This also skews to retail for Pat. Is Primaris still in the market to be selling partial interest in some of the malls? And can you comment on what you've been hearing as far as volume or interest or any market color?

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Patrick James Sullivan, H&R Real Estate Investment Trust - COO of Primaris Management Inc. [29]

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I think in terms of selling partial interest, we're not in any active discussions right now to do it. It's something we could always consider if the opportunity presented itself. But there's nothing happening at the moment. Your second question about is there any other activity we've heard, nothing of note that I've heard. I've heard there's been discussions that have happened, but nothing is transacted.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [30]

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Is it just simply that the gap is too wide between what buyers and sellers are expecting? Or is there just not much interest in terms of -- from the buyer side?

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Patrick James Sullivan, H&R Real Estate Investment Trust - COO of Primaris Management Inc. [31]

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I think everybody has -- with the Target and the Sears box creating -- until the Target and Sears -- primarily, Sears now is resolved. I think there's -- people want to clean up their vacancy before they can realize the value they would want. I do think Ivanhoé did have some properties they have been marketing for some time. And my understanding is that they were very aggressive in their expectations on cap rates. So I think some of the major landlords are going to have to relook at their numbers going forward. But yes, that's about all the insight I have.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [32]

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Okay. Thanks for the color on the same-store sales impact. I guess just to boil it down, could you give us sort of a ballpark of what you think the sales -- the real number would have been if you strip out all the factors that went into the statistics and the calculation of that number?

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Patrick James Sullivan, H&R Real Estate Investment Trust - COO of Primaris Management Inc. [33]

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So it's really hard to explain sales in a nutshell. There's so many moving parts in a sales report. We don't really work towards the number so much. We work towards driving revenue and doing what's right to the tenants. So I'll give you an example. We had a national shoe retailer that wanted to expand. They were performing at double the sales productivity in all of our malls. And -- but they wanted to expand, and they did, and their sales went up. Their productivity is dropped because they've increased their size. They're still going to perform above mall average, but they're on the same-store sales now for 2 years. So there's lots of moving parts like that. So it's really hard to say what the number would have been having done this or that because it moves on a monthly basis.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [34]

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I mean could you at least ballpark it, say, like, modestly positive, modestly negative? Or just give us some semblance of what -- I guess I'm just trying to boil it down to the real view of what same-store sales or mall sales would have been.

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Larry Froom, H&R Real Estate Investment Trust - CFO [35]

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Well, just to help Pat out a little, on all store sales, we had CRUs decrease about, what, 2.5% -- 2.4% overall, and that's kind of been the same trend in those sales numbers. They've also decreased accordingly, according to the square foot reduction of that space.

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Operator [36]

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

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [37]

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Just following up on Jenny's comments there with regards to Primaris. What are your thoughts on occupancy for that portfolio? And are the target in Sears re-leasing? Will that be in same-property NOI growth? Or is that being carved out as sort of other income?

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Patrick James Sullivan, H&R Real Estate Investment Trust - COO of Primaris Management Inc. [38]

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The Sears and Target are primarily large-format tenants, so they're not included in the same-sales -- the sales at all. There are some pockets in Medicine Hat and St. Albert and the Target. We are demising where we did some smaller shop stuff. That hasn't made its way into the same-store sales report. They're in the all-store number right now. But they haven't in 2 years for the most part. So the Medicine Hat food court, for instance, hasn't migrated into the same-store number, and that's why the same-store number is rather -- is much lower at Medicine Hat than it will be. But I think the food court is doing about $1,900 a foot. So that number will have a material impact on same-store when it moves in.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [39]

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Okay. Fair enough. But for your reported same-property NOI growth number for the REIT, do you know...

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Larry Froom, H&R Real Estate Investment Trust - CFO [40]

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Yes. Those targeted sales returns would be in our same-store numbers.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [41]

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Okay. So it sounds like that materially ramps up at the back end of this year and then into next, in terms of the leasing that's been done on Target and Sears.

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Larry Froom, H&R Real Estate Investment Trust - CFO [42]

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Yes.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [43]

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Okay. And then where would you think occupancy -- I mean before Target and Sears, occupancy was pretty high in the mall portfolio. Is the view that you get back to high 90s for your enclosed mall portfolio? And then I guess secondary to that, have you had any discussions at this point with The Bay? I know there's been some noise around that one as well.

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Patrick James Sullivan, H&R Real Estate Investment Trust - COO of Primaris Management Inc. [44]

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In terms of occupancy, we anticipate it will move up. But with the Target and Sears redevelopment, there's a lot of moving parts that will get cleaned up when the projects are finished. We're downsizing some of the Sears boxes. But right now, we're showing the full GLA of the former Sears box occupancy number. So when the redevelopments are done and we rightsize them, that will get reflected in terms of the actual size on completion. The Sears new GLA, we anticipate will get back to historic norms once we moved it through this Target and Sears redevelopment processes. It's really been a tenant's market while all these anchors have been empty. And we saw the tail end of the Target -- before Sears filed, we saw the tail end of the Target process that we were really making good -- heavily getting, or growing our CRU occupancy, and then Sears happened. And a lot of focus has been on backfilling those tenants. So as we move forward in that process, we feel positive.

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

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Okay. And then...

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Patrick James Sullivan, H&R Real Estate Investment Trust - COO of Primaris Management Inc. [46]

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Today, we really have no dialogue with them. I've talked to a lot of the other major landlords. Nobody's really had a dialogue with The Bay. In outside discussions, I've heard about them trying to wind up their Home Outfitters business. Nothing about the in-line stores.

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

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And in terms of their performance in your mall, are they reasonably good Bay stores or...

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Patrick James Sullivan, H&R Real Estate Investment Trust - COO of Primaris Management Inc. [48]

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I would say. They don't report sales, and I really can only guess at what they do. They have invested some money in a few of their stores in the past few years, which is always a sign that they're doing positively. They extended their lease for 10 years at Sunridge. I believe it was last year. So for the most part, my understanding is there's no issues in our portfolio.

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

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Okay. Larry, on straight-line rent, is that all -- the sequential increase, is that all the full recognition of Bell? Or is there something else in there that would be nonrecurring?

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

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In Q2, I don't believe there was anything that was nonrecurring. It was all there. And everything else as -- no unusual items in Q2 straight-line.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [51]

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Okay. And then on the industrial portfolio, in terms of the vacancies there, where would those have been? And what are the prospects for re-leasing?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [52]

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So we have one building in Oakville. That's just about buttoned up and leased to a major tenant. And then there's just 1 or 2 here and there that accounts for the space, but it's all accounted for, basically.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [53]

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Okay. And then the held-for-sale Boucherville property, is that just because it's a one-off in Québec? Or is it because you're getting interesting pricing in that market?

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [54]

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Yes. They had an option to purchase, so they're just exercising their option.

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Operator [55]

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There are no further questions. I will turn the call back over to Mr. Hofstedter for final remarks.

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Thomas J. Hofstedter, H&R Real Estate Investment Trust - President, CEO & Trustee [56]

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Thank you, everybody for participating, and have a great rest of the summer. We'll see you next quarter. Thank you. Bye.

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Operator [57]

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