H&R Real Estate Investment Trust
Q4 2020 Earnings Call Transcript

Published: 13 Feb 2021

[Operator:]

Good morning and welcome to H&R Real Estate Investment Trust 2020 Fourth 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.

[Thomas Hofstedter:]

Thank you and good morning, everyone. I’m Tom Hofstedter, H&R’s CEO. And I’d like to thank everyone for joining us on today’s call. With me here virtually are

[Philippe Lapointe:]

Thanks, Tom, and good morning, everyone. As we report on the closing of 2020, I’d like to begin by revisiting the dedication of our on-site and corporate staff members. As mentioned in previous quarters, our collections rate remains above the industry average, largely due to the exceptional work. On the JV development front, The Pearl in Austin, Texas is scheduled to fully deliver in the third quarter 2021. Nightingale in Seattle, Washington is in the early stages of preleasing and the project will be fully delivered in April of this year. Phase 1 of our Hercules development north of San Francisco, named The Exchange, is currently 74% occupied. Construction of Phase 2, named The Grand, has remained on schedule and is expected to deliver in the second quarter of 2021. Lastly, Shoreline Gateway, our 35 storey tower in Long Beach, California, is also on schedule, and expected to be delivered in the summer of 2021. To supplement our JV development partnerships in the U.S. gateway markets, Lantower has been increasingly focused on expanding its wholly-owned ground-up development platform. Internally managed multifamily development is, in our opinion, the best strategy to increase shareholder value within our space. The expected development yields relative to historically low Class A cap rates provide strong value creation and risk adjusted returns. With over 175 bps of yield coverage, coupled with the benefit of retaining 100% of the upside economics, our recent land purchases in Dallas, Texas and Tampa, Florida, underscore our intent to capitalize on this development strategy. Lantower is able to leverage its brand and network to source opportunities, has market-level experience to select sites, and has property management division to help design, plan and operate an exceptional multifamily community. The synergies between our divisions bolster our competitive advantage as a vertically integrated multifamily investment platform and operating company. As previously mentioned Lantower has been able to secure additional Class A sites for developing their target markets and expects to source additional opportunities in the upcoming quarters. For instance, we recently acquired an infill site in Dallas, Texas in proximity to the Dallas Love Field Airport and Medical District. The plan for the 5.4 acre site is a 5-storey community with approximately 450 units.

[Patrick Sullivan:]

Thanks, Philippe, and good morning. During the fourth quarter, the retail division reported a decline in same property NOI of 1.7%, a marked improvement from the 15.7% decline reported in Q3, primarily due to a significant reduction in bad debt, improved occupancy and growth in retail rents. During the quarter, enclosed malls reported an increase in NOI of 2.5%, despite recording $1.2 million in bad debt. Without any bad debt provision for the quarter, the retail division would have shown an increase of 1.8% with enclosed malls growing by 5.5%. For the full year, the retail division would have shown an increase of 2% without bad debt being recorded and enclosed malls would have grown by 4.5%. Significant leasing completed in the past few years with large format retailers and premises formerly occupied Target and Sears as the primary driver of NOI growth in enclosed malls. Positive rental growth, lower expenses and improved recoveries in the quarter were offset by bad debt, the impact of CCAA tenant filings, coupled with reduced percentage rent and specialty leasing revenues, which were down 69% and 30%, respectively in 2020 compared to 2019. We were well positioned moving into 2020 having completed remerchandising the majority of our vacant anchor boxes. Since the start of the pandemic, our primary focus has been providing to support to our local retail partners and to maintain occupancy. Occupancy in the retail portfolio is 92% as at the end of 2020, compared to 91.5% at the end of 2019, while occupancy in the enclosed malls end of the year at 88.1% compared to 87% at the end of 2019. Unfortunately, government-mandated closures in Manitoba, Ontario and Quebec starting in Q4 2020 will result in further bad debt provisions and will negatively impact our specialty leasing program and percentage rent potential.

[Larry Froom:]

Thank you, Pat, and good morning, everyone. Since the onset of COVID, our number 1 goal was to protect our employees, our tenants and our shoppers. We also ensure, we protected our balance sheet. We finished the year with $63 million of cash on hand, and $1.1 billion of unused borrowing capacity under our lines of credit. In addition, we have an unencumbered property pool of approximately $3.7 billion, which is set to grow in 2021. Debt to total asset ratio at December 31, 2020, was 47.7%, an increase from 44.4% a year earlier. This increase was all due to the fair value adjustment of $1.2 billion to our real estate assets. The IFRS fair value of H&R retail portfolio was reduced by approximately $660 million in Q1 with the changes related primarily to inputs into the forecasting of cash flows, including vacancy rates, market rental rates, tenant retention rates and releasing assumptions. The IFRS value of H&Rs office property was reduced in Q1 by approximately $670 million, primarily from properties of significant energy sector tenancies. These properties are generally subject to long-term leases, and as such, there have been limited changes to cash flow models, but more significant changes to discount rates. While there have been very few recent transactions for comparable properties, our valuation team use prudent assumptions reflecting pricing signals observed in oil prices and the energy sector corporate credit market. These fair value adjustments have hit our portfolio in Alberta the hardest as shown by the decline in fair value of approximately $900 million from $3.2 billion a year ago to $2.3 billion at December 31, 2020. As a result of the significant write-downs, our net asset value per unit decrease from $25.79 per unit to $21.93 per unit at December 31, 2020. We are optimistic we may see some of these fair value adjustments reverse as we emerge from COVID. Moving on to operations, we’re pleased to report that Q4 collections of 95% continued the upward trend since the Q2 lows, including continued improvement and our most challenging segment of enclosed malls, which reached 83%. This trend has continued into January we have collected 82% today from our enclosed malls and 94% overall, a similar positive trend has been seen in our bad debt expense. Our bad debt expense in Q4 2020 was $3.9 million, a significant improvement from $13.5 million in Q3 2020 and $24.5 million in Q2 2020. Our bad debt expense for the year 2020 was $42.2 million, compared to only $2.2 million in 2019. Most of the bad debt expense incurred was out of H&R providing abatements to hardest hit retail tenants, many of which were mandated to close as part of provincial lockdown. At December 31, 2020, we had a provision for expected credit losses in accounts receivable of $15.1 million, which we believe provides ample room against the gross accounts receivable balance of $34.7 million. Given the pandemic backdrop, we are extremely pleased to report our 2020 FFO per unit was $1.67 compared to $1.76 for 2019. Q4 2020 FFO per unit was $0.42 compared to $0.44 a year-ago. 2020 AFFO per unit was $1.27 compared to $1.33 for 2019. Turning to 2021, there are a few items which we expect to influence results going forward. Firstly, as River Landing construction is completed, interest that was capitalized for the River Landing project will no longer be capitalized. Interest capitalized for 2020 amounted to approximately US$11 million. We expect the net drag on FFO until the project achieves stabilized occupancy. Notably, we expect the project to reach stabilized occupancy and NOI contribution of approximately US$25 million in the second half of 2022. Secondly, as noted in our subsequent event notes, in January 2021, H&R converted $140 million U.S. mezzanine loan on a 12.4 acre development site in New Jersey City to a direct ownership position. This will reduce interest income by approximately US$14 million in 2021 compared to 2020, and interest will not be capitalized on the project until development commences. While these factors will hamper our 2021 results, they are expected to substantially reverse in 2022, with anticipated lease-up of River Landing. Offsetting these drags in 2021, we expect there’ll be positive contributions from other factors including

[Thomas Hofstedter:]

Thank you, Larry, and thank you to entire H&R team for their hard work and dedication in 2020. We are pleased with the operating and financial results the team just reviewed and believe the REIT is well positioned as we progress towards a return to a post-pandemic new normal. Thematically, I’ll make a few comments on the outlook for office and retail operating segments. Office is our largest segment accounting for 44% of our revenue. Work from home and return to office are among those hotly debated topics in the real estate world today. Office markets were booming as the world entered the pandemic, with broadly low vacancy, broadly high market rents and high asset pricing. In 2019 and 2020, H&R took action to fortify our office portfolio, selling assets that have significant near-term lease expiries and strong demand and office cycle and negotiating significant lease extensions with major tenants in other properties. The result is a portfolio with an average remaining lease term of over 12 years, 85% of revenues coming from investment-grade tenants at high-quality properties well located in markets and leases on only 1% of office GLA expiring in 2021. We believe in the long-term value proposition of office properties is this specialized environments designed specifically for people to come together to work collaboratively on office work activities. We expect many office users will explore ways to incorporate more flexibility into how their employees use office space over the next few years. And that this can exacerbate the ordinary softness in office leasing conditions, that follows cyclical office market peaks. Our portfolio is defensively positioned, and we will be closely monitoring the market for opportunities to both buy and sell properties that enhance the REIT’s portfolio and create value for our unitholders. Our retail portfolio accounting for 34% of revenues has delivered very solid results in challenging market conditions. Our portfolio includes a mixture of grocery anchored properties, single tenant properties and enclosed centers that are dominant in their respective markets. A common thread through all of these properties is the focus on providing affordable space for more staples oriented retailers allowing the stores to be profitable. Store closures have aggregated less than 1% of retail GLA in our portfolio since the beginning of 2020. Retail rent collection reached 88% in Q4 and retailers have begun signing new leases and making expansion plans that they look forward to a post-pandemic environment. In 2021, we look forward to the rising contributions from River Landing, 4 other multi-residential projects included in our equity accounted investments due to begin lease-up this year, as well as making progress on our industrial and multi-residential developments in the GTA and Vancouver. New developments create a temporary drag on FFO during the early days of lease-up. And as Larry just outlined, this will be the case for H&R in 2021. However, we are focused on the positive contributions to cash flow and NAV per Unit as these projects reach stablization over the next 18 to 24 months. We remain committed to maximizing value for our unitholders and plan to take advantage of opportunities in 2021 to evolve H&R into a more narrowly focused REIT consistent with investors’ preferences. And we now will be pleased to answer any questions from call participants. Operator, please open the line for questions.

[Operator:]

Thank you. Our first question comes from Sam Damiani from TD Securities. Please go ahead, your line is opened.

[Sam Damiani:]

Thanks and good morning everyone. First on Jackson Park, Philippe, I wonder if you could just give us a little bit of detail on the occupancy at Jackson Park, I guess, during Q4 and where it is today, I guess, where your expectations might be for Q1 and Q2?

[Philippe Lapointe:]

Hi, Sam. Good question. So in the last quarter, it’s hovered around, I’d say a tad over 60%. My expectation for the next month or two is it probably starts inching towards the middle of the 60%s. It’s going to be really interesting. I want to be careful and not offering too much guidance only because of the outliers. If this was just a market demand issue, then it will be easier to give a prediction, but because of the vaccine rollouts, and frankly, what happens with Midtown office, I’m not terribly certain. Like I mentioned though, we are seeing a ton more traffic than we have seen in the last 6 months. And obviously, our conversion rate from traffic to actual lease signing has been doubled than being the historical average. And so, somewhat encouraging, but just out of prudence, I’m not capable of giving you accurate guidance on that.

[Sam Damiani:]

Okay, that’s fair. And then, just on the NOI impact, I mean, when you look at 60% to 65% occupancy there, how does that impact either the margin or the absolute NOI dollars compared to, let’s say, Q1 or Q2 of last year, when it was obviously much higher?

[Philippe Lapointe:]

It’s a good question. I think perhaps Larry can opine on the specifics. But because the property is a very large property, a Class A and very modern, the percentage of NOI clearance from revenue is obviously much lower than where the breakeven points from an occupancy perspective is much lower than a Class A building or a Class B building. And so, as far as I can tell, I believe we’re still positive on an NOI basis, even at 60%. Something that Larry can confirm, and so, from that perspective, less so worried. And, obviously, like I said, all signs are pointing to us reaching to bottom. So from here on out, I would expect only a positive NOI growth.

[Larry Froom:]

I’ll just add, Philippe is correct, we are still positive on an NOI basis at Jackson Park. But there has been significant reduction in NOI.

[Sam Damiani:]

Okay, that’s great, thank you. And then just on The Bow with the mortgage bonds maturities starting to come up here this year. I wonder if you could just share your thoughts on how you’re going to sort of approach that situation or if anything’s been accomplished to date.

[Thomas Hofstedter:]

Nothing’s been accomplished to date. Obviously, Ovintiv bonds are trading very, very well, compared to where they were a year ago, as is their stock performance quite frankly. So that opens up a whole new opportunities that didn’t exist a year ago. So I’m optimistic we’ll get somewhere. But it’s kind of – for the short term, we have a bond that’s expiring, in June 2021, which we’ll be paying off by issuing an unsecured piece of paper into the markets within the first half of the year.

[Sam Damiani:]

Okay, thanks. I’ll turn it back.

[Operator:]

Thank you. And our next question comes from Mario Saric from Scotiabank. Please go ahead. Your line is open.

[Mario Saric:]

Hi and good morning. I’m sorry. Tom, given some of your commentary in letter to shareholders about simplifying the lease structure in 2021, which is something that I’ve been waiting to…

[Thomas Hofstedter:]

Sorry, Mario, I’m not hearing you that well. Can you just – I don’t know, try it again?

[Mario Saric:]

Is that better?

[Thomas Hofstedter:]

Yeah. Try it.

[Mario Saric:]

Perfect. Okay. So I was just mentioning, given some of the commentary in the shareholder letter with respect to simplifying the structure of H&R in 2021, which is something that you’ve worked out since, I guess, 2019. Can you give us any sense in terms of what the debt to fair values for each of the verticals would be as of Q4?

[Thomas Hofstedter:]

Sorry. Again, I’m losing, I apologize, the debt of the what?

[Mario Saric:]

Debt to fair value by vertical, so office…

[Thomas Hofstedter:]

I can’t, I can’t hear. Larry, can you hear?

[Larry Froom:]

I think, Mario, you were asking, what the debt to fair value would be per segment of our – amongst our asset classes, is that your question?

[Mario Saric:]

Yeah. Thank you.

[Larry Froom:]

We haven’t given that information, Mario, and I don’t really have it offhand. Happy to maybe speak to you and give you some guidance offline, but I really don’t have it right now.

[Alex Avery:]

Yeah, and I – it’s Alex. I think, Mario, it’s difficult to allocate by segment, when you’ve got as much unsecured corporate level debt as we have. I think maybe what you’re asking is a little bit more about what we think maybe the appropriate level of debt would be by different property types.

[Mario Saric:]

Yeah. If we just take a look at your mortgage debt outstanding, kind of the mortgage debt to asset value by vertical would be something I’d be interested in.

[Alex Avery:]

Oh, okay.

[Larry Froom:]

The mortgage, the mortgage debt.

[Thomas Hofstedter:]

Sorry. But, Mario, that’s not very relevant. That’s where the opportunities lie to – if you look at your total unencumbered pool and you’d like to can maintain a certain percentage overall, where the opportunities lie to go ahead and do secured debt at best better pricing, you do that. And you take the ones that are less receptive to getting good pricing on secured debt in your outlook. It’s not by a division-by-division. It’s by an asset-by-asset basis.

[Alex Avery:]

I think qualitatively you could say that if you look at the availability and cost of debt, the trend over the past few years has been to have less secured debt on retail assets. In the H&R portfolio in particular, there are a lot of very longstanding office properties that have quite low loan to value, because they’re very long-term fully amortizing mortgages. And we highlight some of those coming due over the next 12 or 18 months. But there are some properties within the office portfolio that have higher loan to value. And within the multi-residential, we tend to have higher leverage as a result, in part due to the tax advantages. And the natural hedge that that provides. Given that those are U.S. assets. And there is clearly abundant availability of debt at aggressive pricing on the industrial portfolio.

[Thomas Hofstedter:]

And also, Mario, obviously, in certain asset classes, where we want to sell properties, you want to need them debt free, because then you’d have to pay through a yield maintenance to get rid of the debt. So you look at our office portfolio, for example, Hess is debt free. So it really is not on an asset-by-asset – sorry, category-by-category, it’s more on an asset-by-asset basis that we make those decisions, whether it’s secured or unsecured.

[Mario Saric:]

Right. Okay. And then, associated to that, in terms of creating these new public entities, is it your view internally that each of the verticals, office, retail, industrial, residential, are large enough and distinct enough to be able to stand on their own?

[Thomas Hofstedter:]

I think the answer is yes.

[Mario Saric:]

Okay. And then, in terms of the structure, how should we think about the relationship between those 4 verticals and H&R or corporate like in terms of internal relationships, like external? So hypothetically, if these were to be spun out, let’s say, would you consider an external structure or would you go along the internal structurally?

[Thomas Hofstedter:]

I don’t think I’d want to give – we know what the market wants. So we’re going to try to give the market what it wants, but I don’t think I can answer that question at this early stage of the game. As far as the structure goes there’s many initials involved in making the decisions like that, but you’ll see. Wait and see.

[Mario Saric:]

Okay. That’s fair. My second question is just, I mean, maybe for Philippe with Lantower. You noted a wide gap between how the public and private markets have been treated during the COVID crisis in terms of the U.S. Sunbelt market. What do you think you can do in terms of trying to narrow that gap? And I recognize it’s hard to understand what Lantower’s implied cap rate change has been given it’s part of a bigger organization. But in terms of strategy, what do you think you can do to narrow that gap going forward?

[Philippe Lapointe:]

Well, it’s a very good question. I don’t know that necessarily there’s anything we can do to narrow that gap and change the public perception of U.S. multifamily. Rather, what I think we ought to do is take advantage of the historically wide delta between the development yields and the in-place cap rates. If cap rates, like I mentioned, went down 50 basis points and are closer to 4 than they were to 5 and were developing closer to a 6, then it probably behooves us to look increasingly towards development. Especially in our Sunbelt markets, the delta as well from a private and public market is more pronounced on – or rather with REITs that have gateway exposure. And so, my belief is that’s temporary in nature, only because our house view is the gateway cities will always remain the gateway cities and COVID will one day subside. But as it relates to the development yields, they’re – frankly, in my opinion, they’re just too wide. And so, like I said, we made the announcement that we bought in the last 90 days 2 more sites. I would anticipate that we continue that strategic acquisition initiative, moving forward in 2021, and look to, quite honestly, put a shovel in the ground in some of these sites towards the latter half of this year.

[Mario Saric:]

Great. I think it was maybe 6 months ago or 9 months ago, there’s discussion of potentially trying to monetize the Lantower brand and platform in terms of possibly bringing in partners. Can you just provide an update in terms of where that stands from a capital allocation perspective?

[Philippe Lapointe:]

Yeah, like all things, I mean, there’s 24 hours in a day and 7 days in a week. And so we – it’s just a matter of where we want to place the focus. And in our opinion, Lantower’s – the platform has consistently risen quarter-over-quarter in value. We’ve grown exponentially, as evidenced by our quarter-over-quarter growth last year, especially given the challenges of COVID. And so in this environment, where the platform keeps getting better in my opinion, and is worth more, and we are in tune with how to create additional value this development. It’s just a matter of when we find it opportunistic to bring on a partner, while we’re still growing quickly. And so I don’t think there’s a month that goes by where we don’t hear about interest about buying into either a participation in the existing platform or on a future partnership. But frankly, we have to allocate where we focus our energies. And it is our opinion that as of right now, given COVID, and especially what we’re seeing on the development, perhaps doing that in asset management with risk being a dilution of focus. And so the appetite is certainly there on the third party side to join us. It’s just more matter of us determining the best timing for unitholders.

[Mario Saric:]

Got it. And there’s a gap between public and private valuation that you noted, does that change your desired timing at all, in terms of possibly bringing partners in and up?

[Philippe Lapointe:]

I don’t think it does, because I think that the delta is temporary in nature. I think, it will course correct, fairly quickly, especially in the U.S. As it relates to the next 6 months with the rollout with the vaccination, and obviously having a better handle on COVID, I would suspect that that delta would compress even further. And so I think the public market is going to go and meet the private market not vice versa. And so trying to capitalize on that delta is, I think, we’ll dissipate too quickly. And so I don’t know that that’s necessarily a factor in our decision making right now.

[Mario Saric:]

Got it. Okay. That’s it for me. And thank you for your patience on the technological issue this morning.

[Operator:]

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

[Jenny Ma:]

Thank you. Good morning, everyone. Going back to Jackson Park. I’m just wondering, when you look at sort of the post-COVID view. I know, Philippe, you had mentioned in the past that a large portion of your tenants, your sort of college students. Do you expect that to change a bit given that you referenced the return of Midland office? Or do you think that the tenant base is going to stay relatively unchanged versus pre-COVID?

[Philippe Lapointe:]

It’s a great question. I think first and foremost, it really depends on what opens up first. If they’re both concurrent in nature, where universities are opening up at the same time, as employers are asking their employees to come back to the office. Then, I’d say, it’s probably going to be a good mix and we’re going to see a similar mix attendance. But if one opens before the other, then I suspect that that’s probably the first wave that’s going to hit. But my expectation, candidly, is that once the situation in New York City and normalizes. Jackson Park will probably soften and stabilize faster than most properties. And the reason I say that is casting aside the quality of the construction and its location and proximity to the subway, and obviously one stop away from Midtown. I think if anything, COVID has taught us is, the idea that somehow you want to stay in your 300, 400 square foot studio apartments and be content without access to a park or nearby walking trail, I think is moats, and I think people are putting a premium on that open space. And I know you remember this. But, Jenny, there’s a 2-acre park, a private park for Jackson Park, which quite honestly, no other property nearby has certainly not in New York City. But there’s not that amenity in Long Island City. And so I think that when tenants come back either to work or to study, and value that open space and want to be outside and have that fresh air, I think that they’re going to be flying in droves to Jackson Park.

[Jenny Ma:]

Okay. Great. So I guess in the interim like if you think students are going to be a reasonable driver, I guess, the demand will probably return to summer, hopefully. But in the interim, how is this balancing occupancy versus rent in Jackson Park? Because if you think there’s sort of 6 to 12 month visibility on the demand coming back, or are you willing to give a little bit on rent just to have these suites occupied? Or how are you thinking about that as it the very short-term?

[Philippe Lapointe:]

It’s a great question. I think the strategy lies in, obviously, without reducing rates, just using the strategic blend of concessions, but also term maturity. And what I mean by that is being aggressive with once the concession of free rent that is being offered, but also pushing the leases that historically have been 9 to 12 months, pushing the 15 to 24 months, and then spreading the concession along the terms of the lease. And so I think, those are the leavers that are going to be successful that are currently being in use.

[Jenny Ma:]

Okay. So are you saying that you haven’t had to move face rent much or is there anything up there too?

[Philippe Lapointe:]

Right. That’s exactly, right. I think the…

[Jenny Ma:]

Okay.

[Philippe Lapointe:]

On a net effective of basis, the rents have moved, but obviously a virtue of concessions.

[Jenny Ma:]

Okay, great. Moving on to retail, I think, Pat, I didn’t hear – I’m not sure, I’ve heard you correctly. But you mentioned that the Walmart lease at Dufferin Mall was renewed 20 years. Is that correct?

[Patrick Sullivan:]

Yeah, it was a blend and extend. They had some term left on it. But yeah, we did it 20 years. It’s a 20-year term now.

[Jenny Ma:]

And you said that there was some rent stuff involved as well?

[Patrick Sullivan:]

Yeah, there’s an initial rent step that kicks into the spring, and then every 3 to 4 years, there’s rental bumps.

[Jenny Ma:]

Can you give us a rough magnitude of that bump?

[Patrick Sullivan:]

The first bump I mentioned was about 55% is a significant bump, and the bump thereafter are also pretty significant.

[Jenny Ma:]

Okay. No, I guess, I mean, that’s not necessarily typical for a Walmart lease. Is it because of the virtue of the strength of that location, in particular? Is that the case? Or is it because it’s been, I guess, first lease you signed a long time ago. Is that a mark-to-market? Like what’s really driving this…

[Patrick Sullivan:]

Yeah. I know, it is reflective of the location, the strength of the location, the fact the market was under rent. It was a lease that was done a long time ago. And the market clearly has changed from what it was. And it was an early renewal. So like I said, it was really a blend and extend and as part of that deal, we’ve got our development rights back to facilitate our redevelopment of the property.

[Jenny Ma:]

Okay, great. I guess, last question on that specific store. Does Walmart feel that the store size is appropriate for what it is? Or is there any possibility down the road of expanding that store? Or is it sort of the right size for that market?

[Patrick Sullivan:]

I’d suggest you that the store is a good size, given what Walmart’s footprint is today. It’s – really, I don’t think either – I don’t think we’ve even looked to expand it. By expanding, we would diminish your ability to rent smaller shop space, which pays much higher rent. So I think they’re kind of their footprint is what it is.

[Jenny Ma:]

Okay. Well, I guess, it seems like I think it’s good for the next 20 years, so that’s great. And then moving on to industrial, it looks like the first building of the Caledon development has been very successful. But I know in your commentary, you sort of reiterated that buildings 2 and 3 are still on hold. I guess, just given what we know about the industrial market now and the success you’ve had with building 1. What are you waiting for to change before developing? I mean, I recognize it’s a lot easier to start and stop with industrial, but what else do you need before you invest?

[Thomas Hofstedter:]

Absolutely nothing. We’re just waiting for the winter. So we don’t need to have winter construction, construction. So we are negotiating with someone who want the larger building and whether we landed or not. We’re going to be proceeding after the winter.

[Jenny Ma:]

Okay. And remind me the build time on that? Is that less than 12 months? Or is it sort of that 12 to 18 range?

[Thomas Hofstedter:]

It’s in the 12-ish range?

[Jenny Ma:]

Okay. Great. Thank you very much. I’ll turn it back.

[Thomas Hofstedter:]

Thanks.

[Operator:]

Thank you. And our next question comes from Matt Kornack from National Bank Financial. Please go ahead. Your line is open.

[Matt Kornack:]

Good morning, guys. I’m not sure what information you can provide. But I’m going to ask the question anyway. And it’s a follow-up to Mario’s line of questioning. Notwithstanding the ability of these segments to standalone, do you anticipate that H&R, whatever the surviving entity is would own a stake in each of these going forward?

[Thomas Hofstedter:]

So that’s detail that we are not at the stage of answering, can’t answer yet.

[Matt Kornack:]

Okay. Fair enough.

[Thomas Hofstedter:]

Yeah. It’s a fair question. But it’s too early days. We’re not there yet.

[Matt Kornack:]

I guess, at the end of the day, it will either be an asset management type structure or you could parse it off. But is there a single...

[Thomas Hofstedter:]

No. No. No. You can also – you can’t have an IPO versus a spend, you can spend it all your IPO part of it. There’s a lot of ways to doing this one.

[Matt Kornack:]

And just from a fixed income standpoint because we have been fielding some questions from them. There will be a surviving entity large enough to sustain the unsecured debt that’s currently outstanding?

[Thomas Hofstedter:]

Absolutely. Absolutely.

[Matt Kornack:]

And then on the retail front, Pat, there was some positive on the leasing of space that was subject to CCAA, it sounds like it was 35,000 square feet on 100,000 square feet. What is the nature of those tenancies? And you provided some leases in your commentary, it would some of that have been on previously occupied space by guys that went into CCAA?

[Patrick Sullivan:]

Yeah, one of the deals struck to went into a Pier One at Stone Road Mall. We backfilled a lot of the David’s Tea, there’s not – I wouldn’t say, there’s not – there’s no fashion deals replacing these right now. The fashion guys are pretty much not doing anything at the moment, although, there’s discussions from them for doing deals next year. So it’s a lot of the smaller space. Moving forward, we have two more Pier Ones that that we have – we’re negotiating LOIs on right now and that would be the end of our Pier Ones would have gotten rid of all 3 of that point. And then, yeah, there’s a lot of – just in terms of the CCAA space, there is quite a bit of activity and discussion. It really start-up in the last few weeks for a number of our better malls, that really were the brunt of the impact of the CCAA filing. So again, for instance, at Orchard Park, and we got active discussions with about 6 deals right now, the self space. So it’s good to see some positive momentum on the leasing side.

[Matt Kornack:]

Sure. And then are any of these new tenants to Canada and new to your portfolio? Are they all kind of existing as you’ve dealt with across the portfolio already?

[Patrick Sullivan:]

Nothing new to Canada, not right now. I’ve heard stories of some brands, looking at bringing – coming to Canada and opening. But not right now in our portfolio, we’re just doing domestic players.

[Matt Kornack:]

And your commentary around sort of the e-commerce play, and enclosed malls that was interesting. Is the structuring of the malls and the loading docks, et cetera, is it suited to provide that? And just what, if anything, do you need to do to the malls to make it a better sort of place to either take in returns or send out product?

[Patrick Sullivan:]

I suggest that, it’s still a bit early days in terms of what we’re doing. But there’s a lot of technology that’s out there one of the big issues was really dealing with real time inventory and for customers, consumers to be able to source inventory that’s actually available in the shopping center. And that seems to have been something that’s been overcome now, according to the people we’ve talked to. The beauty of an enclosed shopping center is, as you know, they’re really, really flexible. We can kind of move things around and create space at a fairly, it’s not, I wouldn’t say easy, but it’s very doable to recreate certain areas, where it need to be, not exactly sure what our net needs will be going forward. Clearly, we want to continue with curbside pickup, but the buy online pickup in-store model and such forth is something we’re really going to push along.

[Matt Kornack:]

Okay. That makes sense. On the residential side, and I guess, it’s a 2-pronged question. With regards to the projects like The Pearl, Hercules, Nightingale, Shoreline, there’s some question as to whether those are sold off or purchased at some point. Interested in your thoughts there. And then on the Canadian residential offering or opportunity, when we think of that as a silo – is Lantower an exclusively U.S. operation and those residential suites would stay with the asset class that they’re going to be built on top?

[Thomas Hofstedter:]

So I’ll answer the latter question. We don’t have visibility to that. As you know, we have quite a number of projects that fit the bill 145 Wellington, Front Street, 55 Yonge and our large joint venture on the Telus Tower in Burnaby, so and then there’s Dufferin Mall. So we don’t have the answer to what bucket it would work or how would work, it’s going to be mixed use between office and residential, early days on that. As far as the Canadian bucket of Lantower at this stage of the game, Lantower is not – doesn’t have to be exclusive U.S. can be. But there’s too many questions as to Lantower and where it goes just to be able to answer that question in the future as to which bucket to place these things. Because quite frankly, there a ways off, the first project wouldn’t be ready, probably, for shoving the ground at the earliest, I would say, 1.5 years, 2 years. So it’s early days.

[Matt Kornack:]

It makes sense.

[Philippe Lapointe:]

Yeah, Matt, and as it relates to your first question, I think just like any other asset in our portfolio, we have an evaluation internally of what we think is the fair market value of the assets. In the case of those developments, when they stabilize or before stabilization, but upon that review, if the market, which is what I suspect is going to happen, and I think, that’s what you’re trying to get to. I suspect that the markets given the frothiness for U.S. multifamily, especially given the quality of that construction and its locations, I suspect the market is going to value those assets more than we do internally. And so, if I was a betting man, I would say, we’ll probably end up selling those assets at a very, very low cap rate and quickly redeploying that capital into more accretive investments, such as what we just discussed earlier today on the call.

[Matt Kornack:]

Okay. That makes sense. And then last one, on Jersey City, just wondering if you plan on developing that on your own or if you’d bring in a partner or if you’ve got any ideas as to what’s going to go on there? I know it’s probably going to be a few years out but just interested.

[Thomas Hofstedter:]

So it’s a mixed-use development. It can be a mixed-used development, because we it’s zoned on offer a residential or we can actually put commercial. We can actually put lab space, which is very much involved today. Right now, we’re marketing it to users for both the lab space, the technology that life sciences, that’s very much in vogue, and we’ll see what we land there and that will follow with residential. But from a residential perspective, we are basically, I would say, 2021 is a year on hold, because I would say, overall, if you look at – a good example, which is one of the largest residential developers, as a REIT in that area. You’re probably seeing rents – occupancies will have a trend 80% to 85%. So this is a post-COVID story. Therefore, we’re not in the rush to put the shovel in the ground. Ultimately, it will be great. It is one of the spectacular sites that you can’t really repeat. But it has a good affordability as a mixed-use development. So mixed-used development really entail bringing in either a partner who has experience in that sector or landing a major tenant, which we are currently marketing for. So whatever comes first is really going to be the answer. And residential, my guess, will follow, because it’s going to have to wait until Jersey City recovers from the pandemic.

[Matt Kornack:]

Sure. Thanks for the color. Looking forward to more news on the spinout, so that just means a lot more work for us, but all good. Take care, guys.

[Thomas Hofstedter:]

Thanks.

[Operator:]

Thank you. And our next question comes from Matt Logan from RBC Capital. Please go ahead. Your line is open.

[Matt Logan:]

Thank you and good morning.

[Thomas Hofstedter:]

Good morning.

[Philippe Lapointe:]

Good morning, Matt.

[Matt Logan:]

There’s a lot of opportunity across your business. And when you take a step back and think about the 30,000 foot view, could you give us a sense for what your top 3 priorities are for 2021?

[Thomas Hofstedter:]

Yeah. I can give you the top 2 pretty easily, the top 2, not in that order – necessarily in their orders, Primaris and The Bow. That’s definitely within the top 3. Then the third one, I think what I really have to see is get everybody – getting the vaccine and moving on life and opening up. Those are the top 2. I’m looking forward to getting River Landing. We have a lot of action on the office space. What you’re reading on the newspapers is actually true. They’re flooding to – people moving to Miami in droves. And we’ve had more showings in River Landing on office than we’ve ever seen before. So I’m very encouraged. I think we’ll land our first tenant. Finally, it’s been dragging on because of the pandemic. Probably within the next 60 days, I’m very much certainly we will. And thereafter, we have actually more users than we have space for, which is interesting to see. Miami is small tenant market, not a large tenant market. And all of a sudden due to the pandemic, it turned into a large tenant market. And we have one of the – we have a 40,000 square foot place, which is unusual in the market. So I’m looking forward actually to stabilizing River Landing a lot sooner than I would have thought. I’m looking forward to actually signing our restaurant leases and having the space open again. So I’d say Primaris and The Bow are definitely ranking high up there for 2021, finishing off River Landing and some of our other developments, and basically, just a general overall recovery.

[Matt Logan:]

Great recovery and certainly positive news on River Landing. Did you say 6 days or 60, 6-0?

[Thomas Hofstedter:]

60, 60 days. I’m being conservative, because I can’t imagine last season like one.

[Matt Logan:]

And when we think about the stabilization of that project as a whole, is that really more of an H2 event? Or could that come a little bit sooner?

[Thomas Hofstedter:]

Is it an age – I can’t hear it, is it, what event?

[Matt Logan:]

Is it a second half of 2021 event?

[Thomas Hofstedter:]

Well, no. Well, it depends on the terms of stabilization. As Philippe mentioned, we’re leasing at a conservatively 30, but we’ve been high as 40, 30 to 40 units a week. So we initially thought that it was going to be a 2-year lease-up from now. And it’s really – we’re probably going to finish this within 18 months. So that’s going to happen sooner rather than later. The retail is basically 80% there. So we’re just waiting for the market to cope, to subside, so we can actually fill up the balance of the restaurant space, which we haven’t done. But the office space takes, I would say, their lease is going to be at the end of the year, before I have the leaseholds built out and the tenants paying rents. That’s realistically speaking once we clear the committee approval within the next short while even on the first tenant, it’s not going to happen before the end of the year. So stabilization on a realistic perspective is probably, I would say, 16 months, 15 months from now.

[Matt Logan:]

Okay.

[Thomas Hofstedter:]

Stabilization meaning basically fully leased up.

[Matt Logan:]

And maybe just changing gears to capital allocation. Could you give us a sense for maybe your acquisition disposition targets for 2021?

[Thomas Hofstedter:]

Probably not. I think start at the residential. So Philippe did mention all of the properties that we have with our joint venture partners who are building in new markets of Seattle, Los Angeles, San Francisco, et cetera. That can be geared for sale and that’s something that my guess is that Philippe did allude to and clarify. It’s probably too expensive for us to buy, because I think the caps are going to be very, very low, in there around the 4-ish range, so that’s not accretive enough for us. So that will be a disposition. I think as far as industrial goes, there will be no dispositions. As far as office goes, I think that we obviously have some target office buildings that we want to sell, but I don’t necessarily think that 2021 is the right year to do that until there is some light at the end of the office recovery tunnel, even though we have long-term leases, quite frankly. So our assets can wait and be sold if we want to sell later on to generate cash. So I can’t give you clarity on what assets are going to be sold or when. We’re looking at it. When the time is right, we will do so, but I don’t think the time is right now in those sectors. So I regretfully can’t give you a clarity. It’s really too – the pandemic has really caused much uncertainty as to what the timing is as to sell assets and aim to purchase assets. From a purchase perspective, I don’t think Canada affords much opportunity. I think the opportunities that everyone is waiting for is distress. And distress is only going to happen in certain key markets like New York City. They’re not going to happen in us then or Dallas or, quite frankly, any other target markets. And they won’t happen in Canada, in the assets we want to buy. So bottom line is Canada is going to be very challenged to go ahead and buy accretively in Canada. I think we will be able to purchase things in the United States. But I think it’s more balance sheet management for 2021 and opportunistically sale as the market opens up.

[Matt Logan:]

Well, that’s good color. I appreciate all the comments. I’ll turn the call back. Thank you.

[Operator:]

Thank you. And that concludes our questions. I will now turn the call back to Tom Hofstedter for closing remarks.

[Thomas Hofstedter:]

Thanks, everyone. Stay healthy, stay well. And hopefully, next quarter that we’ll be vaccined. Thank you. Have a good weekend. Bye.

[Operator:]

Thank you for joining us today, ladies and gentlemen. This concludes our call and you may now disconnect.