H&R Real Estate Investment Trust (HRUFF) CEO Tom Hofstedter on Q1 2022 Results – Earnings Call Transcript

H&R Real Estate Investment Trust (OTCPK:HRUFF) Q1 2022 Earnings Conference Call May 10, 2022 9:30 AM ET

Company Participants

Tom Hofstedter – Chief Executive Officer

Philippe Lapointe – President, Lantower Residential

Larry Froom – Chief Financial Officer

Conference Call Participants

Jenny Ma – BMO Capital Markets

Sumayya Syed – CIBC

Matt Kornack – National Bank Financial

Mario Saric – Scotiabank

Jimmy Shan – RBC Capital Markets

Sam Damiani – TD Securities

Operator

Good morning and welcome to H&R Real Estate Investment Trust 2022 First Quarter Earnings Conference Call.

Before beginning the call, H&R would like to remind listeners that certain statements, which may include predictions, conclusions, forecasts or projections and the remarks that follow, may contain forward-looking information, which reflect the current expectations of management regarding future events and performance and speak only as of today’s date.

Forward-looking information requires management to make assumptions or rely on certain material factors and is subject to inherent risks and uncertainties, and actual results could differ materially from the statements in the forward-looking information.

In discussing H&R’s financial and operating performance and in responding to your questions, we may reference certain financial measures, which do not have a meaning recognized or standardized under IFRS or Canadian generally accepted accounting principles and are, therefore, unlikely to be comparable to similar measures presented by other reporting issuers.

Non-GAAP measures should not be considered as alternatives to net income or comparable metrics determined in accordance with IFRS as indicators of H&R’s performance, liquidity, cash flows and profitability. H&R’s management uses these measures to aid in assessing the REIT’s underlying performance and provides these additional measures so that investors can do the same.

Additional information about the material factors, assumptions, risks and uncertainties that could cause actual results to differ materially from statements in the forward-looking information and the material factors or assumptions that may have been applied in making such statements, together with details on H&R’s use of non-GAAP financial measures, are described in more detail in H&R’s public filings, which can be found on H&R’s website and www.sedar.com.

I would now like to introduce Mr. Tom Hofstedter, Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstedter.

Tom Hofstedter

Good morning. I’m Tom Hofstedter and I’d like to thank everyone for joining us today to discuss H&A’s first quarterly financial and operating results and to provide an update on our transformational strategic repositioning plan. With me on the call are Larry Froom our Chief Financial Officer; and Philippe Lapointe, the REIT’s newly appointed President.

Our strong first quarter financial results mark a pivotal moment to the continuation of our strategic transformation and the servicing with the better value within our portfolio. Following the successful spin-out of our enclosed shopping center division and the sale of The Bow and Bell office campus, our portfolio today is significantly more concentrated on higher growth asset classes within strong urban markets.

Since the launch of the REIT’s transformational strategic repositioning plan, we have spent considerable time meeting with many of our unitholders and are encouraged by their helpful comments and feedback regarding our strategy, our team and our disclosure.

We recognize that we have an opportunity for better and broader communication in addition to continuing to demonstrate meaningful steps derived at our capital allocation goals.

As we move through our repositioning plan, increasing our allocation to the REIT’s US residential platform, I’m thrilled to announce that Philippe Lapointe has accepted the role as President of the REIT.

Philippe’s leadership capabilities and achievements in the creation and development of the REIT’s residential platform make him exceptionally well qualified to further contribute during our exciting phase of transition and growth. Philippe will continue to oversee our growing residential platform, as well as have a more influential role in investment strategy, capital redeployment and Investor Relations.

Our portfolio of high-quality properties with long weighted lease term, credit worthy tenants holds great value. This quarter, our net asset value per unit increased to $21.06, as same-property net operating income quickly rebounded and surpassed our projections, while cap rates continued to compress in our industrial residential portfolios.

This added value is captured in our $1 billion in favorable fare adjustments over the fourth, equating to an increase of $3.36 on a per unit basis. Capital allocation is our top priority and at this time one of the best uses of our capital is buying back our units, which are trading at a substantial discounts to net asset value.

Year-to-date we have bought back 13.7 million H&R units for $178 million at a weighted average cost of $12.96, representing a 38% discount to our net asset value per unit of $21.06. We plan to continue to buy back our units, as the significant discount persists.

The strong — with today’s strong quarterly results, we are on our way to creating a simplified growth-oriented company that will serve a significant value for our unitholders.

And with that, I will turn it over to Phillippe to discuss our residential platform, Lantower.

Philippe Lapointe

Good morning, everyone. I’m delighted to be on this call during these monumental changes to discuss our residential updates over the last couple of months and to go over our first quarter highlights.

Starting from a high level, as you’ve heard from Tom, we’ve continued to execute on our strategic plan by redeploying capital in a residential development pipeline, while managing the remaining divestitures of our legacy assets.

Before I launch into our updates, I would like to take a moment to comment on our residential platform’s founding and its ensuing growth. Since our residential platform’s founding in 2014, we have steadily increased our footprint in the US sunbelt market via timely acquisitions. Those acquisitions were funded with recycled capital from dispositions of other non-residential assets, in essence, a near identical strategy as our ongoing repositioning plan.

That very recycling of our capital is deeply embedded in our corporate DNA. And I would humbly submit that over the last eight years, this formula has proven to be quite accretive to our unitholders.

As such, and in light of our recently published strategic repositioning plan, we would like to reiterate that the remaining steps of our plan are a continuation of that exact process that has brought us much success.

And on a more personal note, therein lies the main reason why I’m very motivated to move into the role of President of H&R REIT. I’m very optimistic about our future and of the upcoming value that we intend to create for our unitholders. And so thank you for indulging me for a moment and let’s jump into a review of yet another quarter of strong multifamily fundamentals.

When excluding Jackson Park same-property net operating income from our portfolio in US dollars increased by 11.1% for the three months ending on March 31, 2022 compared to the respective 2021 period. When including Jackson Park, same asset property income from our portfolio in US dollars increased by 31.2% for the three months ending on March 31, 2022 compared to the respective 2021 period.

As we have seen in previous quarters, we are continuing to experience substantial renewal rate growth in all of our US sunbelt markets. By way of example, our new lease trade-outs for our entire portfolio excluding Jackson Park was approximately 12.4% in the first quarter. This represents nearly an entire year of double-digit increases of new leases across our entire portfolio. And for additional context we are still observing comparable elevated renewal rates as of the date of this call.

Moving on to Jackson Park. We continue to see positive trends in the amount of traffic, renewal rates and number of leases executed. At the end of the first quarter, Jackson Park’s occupancy was 98% and the percent of residents renewing the leases hovered in the mid-60s percent range which represents a renewal rate of over double that of Q1 last year.

Furthermore in March, the team signed the lease for the last remaining retail space at Jackson Park bringing retail occupancy to 100% and anecdotes that we believe marks the full return of the city.

As for River Landing of Lantower River Landing, the property has continued its strong performance. As of the end of the first quarter the property was nearly 95% occupied. And for the month of April new lease rates increased 32.9% and renewal lease rates increased 19.8% compared to previous leases. River Landing continues to outpace our pro forma budget and we’re preparing for future fair market value increases as we capitalize on these outsized renewal rates.

As previously mentioned in our disclosure, the first quarter saw a material increase to our fair value and I would like to cover the adjustments to our residential fair market values. In a nutshell, compressing cap rates coupled with continued double-digit NOI growth have supported substantial increases to our multifamily values.

Our valuation cap rates are supported by an independent appraisal and several market research reports. Furthermore, our valuations are also supported by multiple recent US multifamily REIT privatizations. The market recognizes that sunbelt multifamily has proven to be a recession resilient asset class with many years of strong historical fundamentals underscoring the strength of the asset class as a long-term investment.

Additionally, due to the shorter-term duration of the leases and the additional disposable income available to renters during times of wage growth, multifamily represents one of the best inflation hedge investments furthering the appeal to private and institutional capital. The fair value cap rates paired with the demonstrated organic NOI growth supported the fair market value adjustment of over $500 million this quarter.

On the JV development front, we are pleased to report that the Pearl in Austin, Texas was successfully sold after a very active sale process. The return calculations equates to a 3.15 times return on invested equity and a 41% IRR for the REIT.

In Hercules California Phase 2 of our development named The Grand at Bayfront received its final certificate of occupancy in March of this year and is currently 43% leased. Lastly, Shoreline Gateway Long Beach’s tallest residential tower at 35 stories has seen strong renter demand since receiving its final certificate of occupancy in late 2021. The asset is now 47% leased and is achieving higher rental rates than originally budgeted.

On the wholly-owned development front, we expect to break ground on at least 11 distinct projects in 2022 and 2023 in our sunbelt markets. In 2022, we expect to break ground of five projects; West Love, Midtown and CityLine all in Dallas, Bay Side in Tampa, and Sunrise Phase 1 in Orlando, which represents on a combined basis 1,661 apartments.

First I would like to provide an update on Lantower West Love in Dallas Texas. We’re happy to announce that we broke ground on this five-storey 413 unit wrap development last month and we expect to turn the clubhouse and commenced leasing of the first unit in approximately 18 months.

Also in Dallas Texas is Lantower Midtown a five-storey 350 unit wrap development with direct frontage to the North Central Expressway and is expected to break ground this quarter. Our third Dallas development, Lantower CityLine a 295 unit five-storey wrap development in the CityLine mixed-use development is expected to break ground in the fourth quarter of this year. The 186-acre CityLine development includes major employers like State Farms regional headquarters that implies over employees over 10,000 employees and with walkable access to a Whole Foods market.

In Tampa, Florida we are wrapping up the building permit for a development called Lantower Bay Side. This development will consist of 271 units and is expected to break ground this quarter.

Lastly in Orlando, we are currently designing Phase 1 of our Sunrise development. The 332 unit garden style development is located within a short drive of Disney World than the I-4 commercial corridor of Orlando. We expect the break ground on this development in the fourth quarter of this year.

In 2023, we intend to break ground on at least six more projects in our existing markets on land sites that we either currently own or under contract which combined would be an additional 2,200 units. We expect this pipeline to grow as our in-house development team leverages its relationships and local expertise to secure institutional quality development opportunities.

Lantower’s process and foster partnerships with best-in-class brokers, consultants, architects and engineers allow our platform to scale to support the needs of a repositioning plan. We are currently under contract on pursuing rezoning on multiple tracks across Florida and Texas, and so we look forward to provide more color on our expanding pipeline and recent project additions in next quarter.

Lastly, as part of our ESG commitment, we are pursuing an NGBS Green Certification on all new developments. Lantower’s pursuit that the silver or better rating from this nationally recognized green building certifier represents our promise of providing sustainable energy-efficient homes to our residents and to our communities.

Lastly in alignment with our past initiatives, ever since, our founding, we have welcomed two refugee families from Ukraine into one of our communities in Florida at no cost to them. And in the first quarter of this year, our employees donated with a dollar for dollar match from H&R over 17,000 to UNICEF Ukraine, and we continue to look for additional ways to help the cause.

In summary, we are excited about the future value creation opportunities at H&R REIT, and I look forward to contributing even more to those efforts in my capacity of presidency.

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

Larry Froom

Thank you, Philippe, and good morning, everyone. Before I review our financial results, I would like to highlight for disclosure enhancements we have made this quarter. The first is a portfolio summary on page 6 of the MD&A, with a centralized consolidated table of property stacks and metrics. This is H&R at a glance.

The second is a summary table of net operating income, located in our press release. The third is the REIT’s balance sheet on page 14 of the MD&A, which proportionately consolidates equity accounted investments and the fourth is the REIT income statement on page 29 of the MD&A, which proportionately consolidates equity accounted investments. We will continue enhancing our disclosures going forward, and I invite suggestions for further improvements.

As Tom mentioned, we are excited to report our results this quarter, which have already begun to reflect the rewards of the strategic repositioning plan we announced last October. After shedding $4.7 billion of higher risk and lower gross assets in 2021, we are well on our way to streamlining our portfolio and aligning ourselves for higher growth. That growth is clear from our Q1 same property, net operating income, cash basis which grew 19.1% compared with the same quarter of last year.

Each division contributed to the growth with Lantower Residential leading the way with a 31% increase in same-property NOI cash basis 31%. If you dig deeper and exclude Jackson Park which is leased up last year, growth was a very healthy 11%. As Philippe has already discussed, Lantower Residential continues to see significant increases on new leases and renewals.

Same-property NOI cash basis from office properties increased 24.3%, primarily due to the burn-off of Hess Corporation’s rent-free period that expired in June 2021. Now office properties are located in strong urban centers, with a weighted average lease term of just under nine years, leads to strong investment-grade tenants.

I would like to point out that, we have only 40,000 square feet of office leases expiring during the remainder of 2022. Retail same-property NOI cash basis increased by 5.3% for the quarter, driven by the lease-up of River Landing Commercial. Committed retail occupancy at River Landing is now at 90%.

And lastly, industrial same-property NOI cash basis increased by 4.8% for the quarter, primarily due to increased occupancy and contractual rental escalations. Subsequent to the quarter, we released the vacant 314,000 square foot industrial property at 2121 Cornwell. H&R has a 50% ownership interest in this property.

For the remainder of 2022, we have just under 500,000 square feet of industrial leases expiring, at an average rent of $5.12 per square foot. We look forward to reporting further strong NOI growth from our industrial portfolio as the rents in these properties continue to increase.

Overall FFO per unit was $0.28 and AFFO per unit was $0.26 for Q1. Based on our distribution of $0.13 per unit for the quarter, our AFFO payout ratio was a very healthy 50%. During the quarter H&R completed independent appraisals for 23%, of our real estate assets. We are seeing continued rental rate growth and cap rate compression in both the US, residential and industrial sectors, as has been evidenced by many significant transactions over the last quarter. As a result of the independent appraisals and what we are observing in the market, we realized five favorable gains on the fair value of our real estate assets of $1 billion.

Philippe has already described the US sunbelt residential markets and have cap rate compression along with robust rental growth contributed to the portfolio’s large increase in value.

On our Canadian industrial portfolio, cap rate compression and continued growth in market rent were confirmed through 53 independent appraisals received during the quarter. The 53 appraisals amounted to 57% of the total value of our industrial portfolio.

Land and property under development were affected primarily due to industrial lands and two properties under development in California. We obtained an independent appraisal for the industrial land bank in Caledon, which reflected the values of comparable land sales in the area.

The fair value increases resulted in our NAV per unit increasing from $17.70 per unit at December 31st to $21.06 per unit at March 31st and also improved our leverage from 46.6% at December 31st to 43.1% at March 31st.

We finished the quarter with cash on hand of $103 million and $828.5 million available to be drawn on our lines of credits. And so in summary, we are very pleased with our Q1 results. Our high quality portfolio of properties are positioned to produce strong operating results going forward.

And with that I’ll turn the call back to Tom.

Tom Hofstedter

Thank you, Larry. H&R’s flushed with liquidity and we are very confident in our plan and the direction that we are going. We’re rewarding our unitholders for their support in patients and are increasing the distribution by 5.8%. We have significant embedded growth in our properties that gives us the confidence for the distribution increase announced today.

The heavy lifting our teams have completed to date is beginning to bear fruit as evidenced by our strong first quarter results with an increased asset growth profile and Philippe joining with the Executive team, we are moving towards our goal. We will endeavor to continue the cadence of our work and will perform this year, executing against our strategic repositioning plan.

Management and the Board remain fully committed and are actively evaluating opportunities to increase unitholder value and address the significant discount at which our units trade.

Founders, management, and members of the Board and their families collectively own more than $300 million or approximately 9% of the equity of H&R REIT, providing strong alignment with unitholders in pursuit of the REIT’s objectives.

Looking ahead, we will continue to enhance our communication of our strategic repositioning plan in addition to demonstrating meaningful steps to drive at our capital allocation goals, equipped with a strong balance sheet, significant liquidity, enhanced portfolio concentration to large primary markets with strong population and economic growth, and a deepening with the Executive team’s bench strength, we are very well positioned to drive forward our repositioning plan.

We’d now be pleased to answer any questions from the call participants. Operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Jenny Ma from BMO Capital Markets. Please go ahead, your line is open.

Jenny Ma

Hi, good morning and congratulations on a very strong quarter and Philippe your promotion.

Philippe Lapointe

Thank you, Jenny. Much appreciate it.

Tom Hofstedter

Good morning Jenny.

Jenny Ma

I want to touch on the IFRS cap rate moves. When we look at what they were throughout 2021, particularly in the US multifamily division, they were fairly stable but we’ve seen market cap rates for US sunbelt multifamily properties declined throughout that period.

So, I’m wondering the move that you guys made on that division is it a big catch-up move that really factors in the market move from the past 12 months or so, or is it reflective of just the past three months and the transactions that you’ve seen in the market on the M&A side?

Philippe Lapointe

Yes, it’s a great question Jenny. Frankly, it’s less to catch up and more so the result of some very substantial transactions that occurred towards the back end of Q4 and it took a bit of time to have an economic read through of where the fundamentals were but also pricing. They weren’t three multifamily pure plays. They had a capital structure that was a little bit exited. So, it took a bit of time.

But like we put in the press release that in conjunction with an independent appraisal, frankly enough third-party research reports clearly indicated to us that cap rates have been significantly compressed compared to where we held at fair market value. And so it’s about time for us to recognize that deeply embedded value.

Tom Hofstedter

And just to add a little bit of color some enactments and government enactments restrictions came off in the fourth quarter and so we maybe were a little bit gun sharp before they came off in the COVID environment. But subsequent to that and seeing just despite the transactions that there’s been just a ton of transactions at these lower cap rates, we have evidence that for the capture of that value in our portfolio.

Jenny Ma

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

Philippe Lapointe

In 2021, we normally do about 25% to 33% of our portfolio in a year. So, yes, this quarter was a higher level. A lot of that is driven by the industrials, so we are looking to do a refinancing on our portfolio. So of industrials that we own 50% with PSP and Crestpoint. So we have done appraisals for that refinancing and that was really a large part of industrial financing.

And then we had an appraisal done on the land bank that we had in Caledon as well. And the other appraisals are on some of our development on our office properties. We did nine appraisals on our office properties that we felt had intensification opportunities, and although, there weren’t much of an increase. There was something there.

Jenny Ma

Okay. Going back to the U.S. multi-family portfolio, given that part of it was driven by other M&A transactions in the market, does the 3.7 cap rate you guys carry now contain any sense of a portfolio premium, or is that just a weighted average of the individual properties?

Larry Froom

No. So, weighted average of the individual properties, but I would say, we’ve got gateway markets that obviously have a cap rate lower than sunbelt markets. And so on a total basis the land is around 3.7%. Interestingly, enough the transactions that I was referring to trade at cap rates significantly lower than 3.7%. But the vintage and quality assets were not comparable in one instance the assets were built in the 1980s and the other assets that are in the other case some of the assets were in the tertiary markets.

So, I think that personal note that I believe that we’re still very conservative given where our cap rates are inactivate the market is. I suspect that obviously with the increase in interest rates one is wondering ultimately where cap rates are. But frankly it’s the battle of the inflows of capital versus the increase in capital and the increase in interest rates, and as of right now the inflow of capital seems to be winning in all of our multifamily markets in the U.S.

Jenny Ma

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

Philippe Lapointe

Yes. So, a less impact there. I would humbly submit that one way of looking at Lantower is its spectacular growth engine for H&R REIT and for all of its unitholders. As it relates to ultimately what the ongoing strategy is what — we were built on being opportunistic and seeking arbitrage opportunities between our markets, between asset types that doesn’t go away. But frankly, as of right now we’re seeing, the delta between current existing products and our development yield is historically wider than it’s been in a very, very long-term. So, for as long as that’s true, I think, we pivoted significantly to development and create value that way. But again, there’s a decompression of cap rates and there’s opportunities to play one market versus another one asset type, but one asset count with another that we’ll definitely take advantage of that.

Tom Hofstedter

And right now we have on the books plans about five or six development projects in the U.S.

Philippe Lapointe

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

Jenny Ma

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

Tom Hofstedter

The market has shifted, but has shifted very recently. I would say, it shifted around all two weeks ago. I think the trades that happened prior to that would receive different pricing today. Our goal has been an organized sale process over a period of — a lengthy period of a few years. It’s not a fire sale. It’s not a sale that’s going to be — anything has to be sold.

We don’t have any short-term lease expiries. We have quality assets that can be sold. So we’re not going to sell just for the sake of selling. We do have $900 million of dry powder through debt and through cash to continue to go with our NCIB. We currently have seven service stations under contract for around $60 million. I expect that to go hard.

We have a couple of other LOIs that have been signed and are subject to APS [ph] and due diligence, I expect that to go hard ultimately as well. But again, it will be organized as the market continues to shift negatively then we will obviously not be achieving our goals of selling, but then again, our goal is to sell not a fire sale as I mentioned. And therefore, over the period of the next few years, we will be selling as the market is there to buy our assets. I expect with the volatility in interest rates that throughout the summer you’re going to see a very, very weak market in totality. I think multi-res fine industrial still hold up, but I think the other sectors are going to have be under pressure.

Philippe Lapointe

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

Tom Hofstedter

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

Jenny Ma

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

Tom Hofstedter

I have a number in my head, but I can’t spell out the numbers subject to the volatility in the market. And I just said two weeks ago, I think the market had a major shift where everything is frozen. I think there — it’s not only interest rates, it’s also the sentiment of going back to work. And I don’t think if you look at downtown Toronto or right now, I’m looking at the Investment Street, we’re not seeing any cars.

I don’t think over the period of the summer people are going to be able to go that quickly back to the office. That shift has to occur. So it’s hard for me to give you a number because there are so many variables out there that really will impact the success of trying to sell. I do think we will succeed to have a significant amount of sales towards — by the end of the year, but I can’t really put a number on it.

Jenny Ma

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

Philippe Lapointe

Thanks Jenny.

Operator

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

Sumayya Syed

Thanks, good morning and congrats Philippe on your new and expanded role.

Philippe Lapointe

Thank you, Sumayya.

Sumayya Syed

Just wondering if you could share some of your top priorities in this new role?

Philippe Lapointe

It’s an interesting question and I think there are many. But I think first and foremost, we definitely want to improve our communication to our unitholders and frankly to the market. I think we’ve done a good job. We have done a great job, but that’s one of the first things that I want to work on.

Frankly Sumayya, we’ve got a great story. In my mind we have inexplicable delta from our NAV or share price. And I look forward to sharing the story with as many people that are interested in hearing it. I mean because we’re obviously tremendously confident in this value proposition.

Sumayya Syed

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

Larry Froom

Well, that’s a good question Sumayya. It’s Larry. All right. I think what changed is, we really de-risked our business with selling The Bow and Primaris in Q4 2021 and still seeing the big discounts in our units, we feel like that’s a great opportunity now and the best optimal allocation that we can make is to find back our capital, while there’s discounts persist.

Tom Hofstedter

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

Larry Froom

And we see good growth going forward in the business.

Sumayya Syed

Right. Okay. And just the last question I had was on the retail and property growth that was fairly strong and helped by River Landing, but do you have a sense of what would be retail organic growth on a more normalized level?

Larry Froom

Yes. It was basically all retail. It was basically all River Landing. If you have that part of River Landing it will be pretty flat.

Sumayya Syed

Okay. Thank you.

Operator

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

Matt Kornack

Hi guys. I’ve been waiting for this quarter for a while and I’m glad that it finally happened. Good results here. On the capital recycling front, a lot of attention has been paid to the office and retail assets. But is there an opportunity also I guess to maybe churn out of some of your existing legacy multifamily assets and use the funds at a 3 cap to fund some of your mid-5 cap new developments in the similar markets.

Philippe Lapointe

I think we’ve got enough liquidity right now not to have to do that, but it’s an interesting question Matt. What we’re seeing currently is there’s some arbitrage opportunities between one sunbelt market versus another. And so, I think what is a more probable outcome is thus recognizing — I’m using fictitious numbers. But if I can buy it for, if I can sell for a sub-3 in Austin and buy for [Technical Difficulty] an accretive exchange, if you will. And that may be something that we’re looking to.

But frankly as of right now, my biggest I guess reluctant in doing this also — if you take a look at our NOI growth, we’re looking at double-digit NOI growth on existing [Technical Difficulty] it would be hard to sell a known commodity for an unknown asset.

Matt Kornack

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

Larry Froom

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

Tom Hofstedter

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

Larry Froom

And our development spend for 2022 is not that large. I mean in Philippe’s project from the Lantower we’ve got probably we’re budgeting for $75 million to be spent. We have a couple of other projects in Canada and that will probably be another call it $45 million. So, most like we’re looking at $110 million $120 million development spend this year.

Tom Hofstedter

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

Matt Kornack

Okay. So the bulk of that — those 2022 start of construction for the US multifamily side that will be mostly 2023 and into 2024, and you’ve got 2024 as kind of date of completion, but is it mid and staggered? How should we think about that from the development side?

Philippe Lapointe

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

Matt Kornack

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

Philippe Lapointe

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

Matt Kornack

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

Larry Froom

I think it’s from a later part of Q3, or early part of Q4 just going off memory.

Matt Kornack

And the last one…

Larry Froom

Its Q4.

Matt Kornack

Okay. Last one for me on CapEx, Larry. There’s an insurance proceeds in your redevelopment CapEx. Do you know what it would have been ex the insurance proceeds?

Larry Froom

We didn’t have much CapEx ex the insurance proceeds. It would have been — I’m going to look at it I’ll get back to you Matt. I don’t know the exact number I’ll get back to you, but I don’t think there’s anything major there.

Matt Kornack

Okay. And I guess that’s a broader theme I guess as well across this new entity is that CapEx this quarter has gone down substantially and you’d expect it to stay at these lower levels?

Larry Froom

Yes. I think there will be a bit of a CapEx increase. Our budget is a bit higher than the amount we spend for Q4, but not substantially maybe another $1 million or so a $0.25. And just so you can work out the number yourself if you have it in front of you met the insurance proceeds are US$12.5 million.

Matt Kornack

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

Operator

Our next question comes from Mario Saric from Scotiabank. Please go ahead. Your line is open.

Mario Saric

Hey good morning. Thanks for taking the question. I wanted to maybe just come back to the Lantower and the strong same-store NOI growth. Philippe, how sustainable do you see high single-digit, low double-digit same-store NOI growth within the portfolio over the next 12 to 18 months?

Philippe Lapointe

I would believe it to be very sustainable. One of the metrics I brought this up last time on our call, but one of the metrics that we — the rent-to-income ratio before this run-up in rents and afterwards and it’s barely moved, which indicates to us but ultimately there’s still a lot of growth but there’s more importantly we’re noticing is an unbelievable amount of income growth on behalf of our tenants and most of the general population.

So for as long as that’s true, I’m very bullish on our rents. And even if that were to abate somewhat, we still have a ton to catch up versus ultimately their capacity to pay on rents. Not to mention, by the way this is negative, not to mention the impact of how expensive single-family housing has become. And so as you take a look at your demand for your product, not only are they making more money but the opportunity to purchase a home and to ultimately move out of our apartments is diminishing.

Mario Saric

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

Philippe Lapointe

It’s a little under 21%. To give you a frame of reference, if you were to apply for a loan to a mortgage to buy house, I think the maximum ratio is about 33% at which point that’s the breaking point. And so not to imply we would ever get there, but there’s obviously a ton of runway ahead of us.

Mario Saric

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

Philippe Lapointe

That’s exactly correct. I would also add for additional context and clarity two things. Number one is at any point in time we have about 80 to 100 assets that we’re currently underwriting in the respective markets to get better sense of the market and get a pulse for it. As of right now the vast majority of opportunities that are actionable today with today’s interest rates are all at a cap rate of sub 3.5%. So is that subject to change at some point in the future? TBD. But as of right now that’s the reality, in which we live in.

The second and this is more anecdotal than anything else, but we are currently selling an asset. We’re under contract of selling assets in San Antonio. Due diligence was actually way late last night. And the – again, in today’s environment, with today’s cap rate that value is in excess of the value that we’re holding it on our books. So in excess of our IFRS value, and San Antonio arguably our slowest of all seven markets.

Mario Saric

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

Larry Froom

This is really a function of the great growth, we’ve seen this quarter and the confidence in our assets to kind of continue that growth definitely for next quarter and probably into the second half of this year. Our AFFO payout ratio, for the quarter was 51 — so that’s 50% — excuse me 50%, so that’s a very healthy payout ratio. And we wanted to return — we wanted to increase that. How do we look at the amount going forward and what ratio you should think of? We said more or less we wanted to be between, 45% and 55% payout ratio of FFO. And that’s where we are landing at and we’ll continue on that path going forward.

Tom Hofstedter

But again, we have the confidence. We cut pre-COVID, we are very conservative as you well know both on our appraised values and IFRS values and on our path. We have the confidence now post Primaris, there’s no more drag on us, no more drag on our stock to go and increase distributions going forward to the levels that Larry mentioned. We have no real lease expiries that are bothering us. We have no assets weak tenants at all. I know bad debt. So we’re in a position to just keep on putting coupons.

Our industrial rents have gone up dramatically, just from January till today we’ve done around 2,750,000-odd square feet of industrial renewals and around going from an average of $860 to $1157 it’s a 52.8% increase that represent $10 million to 100% level, $5 million at our level. And we expect the industrial and the residential to continue to clip along with the retail and office achieving its contractual rental escalations, which of course are more muted but overall gives us the confidence continue to increase distributions over time.

Mario Saric

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

Tom Hofstedter

Well, that’s a little bit on the difficult side because it depends if it’s at the United States or Canada. So where we have — our plan ultimately always the vision, selling some United States and some Canada. So the — we’re now balancing act of what — where that delta lies. In the United States, it will be 1031 and it’s not an issue in Canada. Of course, it’s an issue. So there’s not a lot of capacity to go ahead and continue distributions [ph]. And then again that’s again why we increased distribution now in anticipation of the fact that we will be selling assets and potentially have to do a special distribution. In light, that we were confident in the increase that we did provide to the unitholders name.

Mario Saric

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

Tom Hofstedter

I think as I mentioned before, it’s very new. This is all a couple of weeks old with the markets basically. I honestly, taken a strong pause for everything. You’ve seen the office completely dry up and the retail again dry up. I don’t think anybody is moving to cap rates, to sell or for sale. I think the markets — the capital markets are in a very strong position as far as their debt levels go, so there’s no urgency. So we’re going to have — it’s almost like a wait and see until people define their levels of where interest rates are going to lie. I don’t think, you’re going to see over the course of the summer a whole lot of transactions taking place in Canada. The United States will obviously, see some more.

So the answer to your question is, it’s too early. I don’t know. I don’t think anybody knows. I think what you’re going to see H&R be doing and many will gravitate to the same formula, is a lot of off-market deals rather than a widely marketed deals, to give the buyer the breathing room to take to go ahead and deal with it off market with the comfort that there’s not a lineup over there. And I think, you’ll see relationship deals. You all see structured deals. If you look at our Bow deal, that was a highly structured deal. I think you’ll see that going forward as well, as the market comes — as the market finds its place. Overall, though I’m pretty confident we’ll be able to achieve our objective to sell assets. But again, I think they’ll be off-market until the market finds its place.

Mario Saric

Got it. And just on the off-market we’ve seen some REITs, kind of, sell assets and kind of taking back units at IFRS valuations, that’s where the stocks are trading, like, do you see that as a potential possibility for you —

Tom Hofstedter

No. And I don’t think that’s a big driver. We talked about that a long, long time ago, as H&R traded a discount to NAV. We always suggested NAV for NAV would make sense. I think the deal that you’re referring to the chosen ally [ph] deal was structured. I think it was close enough that they could achieve their objectives from an OpEx perspective, but I don’t think it’s a driver going forward at all.

I think that the — it’s very hard to do NAV for NAV. There is no one who agrees on what — the proponents of the H&R’s of the world will not agree necessarily with the other side of what the NAV is. I don’t think you’re going to see that becoming a big part of our sales program or the market sales program for that matter.

Mario Saric

Okay. And my last question, again, this may be looking out a bit too much, but just structurally speaking, the portfolio as it sits today like the same property NOI growth has been really good this quarter, likely next quarter as well, given what Lantower is doing.

Structurally, what kind of same-store NOI growth do you think the company start up to deliver after we kind of get past the Jackson Park year-over-year and the Hess tower year-over-year, what kind of structural same property NOI growth do you think you can achieve?

Larry Froom

If you backed out Jackson Park and River Landing from our same asset same-property NOI, you’d be at 5.4% growth. So we think, with the Lantower Residential achieving single teen digit growth. That’s going to definitely be the driver.

The industrial, when you’re looking at great growth going forward as well, hesitant to put any numbers on it but, the 5% we achieved this quarter should be going forward for the next year or two.

And then office and retail will be smartly less — will be more muted. Well, just the contractual rental escalations coming in. Basically our office and retail portfolios are leased long term and the only growth coming in from them will be the rental escalations.

Tom Hofstedter

Right. And don’t forget that’s lumpy. Office and — retail and office are five-year — for the most part five-year as opposed to industrial, which is now the market is one year, annual 3% to even 4% of annual escalators.

The retail is the least — retail right across the board has always been the least. It’s more like contractual rental escalation. It’s not based upon a percentage or rather a $0.50 or $1 per square foot, for the larger box deals and the office is contractual at 10% every five.

So it’s lumpy. But again, as Larry mentioned, there’s no lease turnovers. There’s no weak tenants, so we expect to get that to achieve those type of growth that type of growth in the retail and office over time. And again the driver being at this point in time residential and industrial taking us forward.

Mario Saric

Great. Thanks, guys.

Operator

Our next question comes from Jimmy Shan from RBC Capital Markets. Please, go ahead. Your line is open.

Jimmy Shan

Thank you. I just wanted to follow up on the comment about the market taking a pause. So is that also happening in the hot sectors like industrial in Canada? And so, that’s one. And then in the multi-res sunbelt, it sounds like there is no pause there.

So I’m just kind of curious as to how you think people are just defying paying a 3.5% cap and when the cost of debt is ahead of that? And is it just the confidence in the underwriting continued high rent inflation and kind of, maybe your thoughts there would be great?

Tom Hofstedter

Well, the driver in industrial is very simple. You have a vacancy rate throughout North America, 2% across many markets. They’re expecting substantial rental escalations and that basically compensates for the rise in interest rates.

You are seeing a lot of demand for industrial, also because a lot of institutions such as, bunch of industrial [ph] companies have to grow their real estate allocation and they don’t want to grow it in other sectors necessarily, so they’re putting more capital into the industrial markets which they — right now for the foreseeable future nobody sees a pause.

And I would tend to say it’s the same thing with the residential. The residential is powered in the United States, not in Canada, but United States by that rental growth and that’s compensating for the rise in interest rates. The pause that you’re seeing in the market is really more in the office sector and the retail sectors.

Philippe Lapointe

Yes. And Jimmy, if I can add to that answer, what I would tell you as well, that obviously we’d be speculating. But from what we’re hearing is, folks are frankly underwriting considerable NOI growth. And so while they’re in a negative leverage situation day one, obviously, the pro forma cause for that lower, or to be the case within seven to 18 months. And I think it’s more bet on the fundamentals. And frankly, I share in that optimism. However, frankly, when retiring a negative leverage. I hate to borrow this expression, but it’s a pitch that we’re frankly not going to swing it.

Tom Hofstedter

You also have to remember that when you rise interest rates, the lending world changes and the loan to values change. And right now, when you’re underwriting — in the United States more so the Canada again, when you’re underwriting deals on the private side, you’re layering first mortgage financing with mezz financing, the amount of equity required be greater, that will be more, because the demand is shifting the amount of who the buyers are, but the demand is so strong that I think there’s still — the values will be maintaining.

You’ll just see a whole lot of private money off the table as long as their funding through debt decrease and they have to put in more equity. But again, this market is so strong, that it will just be a shift in players, but different players same pricing.

Jimmy Shan

Okay. Again, thanks for that. So — and then on the fair value gain with respect to the Caledon Industrial Land is that — maybe not too familiar, I know that you got a couple of assets there. Can you provide some color there? Is it just excess that land that’s being revalued up, or is it actual development projects themselves being valued at higher. Can you maybe provide some color there?

Tom Hofstedter

Yeah. For Industrial land and specifically in Canada the Toronto and Vancouver market even Montreal for that matter have seen larger growth in a shorter period of time than any other after class by far. You’ve seen for example residential 300,000 square foot from billable square foot in Toronto by substantially higher in Vancouver. That’s been a gradual increase over a large period of time.

The industrial market has gone from $1.5 million to $3.5 million an acre really over a period of very few months. We bought Mississauga Road, and we — I had $1.25 million an acre we bought to Slate Road. So they drive it, we paid $1.5 million an acre and those properties are today north of $4 million an acre.

A lot of the increase in the Caledon market happened over the past six months. And it’s real. It’s because the users that are there they’re taking the space. In our particular case it was also the release of the land. We unlike many of the others our land was actually zoned for industrial. A lot of the lands that you’re seeing were subject to the release of lands into zoning that achieved those types of goals.

We actually were zoned when we were subject to the highway extension which is now at the process of probably being finished now this year as opposed to six months ago I could not have told you that. And as such I expect to achieve somewhere between $3.25, to $3.5 million, per acre. And I expect that the values of Slate, Mississauga Road are going to be evaluated close to $4 million an acre.

Just to give you a heads up on what that means in English, it means in English, that you’re taking our Caledon lands at $700,000 to $800,000 an acre, you’re developing to a 7% cap. And by the time you factor in — the current market value industrial buildings are being built to a 4.25 cap today, which still achieve some appreciation versus the 3.5% to 3.75% value if the upon built. But you can see the profit margin has been squeezed very, very dramatically.

It still supports the $3.5 million to $4 million an acre. And I think what you’re going to find in industrial is, because of this escalating land values rental rate has to be pushed forward. Also you had an increase in development charges that have almost doubled. So you’re going to see industrial lands — sorry industrial rents continue to escalate in cities like Toronto and Vancouver just because the land is so expensive and the development costs are that expensive to create a yield of some profit to the developers.

Jimmy Shan

Yeah. Great. Thanks for that color. Sorry last one. Last quarter there was some comment about Jackson Park having some concession costs and showing up in Q2 and Q3. I just — is that still the case? And I couldn’t remember what the impact would be in Q2 and Q3 for that?

Philippe Lapointe

Yeah. So there’s definitely going to be concession burn off. I would say that, we’re still well within — I think we’re in a margin of 1% off of our current budget. And so our projections are fairly accurate. But I think that by the end of the third quarter we should see a significant burn as evidenced by the fact that we’re 99% leased.

Given the high occupancy rate and also the renewal rate, I would anticipate that that number come down quite significantly in Q4 and 2023. Our projection …

Jimmy Shan

Got it.

Philippe Lapointe

… just to be additionally helpful to Jimmy, our early estimates are that the concession costs are going to be lowered by in excess of 50% in 2023.

Jimmy Shan

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

Larry Froom

No we are expecting the number to come down a bit in Q2 and Q3, just for the amount of turn we have at Jackson Park most of that turn comes in the summer months. So there will be commissions that we have to pay for those leases renewal — those leases renewing. And in addition to the burn-off of the concessions that we gave and the original lease subdue in COVID. So we are expecting a decrease in Q2 and Q3 of Q1’s numbers. And — but just to give us some color, we’re hoping the River Landing commercial side and the retail and the office side we kind of offset the Jackson Park decrease.

Jimmy Shan

Okay. Got it. Thank you.

Operator

Our last question comes from Sam Damiani from [Technical Difficulty]?

Sam Damiani

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

Philippe Lapointe

Yeah. So what we are looking at a development yield is frankly in line with the conservative underwriting. We underwrote these rents. We published the deals, when I think the lumber we got $1200 a linear foot. And I think now I haven’t checked the figures, but they’re sub-800. And so we’ve got a significant amount of cushion in the denominator of the development yield.

Not to mention that the numerator seems to be increasing obviously every week every month as evidenced by the growth in NOI and revenue that we’ve been disclosing. However, we are using a very, very conservative growth factor for our trend deals. And so in essence what I’m trying to say? I’m saying our numerator is conservative, our denominator has a cushion. And so obviously, I don’t want to jinx us by saying this but we’ve got the capacity to take on some supply chain disruptions and increase in labor cost and whatnot but even an increase in cost of capital and still have a significant margin safety for those yields.

Sam Damiani

And who would be the average rent across those, I guess five or six starts that you’re planning this year what would be the typical rent for suite?

Philippe Lapointe

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

Sam Damiani

Sure. Okay. Thanks. And then last question on this is how does that $280,000 per suite compared to the current IFRS fair value for your Lantower portfolio, excluding Jackson Park?

Philippe Lapointe

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

Tom Hofstedter

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

Sam Damiani

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

Larry Froom

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

Sam Damiani

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

Larry Froom

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

Sam Damiani

I’m sorry. And would it all be the GTA as well?

Larry Froom

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

Sam Damiani

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

Larry Froom

It’s — the aggressive 220 [indiscernible].

Tom Hofstedter

Yeah, yeah. It’s a Greater Montreal. Very much Greater Montreal.

Sam Damiani

Great. Thank you. I’ll turn it back.

Operator

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

Tom Hofstedter

Okay. Thank you everybody, and have a great summer I guess. Have a nice weekend. Bye.

Operator

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