H&R Real Estate Investment Trust (HRUN) Earnings Call Transcript & Summary

Good morning, and welcome to H&R Real Estate Investment Trust's 2020 First Quarter Earnings Conference Call. Before beginning the call, H&R would like to remind listeners that certain statements, which may include predictions, conclusions, forecasts or projections in the remarks that follow may contain forward-looking information, which reflects the current expectations of management regarding future events and performance and speak only 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. And 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 the statements in the forward-looking information and the material factors or assumptions that may have been applied in making such statements, together with details on H&R's use of non-GAAP financial measures are described in more detail in H&R's public filings, which can be found on our website and on www.sedar.com. I would now like to introduce Mr. Tom Hofstedter, Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstedter.

Good morning, and thank you for joining us today. I'm Tom Hofstedter, CEO of the REIT, and I'd like to welcome everyone to the call. Joining me today are Larry Froom, our CFO; Pat Sullivan, COO of Primaris; and Philippe Lapointe, COO of Lantower. Let me address the current environment, which includes a great deal of economic uncertainty, significant changes in our day-to-day lives and unfortunately, significant pain and suffering for those directly and indirectly impacted by COVID-19. Our first priority is the safety and well-being of our employees, tenants and visitors to our properties. We are following all the recommended behaviors, including social distancing, practicing remote working and frequent cleaning of space, among others. Our team has been working closely with our tenants to accommodate optimal financial and operating solutions to support the success of our properties. We're looking forward to a more normal operating environment in near future and are pleased to report that we have adapted our working arrangements to be operating at as it is close to normal as manner as possible, and even begun to reopen some of our properties that have been ordered closed. Next up, Larry will summarize our quarterly and annual financial results, Pat will then provide an update on our retail portfolio, followed by Philippe, who will update us on our multi-residential portfolio. And finally, I'll conclude with some closing remarks. Over to you, Larry.

Thank you, Tom. Good morning, everyone, and thank you for joining us today. Starting with funds from operations, FFO, Q1 2020 basic and diluted FFO was $0.45 per unit compared to $0.45 per unit in Q1 2019. Included in net income and FFO were lease termination fees of $200,000 in Q1 2020 compared to $6 million in Q1 2019. For the quarter, normalized FFO was $0.46 per unit compared to $0.44 per unit in Q1 2019. We view this as quite an achievement, given that we have completed approximately $1 billion of asset sales over the past 15 months compared to approximately $206 million of property acquisitions during the same period. Our Office portfolio occupancy at March 31 was 99.3% and committed occupancy was 99.8%. Excluding the lease termination fees mentioned previously, the same-asset property operating income from the Office portfolio increased by 1.2% over Q1 2019. Our industrial portfolio for occupancy at March 31 was 98.9%. The same-asset property operating income from our industrial portfolio increased by 2.8% over Q1 2019. Construction is continuing in Caledon, Ontario, on the 343,000 square foot industrial building we have leased to Deutsche Post for 10 years. Occupancy is expected to commence in Q4 2020. And as a result of COVID-19, we have temporarily suspended all other industrial construction. Same-asset property operating income from our retail portfolio decreased by 2.1% as compared to Q1 2019, mainly as a result of Q1 2019 benefiting from certain 2018 final tenant billings. Same-asset property operating income from our residential portfolio in U.S. dollars increased by 33% over Q1 2019 due to properties, including Jackson Park, that were a lease up last year. Excluding these properties in lease up, same-asset property operating income increased by 8%. Included in our net loss for Q1 is a fair value adjustment on real estate assets of $1.3 billion. This is by far the largest fair value adjustment to date. These adjustments are a result of our regularly quarterly IFRS value process and include the following 2 trends resulting from COVID: one, an acceleration of challenging conditions in the retail landscape, impacting the market pricing of retail properties; and two, energy sector challenges that have impacted the credit quality of many companies operating in this industry and the related impacts on property market fundamentals in markets significantly influenced by energy and industry employment and profitability. The IFRS fair value of H&R's Retail portfolio has been reduced by approximately $660 million. With the changes relating primarily to inputs into the forecasting of cash flows, including normalized vacancy rates, market rental rates, tenant retention rates and releasing assumptions. The revised inputs into discounted cash flow models have resulted in lower fair value market values and higher implied overall cap rates, in particular, for our enclosed mall properties. The IFRS value -- fair value of H&R's Office portfolio with significant energy sector tenancies has been reduced by approximately $680 million. 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 the discount rates. While there's been very few recent transactions for comparable properties, our valuation team used prudent assumptions reflecting pricing signals observed in oil prices and the energy sector corporate credit markets. These fair value adjustments have hit our portfolio in Alberta the hardest, as shown by the decline in fair value in Alberta of approximately $900 million from $3.2 billion at year-end to $2.3 billion at March 31, 2020. The fair value adjustment was the primary reason for our net asset value decreasing from $25.79 per unit at year-end to $22.26 per unit as at March 31, 2020. Management and the Board strongly supported taking a more proactive approach to updating fair market values to ensure prudent financial reporting practices. Certain retail industries trends recover and our energy industry conditions improve, we will have the opportunity to update fair values. As at March 31, 2020, debt to total assets was 47.9% compared to 44.4% at December 31, 2019. The increase in debt to total asset is primarily due to the fair value adjustments discussed previously. In February 2020, H&R repaid all of its Series P senior debentures upon maturity for a cash payment of USD 125 million. In March 2020, H&R repaid all of its senior Series F debentures upon maturity for a cash payment of $175 million. There are no further debenture maturities this year or in 2021. Our next debenture maturity will be in May 2022. And as at March 31, 2020, H&R only had $116.3 million of debt maturing during the remainder of 2020, consisting of $64.8 million in mortgages and the balance from a secured line of credit from a Canadian bank. Subsequent to March 31, 2020, we bolstered our liquidity by securing a $425 million line of credit from a syndicate of 4 Canadian banks and secured a $100 million mortgage secured by previously unencumbered property. This new credit facility and mortgage will arrange following the onset of COVID and demonstrate H&R's strong access to capital. Rent collection has been a key focus during the pandemic and one, we believe we have performed well, while also accommodating the needs of our tenant partners. To date, our rent collections for April amounted to 85%, and rent collections for May amounts to 80%, currently. I will now turn the call over to Pat to give an update on our Retail division.

Thank you, Larry, and good morning. During Q1 2020, Retail showed a decline in NOI of 2.1% as compared to Q1 2019. U.S. retail showed a 5.4% decline during the quarter, primarily due to Q1 2019 benefiting from certain 2018 final billings. While enclosed malls showed a 1.2% decline attributed to a large tax refund received in Q1 2019 and timing associated with capitalized costs. Primaris reported to have a solid year of growth in 2020 due to a number of development projects coming online. In Q1 2020, Best Buy opened a new store at Sunridge Mall, Mark's opened from 19,000 square feet at McAllister Place. And over the next 6 months, approximately 140,000 square feet of large-format national tenants is scheduled to open from the redevelopment by Sears boxes. Our redevelopment work and remerchandising efforts over the past few years were beginning to be reflected positively in our property sales performance. For the 12 months ending February, same-store sales were $549 per square foot, an increase from the $545 per square foot for the period ending December 2019. For the month of February, same-store sales showed an increase of 5.4%, with the notable increases being realized at properties in BC, Alberta and New Brunswick. Since the declaration of the pandemic, we have undertaken significant cost-cutting initiatives. Mall common area expenses were reduced by almost 40%, and capital expenses were slashed by 35%, with only necessary capital spending being completed this year. We expect to maintain cost control protocols in place throughout the remainder of the year and plan to apply cost savings towards rental arrears and outstanding deferred rents. Collections for rent in our enclosed malls were generally higher than that stated by other enclosed mall owners due to the fact that our malls typically have a higher weighting towards essential services and a lower fashion component. We recognize the challenging times faced by a retailer and have worked diligently to communicate, dealt directly with as many as possible. We have been pleased with the contributions made by small and medium-sized business within our portfolio during the month of April, but this has been somewhat diminished in May as many wait for clarification on the government rent assistance plan. Within the Primaris portfolio, we believe there may be a significant number of tenants that qualify for the government's small business rental assistance program. However, until such time that the program details are fully defined, we cannot quantify the weighting in our portfolio. We recognize that each retailer has a unique financial situation and ability to endure this chaotic period, and we are working with each accordingly. Moving forward, our rental collections to date will improve as we negotiate payment terms with tenants and we expect that in addition to rental deferrals, there will also be abatement, which is a requirement of the government program for small business. We fully anticipate that there will be retail failures as a result of this pandemic and there are significant concerns by retailers regarding sales volumes returning over the balance of the year, especially while government protocols remain in place. In this regard, we anticipate many retailers will need rental assistance following reopening but until retailers are open and operating we are uncertain as to what will be required, if anything. Over the past few weeks, several of our properties have reopened for business specifically both our malls in Winnipeg, which opened May 4 and both properties in New Brunswick, which opened May 13. Malls in Winnipeg opened initially with 30% of stores operating and since that has become a route about [Technical Difficulty] while on New Brunswick, 35% of stores opened this week. Our malls in Alberta opened yesterday. However, Calgary malls opened with restrictions, specifically restaurants and hair salons could not open until May 25. Our mall in BC opens May 19. We have no definitive time line for our 5 remaining malls in Ontario and Quebec to reopen. We have been working in accordance with public health authorities and have instituted a number of protocols included elevated cleaning, signage promoted social distancing, limiting the number of entrances open, limited hours and enhanced safety procedures in loading and garbage area. In addition to our efforts, tenants have instituted their own measures. In the short term, we expect these measures will negatively impact sales, specifically for service providers such as hair salons that are not able to fully utilize their space due to social distancing requirements. Nevertheless, early feedback from tenants that have opened are positive, with many reporting comparable sales higher than the period last year. In closing, retailers faced significant challenges recently with this current crisis being the most difficult period retailers faced in our generation. The significant work we have undertaken to redevelop, remerchandise and reposition our market-dominant assets will be of tremendous benefit when this crisis abates. This crisis will likely accelerate the trend towards store rationalization due to e-commerce. However, retailers continue to communicate the importance of bricks-and-mortar stores for their success. We are confident that our assets were typically the only major enclosed mall in the respective regions are well positioned for the long term. Thank you, and I'll now turn it over to Philippe.

Good morning, everyone. We've got some notable updates for this quarter related to the last few tumultuous months. But before I begin, I would like to express my gratitude to our Lantower teams, who, through all of this turbulence, have been able to secure above-industry average rental collections, and mitigates some of the negative fallout from COVID-19. And so let us begin with collections. Unsurprisingly, COVID-19 has and continues to have major implications to our business, especially in how we operate our properties. Thankfully, Lantower executed several early strategic initiatives which so far has shielded our portfolio as much as possible from the impending economic shock felt throughout our U.S. markets. Collections were top of mind as we were approaching the inevitable layoffs. And so we enacted a few strategies that supported our collections percentage and just as importantly, assisted our residents through this unpredictable period. I am incredibly proud of our teams as those proactive strategies have been successful to date, as evidenced by a receipt of approximately 97% of expected collections for April, and over 93% as of yesterday for the month of May. We expect May collections to mirror April by receiving nearly all of our expected rents as we look forward to our summer high leasing season. For comparison, the National Multi Housing Council's rent payment tracker, which is currently tracking 11.4 million apartment units across the U.S., recently released that 80.2% of residents had paid a portion of their main rent by May 6. Lantower had collected approximately 90% of its rent by the same day, illustrating our success in securing rent payments and underscoring the quality of our renter base. In addition to the collection, incentives that we've implemented and in anticipation of the pressed operating performance in the near term, we've implemented numerous cost-cutting measures at the property and corporate level. These measures include renegotiating nearly every service and maintenance contract, eliminating non-mission critical expenses, pausing all elective capital expenditures, internalizing marketing responsibilities and pivoting to online and digital leasing. On the financial front, our same-asset quarter-end operating income increased in U.S. dollars from $16,514,000 in the first quarter of 2019 to $21,964,000 in the first quarter of 2020. This equates to same-asset quarter-over-quarter operating income growth of 33%, which is artificially high due to the inclusion of Jackson Park's lease-up statistics. When excluding lease ups, our same asset quarter-over-quarter operating income growth equates to 8%. This 8% quarter-over-quarter operating income growth is primarily due to rental growth and the stabilization of a few of our assets in our portfolio. While much has changed over the last few months, some recurring themes have surfaced within our industry, namely, we've realized the effectiveness of virtual and self-guided leasing. In large part, thanks to our marketing department, Lantower was one of the first operators to market this leasing option right before COVID-19 substantially impaired our ability to use lease units in person. And we are delighted to announce that have received resounding success. In light of this, we're looking to take advantage of this paradigm shift in how leasing is executed by utilizing technology to decrease our leasing cost and increase our leasing capacity. It is our belief that what started out as a tactic stemming out of necessity and safety has identified the obvious next-generation of efficient apartment leasing. As such, we will be pursuing the testing and implementation of certain specific technology enhancements to a few Lantower properties to better gauge their ROI. As evidenced by early efforts and in confirming with some of our U.S. publicly traded multifamily peers, tech packages have proven to be a major success not only from a maintenance and management perspective, but also from a resident satisfaction and leasing desirability point of view. We want to be intentional with the potential capital investment, and our goal is to bring our portfolio to the cutting-edge of property tech, thereby increasing our competitive note within the markets. We look forward to sharing more updates about these initiatives in the coming market in the coming quarters. On the development front, The Pearl in Austin, Texas is on track to commence pre-leasing in August and deliver later this year; Nightingale in Seattle, Washington is estimated to commence pre-leasing by the end of this year and will deliver in the first quarter of 2021; Phase 1 of our Hercules development in San Francisco has started virtual leasing, and Phase II has started construction in the first quarter of 2019 and is expected to be delivering in the second quarter of 2021. Lastly, Shoreline Gateway in Long Beach, California is on schedule and expected to be delivered in the summer of 2021. The last few years, we've been approached by strategic investors, mostly consisting of pension funds, gauging our interest in leveraging our Lantower platform and expertise and to co-investing in acquiring more multifamily properties and multifamily deck. While we do not believe the timing was right for a variety of reasons, we're now closely reviewing those opportunities with the ultimate goal of creating an asset management platform within Lantower, whereby our strategic investors would co-invest significant capital alongside our seed capital. As with most recessions or loss in economic activity, value-creating opportunities eventually emerge. And this period is no different then while it is very early, we have several very interesting opportunities in our pipeline that mirrors for further review with our partners. As always, we remain very judicious with our investment selection criteria, and we'll be closely analyzing our markets to determine which sectors within our asset class yield the most accretive risk-adjusted investment returns. And with that, I will pass along the conversation back to Tom.

Thanks, Philippe. Before we begin our Q&A, I'd like to highlight a few items. Firstly, our fair value adjustments. As you all know, the IFRS fair value process provides a fair bit of latitude. Our approach has always been that if for IFRS fair value to be meaningful, it needs to be responsive to changing market dynamics and as objective as possible. As Larry mentioned, this quarter included a significant reduction in fair value, reflecting both retail industry headwinds and energy sector challenges. Some may argue that there haven't been enough transaction to convert any change in values. Our valuation team have concluded that while this may be true, both the retail and energy sectors have been struggling prior to the pandemic, and it is reasonable to expect those trends, at the very least, to continue. But in reality, they have accelerated during the pandemic as would be expected. We feel that writing down valuations to reflect current market conditions is not only appropriate, but is also required in keeping with conservative best practices disclosure policy. Let me remind everyone that fair values are reviewed every quarter and should market conditions change, we should expect a corresponding change in fair values. The fair value process is actually relatively straightforward. Ask yourself if you think market values have changed, and the answer is yes, you should expect the fair values to change to reflect that, end of story. Two, second, our change in our distributions. The choices to reduce our distributions was not an easy one. We have had many, many discussions over the past several weeks on the topic. We know that there will be many opinions and questions about this decision. Let me explain this decision as simply as possible. We've been working hard to evolve H&R over the past few years, and we have looked at potential transactions and potential courses of action that led to conservation back to the REIT's -- conversations back to the REIT's distribution. Our payout ratio has been on the high end of the range and that has often complicated these decisions. Management and the Board have been balancing the objectives of: one, reducing the payout ratio; with two, recycling capital into higher growth assets and other short term that move options that improve the quality of the REIT. With the onset of the COVID-19 pandemic, it became clear that there would be both a short-term impact on the income of the REIT's retail portfolio and also a need for more capital to support expected tenant turnover over the next few years. Once you reach the decision to reduce our distribution, we consider all eventualities, look at required distributions for tax purposes and wanted to make sure that our new distribution was set at a level that is sustainable in all the scenarios we considered. Again, this was not an easy decision. But after much deliberation discussion, we are very comfortable that this action is in the best long-term interest of H&R unit holders to help support and grow the business. I'm sure that there are a lot of questions, so I'll wrap it up in a second. The COVID-19 pandemic has had a dramatic impact on virtually every aspect to our daily lives. It has created many challenges and a lot of uncertainty. Tough times lead to tough decisions, and we are confident that we've made good decisions that will benefit our unit holders. We have a lot of great things going on in the portfolio, and we're excited about the future. And with that, I'll turn the line over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Sam Damiani of TD Securities.

Just wanted to start off with the IFRS value reduction. I don't believe there is, but could you just clarify if there were any external appraisals or advice received to resolve in the $1.3 billion reduction?

Sam, it's Larry. No, there were no external appraisals in the assets that we wrote down.

And what about just sort of advice, externally?

Sorry, I didn't hear that.

Did you receive any professional advice of any kind, I guess, leading you to these numbers?

Sam, who would you recommend we ask? You want to talk to an appraiser, we basically -- we talked to our auditors to get their support, obviously. And we spoke to the industry, but we're in the industry. Who do you actually expect us to ask? Let us face I'm giving appraisal on Calgary office market, there hasn't been a trade, as you mentioned before. So the reality is, if you look at retail across the board, not only -- not with Primaris as an example, but even all retail, no one is going to buy the sector right now until this ends, the pandemic. So you've got to make a decision. What's a relatively fair value for that asset considering that you gave yourself an appropriate length of time to market that asset? So let's assume that's 6 months. But we don't know where the 6 months is going to go during the epidemic or will be post pandemic what the story is. So you all have to write-down your assets to be honest with yourself. And in fact, there has been a decrease. But the question is, what is that number? So it's a tough decision to make. There's been discussion with all within the industry as much as we possibly can, it's very hard to arrive at a consensus.

All right. So your DCFs have changed to reflect a higher discount rate, but also lower cash flows. Due to those lower cash...

No, Sam, that's not Office. Office does not reflect a change in cash flows, it reflects a change in the discount -- to the discount rate. In other words, in retail, the difference is, you can look into -- little bit in the back -- going backwards into your previous run rate and use a cap rate on that on IRR discount or whatever you want to do. We actually look forward in the retail to look at pre-pandemic and hopefully post-pandemic to realize that the vacancy rates will probably increase somewhat, assuming we're at 95%, they will probably going out to 91%. You can expect that to be probably in a lot of sectors. And the rental rates will probably have gone down as well. If you look at residential building, for example, if you take the same cap rate, which is probably -- the wisdom that we're hearing in the marketplace is that cap rates will be maintained, but the vacancy allowance will go up. If the vacancy allowance goes up from 95% to 90%, effectively taking down your IFRS value by 10%. Now you haven't changed your cap rate, but you have changed your NOI. Retail industry, not the office industry, in our cases, we have more or less long-term leases. The Bow has 18 years, TransCanada has 10 years and Hess has 7 years. So there's not trim over there. It's more or less reflective of the discount rate for the residual, the IRR residual.

Understood. In your comments about the distribution, you talked about some CapEx required for tenant turnover in the mall portfolio, clearly, are those CapEx numbers reflected in the Q1 IFRS value reduction?

Yes.

They are. Okay.

As part of the reason, the distribution. The distribution is not only a question of what is the immediate capital needs because, as Larry has pointed out, and you all know, we have a substantial lines available for that. Just going forward, nobody has a clue how long this is going to last, and there will be a lot of opportunities. Besides the fact that you're going need it for expenses. There's office and office is reasons as well. So we'll be very cautious with our distributions and with our appraisals. But again, let me remind you that we can always increase those things going forward. We don't have to decrease them again. So we've gone to the levels where we think we're safe. We don't have a discussion with you every single quarter as to what's going on in valuations for the Calgary office or let's talk about how is the situation in the retail environment even post-pandemic. We're really down to a level that we're pretty comfortable. We've taken a hit. And from there on in, we have substantial -- we hit the bottom on those assets, and we have substantial growth in all the other sectors, the industrial, residential and the office sectors that basically says, so this is the bottom guys. From here on, it should be up. Remember that we went from a -- our IFRS valued down to after writing down $1.3 billion, the assets went down to $22.26 which is still a very, very comfortable high valuation also to where we're trading right now.

All right. Just a quick second question is on The Bow. What is your intention with respect to the maturity of the bonds over the next 3 years?

So we have a few alternatives, which we're currently working on. We can -- we're talking about extending those bonds. We may be paying off those bonds. We have time on those bonds. And quite frankly, we don't pressure on those bonds because, as you well know, this is executed by the asset alone. So we have another, what, 13 months till expiry of the first bond and there's 3 tranches to those bonds. So we're going to watch the situation out there with the oil and gas and watch our vendors' creditworthiness, and we'll -- we have time and opportunities to deal with it over the next 13 months.

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

Just to continue on the topic of the IFRS fair value change within the office sector. Can you comment on how much of that was related to The Bow specifically? And I'm also wondering if the discussions that you've had a few months ago with regards to the sale informed any of the valuation changes you made to it?

So -- and an actual fact, it didn't because we were fair along the advancement with the sale process when the COVID hit and that shut it down. And then second, I think you had negative $40 on oil, which basically puts a nail in the coffin on those discussions. So what it reflected really of the fact that we were for sale, have had some solid interest and then the market fell off. It's more or less reflective of where we are right now. And where we are right now is questionable. Now oil and gas, it's very interesting to see how it's gone from a minus $40 just a few days ago to what is that now? What it is, let's say, $27 or $28? So that's a vast improvement. You still have around $35, I believe, is the number that is using as a breakeven, although they are hedged for the balance of the year. We can't really discuss individual asset appraisals. Obviously, if we did that, that would be really distorting the process of valuations for the analysts that they'd take one asset and say, this is the value of that asset, and say I don't have enough information to evaluate the rest of the portfolio. So it's not really the proper way to go. Either you have all the information which management has and then you can make the assessment on IFRS valuations with all the tools and with all the knowledge, or we have to give you batches and what actually, we've intended to do.

Okay. So turning to retail. I mean I guess I'll need all the details with the assumption, but how does the occupancy rate is expected -- the expected market rents. How does that fit relative to where the portfolio is at today? Is it still above those metrics or at or below just want to get a sense as to where that range?

Sorry. I don't really understand the question. You're asking how the IFRS value for Primaris was -- for the enclosed malls was achieved. Was it right then?

No, no, I want to know the assumptions that went into the fair value change and how that -- how those compare to where the metrics are today as far as occupancy and rents?

There's nothing -- look, the -- occupancy there is 30%. And quite frankly, that's good relative to the enclosed malls, which, as you all know, ranges between 10% and 20%. There's no bearing to that -- on that at all. I don't think anybody is going to sell or buy an asset, predicating on no NOI, very little NOI.

There are occupancy, occupancy and rents. Like are you expecting -- are you still expecting rents to decline more than where the portfolio is at and same with occupancy? Or is it roughly about the same?

Well, take restaurants as an example. A restaurant was paying you a block ratio of 10%. It's going to open up slowly. It's going to open up with physical distancing. And as such, this business is going to be hammered. So if it's a mom and pop, you're going to have to go ahead and defer it -- it's not going to be deferred any -- unless in the future, it's going to be a reduction in rent going forward. You're always going to have on niche rollovers the next few years. I think Yorkdale is a great example. I doubt very highly a lot of tenants are not going to pay $300 a square foot. The block ratios can't be supported. And they also have to go ahead and to retool their balance sheet to accommodate repurchase inventory with a lot of the existing inventories being obsolete. So I do believe that rental rates will be coming down. I believe our rental rates in Primaris will be coming down less, so than the high-end malls, quite frankly. Because we're the -- as Pat has mentioned, we're the only one of the primary mall into marketplace. Our block ratios never were high. We're always supportable. So to answer your question specifically, the rental rates, the NOI will come down, has come down, and it was only expected to come down somewhat and the vacancy rates will go up. Those tinkering with those numbers, with those vacancy rates going up and rental rates come down was the exact result of the decrease in the IFRS values for Primaris.

Okay. And then with regards to the $1.7 million of costs related to the failed acquisition, can you give us any color on that? Was that related to Lantower or another asset class?

So when I say that Philippe is going to answer the question, I'll give you a hint. Philippe?

Yes. So I can handle that. So depending on what day we use for COVID actually materializing. And anyway, we had an acquisition that we are in a middle of due diligence, we had a nonrefundable deposit. It was a $66 million deal, a lease-up in Orlando, beautiful asset. We're incredibly excited to have it. But quite honestly, given what we are seeing coming down the pike as it relates to COVID, but also its impact on #1, lease-ups in terms of traffic counts, but more importantly, what it did to the Orlando economy, we thought it would be much more judicious to simply bail. We have an excellent relationship with the seller, which is Carlyle. We've done 3 or 4 acquisitions with them. I have no reason to believe that we would not be able to resuscitate the deal at some point in the future, albeit at a much lower basis. We just thought it would be more appropriate, in terms of just stewards of unit holders' capital, to essentially bail out of that transaction. And if the next -- if the 7 weeks past that were any indication, we are convinced we did the right thing.

Okay. Is there anything...

Another reflection on the overall residential value, the values have decreased in the overall Lantower portfolio. That's a reflection of the fact that Disney closed down, and this is a Kissimmee asset, which is -- which services that market. So the immediate impact is not a cap rate discussion, more or less it's loosed up in a very tight environment where there's no visibility as to when the tourist attractions in Orlando are going to open. The lease-up period would be too long, and that's why the reason we dropped it. I don't think you should extrapolate from Orlando that Dallas is the same -- in the same category as Orlando.

I would agree. And Jenny, what I would add to that is, in light of our collections in April and May, generally speaking, all of our properties have done very, very well, much better than our industry average, but there's been no weakness as of right now in the Orlando market from a collections perspective for our stabilized deals. We just weren't enamored with the idea of going into a lease-up at that point in time.

Okay. Is there anything in the Lantower pipeline on the acquisition or disposition side at this point?

No.

Okay. And then my final question is with regards to the new financing activity. I'm not sure if I missed it, but was there a rate provided on the $100 million mortgage and the $425 million credit facility?

You didn't miss it. We didn't provide it, but I don't think it's material, so I can give it to you. It was 3.8% on the mortgage and the credit facility is just policy because it's involved our bankers, we do not give the rates on that.

It's -- the bank has really syndicated the term of the financing work for the mortgage was 10 years.

Our next question comes from the line of Neil Downey of RBC Capital Markets.

Tom, you went very much through the decision process in terms of why you decided to cut the distribution in half. Can you maybe add some color as to how you arrived at what the magnitude would be, down 50% versus some other percentage?

Yes, it's not as sophisticated as you would hope. The reality is, we toyed between a number of 40% and 50%. And since we don't know where the pandemic is going, quite frankly, but there will be a recurrence. And we don't -- definitely know we don't want to have to come back again. It's no mathematical formula I can give you to answer that question. It was a comfort zone saying, we're trading where we're trading at and our IFRS value is $22.26. The market was -- we were mid-double digits, 15%, 16% returns. Obviously, the market perceived that there's going to be distributions cut. So we took -- we basically went to the high end, which was again, 40% to 50% and called a tax consideration, why 50% is the magic number. Because 50% is the magic number. That put that bar up -- the high end bar at because the tax consideration is at 50%. And we just let the go ahead and cut it down. Now you can always increase it, but you can't ever decrease it again. We don't know where the world is going. So again not a sign -- by the range, and we're just at the upper end of the range.

Okay. Super. To circle back a little bit on the Office fair value marks. And I fully appreciate that you shouldn't be giving us values for individual properties. But maybe just flushing out sort of directionally or which assets were affected. It sounds fairly transparent here that The Bow was part of that mark, but...

Actually, it's oil and gas, right? So it's Hess.

Yes. What about in Houston, Hess?

Hess, TransCanada and The Bow. And you know the level of nonrecourse debt we have on The Bow. And the TransCanada has 10 years left of term. And Hess has 6-plus years of term. You know that in every oil and gas marketplace, I'm just giving you a formula so you'll figure it out, probably you did already. In the oil and gas marketplace, they're, by definition, you're above market because the net effectives are always going to be lower than the face. And the face is always going to be, in the case of a Calgary that make $18 or $20 net effective, but that's -- sorry, face, so that's not net effective. So we took our -- your starting point is going to be $760 million expiring in June 2021 on The Bow side. And then you can add something to that to reflect some value, the cash flow over and above the debt, the nonrecourse debt and the rest is allocated between -- more to Hess than, obviously, than to TransCanada Pipelines. TransCanada Pipelines, when we did the deal, was selling at a five to one five cap to who, a couple of years ago. But at the beginning actually it was a decrease of this -- the whole meltdown in Calgary. We brought down the risk by doing a blended and selling TransCanada. So TransCanada's rents are not crazy out of the market. But the Hess has that issue know that 300,000 square feet was put on the sublet market around 1.5 years ago or so and they sublet most of that space. So they're not occupying the entire building, they have sublet some of the space. They would be looking to do a long-term blend and extend on that, then COVID hit, and that's where it sits. So allocate to TransCanada, the most -- certainly, The Bow's the most and then Hess and then TransCanada, as you would have done anyhow.

Yes. Okay. And in TransCanada, does it relate to the fact that there's subtenants in there, because...

So at TransCanada, there are subtenants in there. And quite frankly, TransCanada's been taking up the space as it comes back. That's never been an issue, in that TransCanada not even lost much dollars on that at all. The space has always been fully occupied and fully leased. That's not the issue. I think this is their head office. They're comfortable in it. They've been giving back space in other buildings, one of [indiscernible] get back space, as an example, was Telus Tower, which we sold, but they were in there. They're just leaving there right now and going back into TransCanada Pipelines Tower. And fifth, the old Esso building, they had space there, they're giving back. So they're going to consolidate back into the TransCanada Tower, and it's always had sublet space, and sublet space is not space that was bothering them, which is the case with. And The Bow, it was more or less spaces they used for their flex -- for their -- space that they move in and out of to accommodate their growth. So that's never been a worrisome issue for them. They never once requested us to take back space. And they did a blend and extend, don't forget on the entire building.

Yes. Yes. That was a good deal for the REIT. Just on the, I guess, the top 10 tenants specifically, there's a high degree of creditworthiness. There's lots of term on those top 10. Have any of those tenants, whether it'd be in the last few weeks or a couple of months, made any sort of approach or request for changes in rental terms or reduction in rate or anything like that?

So I'm just looking at the book right now. Ovintiv, Bell, Hess, New York, Giant Eagle, Canadian Tire, TC Energy, Chorus and Lowe's and finally, [indiscernible]. Lowe's in actual -- in fact, we actually did blend and extends with. I think we have about 15 Lowe's or something like that. We did brand-new blend and extends for 15-year terms on those Lowe's. We just actually had done -- did another one recently. So that's put to bed. TELUS Communications, as you know, we sold the Calgary asset. None of those tenants have asked for any form of abatement. Nor would we have given them or deferrals, sorry.

And our next question comes from the line of [ Gordon Nichols ] of CIBC.

Thanks very much, but my question was answered. Thank you.

And our next question comes from the line of Matt Kornack of National Bank.

With regards to the distribution policy going forward, would the view be that, at this point, as things normalize, and who knows what the new normal looks like, but that you'd potentially keep more retention of capital in the REIT going forward as opposed to increasing back to a level where you were before?

Well, we evaluate it every single quarter. So we'll see where the world goes. Let's get rid of the pandemic first, but you'll definitely have seen us not having no focus to going back to where they were just because that's the way we were. It will be predicated on the conditions and the situation at that time, our FFO payout ratios and how management and the Board feels what's appropriate at that time. But we don't have a goal to say, this is the pandemic, we cut it by 50%. Next quarter, pandemic is over, everybody is back, no more physical distance, we're going back there. It will be predicated on the situation on a quarter-by-quarter basis.

Okay. Fair enough. And then with regards to LTVs on your mortgage maturities, they still are pretty reasonable for the next 3 years. 2023 shot up. So assume there was a fair amount of value adjustment there. But presumably, the mortgage markets remain open and there's potentially up financing potential coming out of the mortgages?

There's definite potential coming out of the mortgages without question. The balancing act that we have to do is predicated on the unsecured market, because we all want to increase the level of our unencumbered pool. So we balance between what is open as far as unsecured versus what's available on the secured, and that balancing act will always continue. As you well know, the unsecured market is starting to open up again. All REITs, I could assume, would rather do unsecured, if they can, just because it's so much easier. And you really -- it's hard to dance on both of them because the demands are different for both of them. The unsecured world likes unencumbered pool as much as possible. And if we can, we'd like to go and continue in that vein.

And presumably, the rating agencies and your bondholders like the fact that you're retaining an extra $200 million a year. And there's been a few unsecured issuances in the market that have been well received. How do you think of that in terms of how much you're carrying on your lines of credit versus a reduction in your unsecured book?

There's no question that with the unsecured world opens up again and it's easy to access that we will access it to basically bring down those lines. And I guess, the moral of the story is, if you look at the United States more than Canada as an example. Look at Simon Property's is a class example, even though its stocks hammered into the mall business, it always had substantially unencumbered lines. The lines are basically there to give the financial support to the unsecured, but the primary source of financing is the unsecured. So lines are there to use, but not to use as permanent debt. Unsecureds are there for unsecured.

And I guess time will tell, but I'd assume your spreads will likely come in as a result of this move. And then on the Lantower comment with regards to leveraging JV commitments from other partners, would that require potentially selling portions of your existing assets? Or is that all on new commitments?

No, that does not -- I think, we have the $200 million that we've now freed up, and our lines, our cash, our availability, we'll be accessing that. But we're not thinking of doing 50-50 co-venturing with and that is not required, which with accessing other capital to asset management, property management, to grow that platform.

Yes. I think, Matt, the comment was more to the fact that, I can't recall for this year, some of your peers, but we get asked from time to time about the -- obviously, there's a tremendous appetite for multifamily and we get -- will I get calls from several pension funds asking us what our interest is in leveraging our platform and leveraging our expertise. And as I alluded in the speech, it was too premature. And candidly, for a variety of reasons, we didn't think the time was right. I think now we're going to take our time. We're going to answer those calls. We're going to review all of our options. And if and when we elect to go forward with this, it will be in a controlling entity but with a minority investment, because ultimately, that's the play, right? It's the leveraging the expertise that we've been able to develop in the last 6 years. And our -- what I like to I believe is, to be our very strong track record.

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

Sorry, just following up on the Lantower discussion. Just to be clear, like going forward in terms of the partnership with the pension funds, the plan would be for H&R to do a small co-invest in these funds going forward? Is that correct?

Yes, I think the plan is for that. Like I said, I think it's premature to discuss the details of what that's going to look like only because, candidly, what we've discussed in the past has been very, very different, and everyone has their own construct. But in no case would it be a major capital investment on our behalf. At the end of the day, the reason why we'd be doing this is to lever the platform, not to lever our capital to the benefit of the asset management platform.

Got it. And it sounds like -- can you expand, in terms of funding macro investment, it wouldn't come from seeding a percentage interest in existing assets, but rather buying your small interest in new assets going forward?

Yes. And Mario, I appreciate you asking the question. I just think that as of right now, it's too premature to answer that question in a definitive manner.

Okay. Just maybe a higher level, like, in these discussions that you've been having with the pension funds, our understanding in the private market is that pension funds and sovereign wealth funds have pretty much shut down in terms of private investments. Are you getting the sense that they're coming back and reviewing potential transactions and/or investment committee is considering alternatives today?

It's a great question. Yes, it's a great question. And I think it's a little bit early in the COVID time line, but I would say anecdotally, there's definitely the recognition in the market that multifamily has been and will continue to be a very resilient asset class. And I think for those who were unaware or didn't have that appreciation for it, they certainly do now. And so I think it's more stemming from that base, than anything else that people are realizing or pension funds or endowments or whoever else we're talking to, it's just the recognition that as of right now, especially going through COVID. We're collecting 97% of our revenue. Knock on wood, we see no reason to believe that, that's going to abate. Our tenant base is incredibly strong. We love the Class A multifamily space. It is actually showing up to be one of the most resilient within our U.S. multifamily environment. So I think it's less so of money being unfrozen, but more so just the general acknowledgment that this is a prized asset class and one that's eliciting a lot of interest.

Got it. Okay. And then my second question just relates to Primaris. And I may have missed it and you may not be willing to share it, but I thought I'd throw it there. Anyways, with the reduction in the IFRS value, are you going to give a sense of what Primaris is being run out on the books here in terms of fair value?

Sorry, Mario, you came out a bit broken up. Are you asking what the total value of Primaris would be, fair value on our book?

Yes, I'm asking if you're willing to share what the total Primaris fair value and then the net equity that is in your $22.56 IFRS now it is today.

Because we haven't put that into our MD&A or financials, we shouldn't give -- we've just broken it out into retail. You can figure out our retail as a total is in our MD&A, but it's not broken out any further than that.

And there are no further questions in the queue at this time. I will turn the call back over to Tom Hofstedter for final remarks.

Thanks, everybody, for joining us. Enjoy the long weekend. Stay indoors and binge watch television. Have a good one.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.