H&R Real Estate Investment Trust (OTCPK:HRUFF) Q3 2022 Earnings Conference Call November 15, 2022 9:30 AM ET
Company Participants
Thomas Hofstedter – CEO & Executive Chairman
Philippe Lapointe – President
Larry Froom – CFO
Conference Call Participants
Sam Damiani – TD Securities
Matt Kornack – National Bank Financial
Jenny Ma – BMO Capital Markets
Jeremy Shan – RBC Capital Markets
Operator
Good morning, and welcome to H&R Real Estate Investment Trust 2022 Third Quarter Earnings Conference Call.
Before beginning the call, H&R would like to remind listeners that certain statements, which may include predictions, conclusions, forecasts or projections in the remarks that follow may contain forward-looking information which reflect the current expectations of management regarding future events and performance and speak only as of today’s date.
Forward-looking information requires management to make assumptions or rely on certain material factors and is subject to inherent risks and uncertainties and 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 meaning recognized or [indiscernible] 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 measures, trade assessings, the REIT’s underlying performance and provides these additional measures so the investor can be [indiscernible]
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 I described in more detail in H&R’s public filings, which can be found on H&R’s website and at www.sedar.com.
I would now like to introduce Mr. Tom Hofstedter, Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstedter.
Thomas Hofstedter
Good morning, everyone. And I’d like to thank you for joining us today to discuss our third quarter financial and operating results. With me on the call are Philippe Lapointe, President; and Larry Froom, our Chief Financial Officer.
Year-to-date, our teams have been executing against our repositioning plan that we laid out in the investment community just over a year ago today. Since October 27, 2021, we have made great progress and are moving towards our desired outcome of becoming a streamlined, growth-oriented REIT. Already, our company looks very different than it did over a year ago, as is evidenced by our asset composition, balance sheet and same property net operating income growth.
In the last 1.5 years, we have moved over $5 billion of lower growth office and retail properties and reallocated that capital into higher growth of Sunbelt and Gateway to the residential alongside buying back our own units at a significant discount to have. Our year-to-date results and performance highlights the quality of our properties and embedded growth that we are servicing as a result of this transformation. We are continuing our progress with dispositions announced to date furthering our portfolio simplification strategy.
Capital allocation remains our top priority as we drive our plan forward and where our focus remains. Year-to-date, we have recycled capital out of $455 million of office, retail and other noncore asset sales, reallocating that capital to the repurchase and cancellation of almost $300 million worth of our units, or 22.9 million units at a discount to our NAV. Our NCIB has been very accretive to unitholders, creating $0.72 in NAV per unit.
In August, we completed the sale of 4 office properties and — retail properties totaling $167.8 million. And after quarter end, we sold an additional 3 properties totaling $49 million, comprised of 2 automotive tenanted retail properties in Arizona at a weighted average cap rate of 5.8% and a vacant single-tenant office property in Burlington, Ontario, for $26 million.
These sales are in line with our IFRS values, providing further support to our net asset value and aligning to our repositioning plan. And lastly, is the 9.1% distribution increase that we announced yesterday, supported by our very strong year-to-date performance and our positive outlook for the future. This increase is the monthly distribution to $0.05 per unit, commencing in January 2023.
With today’s strong quarterly results, we are on our way to creating a simplified growth-oriented company that will surface significant value to our unitholders.
And with that, I will turn it over to Philippe.
Philippe Lapointe
Thank you, and good morning, everyone. I’m happy to be on this call to discuss our Q3 updates and to go over our quarterly highlights. But before I do, I’d like to pause for a moment and highlight some of the recent enhancements that have been made at the H&R Board level and other ESG accomplishments. In accordance with H&R’s policies governing Board tenure, 4 new independent trustees were elected in 2021 upon the retirement of 2 members. Their collective expertise combined with the existing trustees has created a well-diversified independence and experienced the Board, which should enhance investor confidence and governance sentiment.
Additionally, women currently represent 38% of our Board, marking progress on the Board’s diversity commitments and achieving the Canada clubs aim for better gender balance. The majority independent Board and H&R management team are fully committed to continuing to enhance corporate governance and to increase unitholder value. Another material ESG step we made this year was participating in a GRESB real estate assessment, which is an investor-driven global ESG benchmark and reporting framework that enables us to understand our performance against peers and to provide investors with the information they require to make thoughtful investment decisions.
In addition to our earnings announcement last night, we also released our annual sustainability report that outlined some of our recent progress. We are also proud to report that 50% of our are women. And for the third consecutive year, H&R replaced on the Globe and Mail’s Women Lead Here benchmark of executive gender diversity. We understand that health and safety, employment engagement, diversity, equity and inclusion, and engaging with our tenants and communities are critical for our long-term success as an industry-leading real estate organization.
And to that end, we look forward to updating our stakeholders of that progress. On to the Lantower portfolio. The U.S. Sunbelt and Gateway markets continue to experience strong supply and demand fundamentals for multifamily rentals, an additional tailwind that we expect to accelerate those fundamentals is the increase in mortgage rates.
With a rate of over 7% for the most typical mortgage, the rent versus buy decision will likely push additional households into the runner space. For context, our same-store tenant move-outs due to buying a home decreased from approximately 20% in the second quarter to 12% in the third quarter, a trend that we anticipate will continue.
Additionally, this year’s same-store Q3 traffic and completed applications are actually higher than the third quarter of last year. Lantower’s Sunbelt portfolio has continued to register double-digit renewals and new lease trade-outs as a blended rate for new leases and renewals equated over 15% in the third quarter.
Therefore, while the rental rate growth acceleration may have based in the coming quarters, our top line growth is still substantially outpacing expense growth and also supporting existing fair market valuations despite potential future increases in cap rates.
Moving on to Jackson Park, positive trends in the amount of traffic, renewal rates and number of leases executed have continued through the third quarter. At the end of the third quarter, Jackson Park’s occupancy was 99.5%, reflecting yet another quarter of tremendous operating results from the asset. On the development front, Lantower West Love in Dallas, Texas is on schedule and on budget with the second level of concrete pours on a podium and parking garage occurring this week.
Also in Dallas, Texas, Lantower Midtown is on schedule and on budget with site work completed and the tower crane being erected by next week. We expect limited, if any, variance in the overall budget based on how we are tracking. West Love’s hard costs are 99% bought out by our general contractor, while Midtown is 90% bought out with our GMP contracts.
While we have elected to postpone the construction starts of some of our development pipeline, we have continued progressing through a different phase of design, drawing and permitting as our [indiscernible] development pipeline based on our conviction at the appropriate time.
On the JV development front in Hercules, California Phase 2 called the Grand at Bayfront is 64% leased in Shoreline Gateway, Long Beach’s tallest residential tower at 35 stories has seen stronger rental demand is now 80% leased with rents that are matching pro forma. And lastly, before I hand it over to Larry, I want to acknowledge the Lantower Residential, one in National Marketing and Advertising Award presented by the Multifamily Executive Magazine, which is widely recognized as one of the most influential multifamily publications in the U.S. Congratulations are in order to the Lantower operations team for a notable achievement led by COO, Emily Watson; and President of Property Management, Colin Grant in notching yet another mark on our path to maintaining a best-in-class operating platform.
And with that, I will pass along the conversation to Larry.
Larry Froom
Thank you, Philippe, and good morning, everyone. As Tom mentioned, we are excited to report our results this quarter, which are reflecting our simplified portfolio strategy and alignment to higher growth. That growth is clear from our year-to-date results of same-property net operating income on a cash basis, which grew 16.6% compared with the first 9 months of 2021.
In addition to our capital allocation initiatives, our portfolio produced strong third quarter results with total same property net operating income on a cash basis increasing by 11.5% compared with the same quarter last year. Our residential division led the way with a 36.5% increase primarily driven by an increase in occupancy at Jackson Park in New York.
Excluding Jackson Park, Lantower’s growth in U.S. dollars was 11.2% for the quarter. As Philippe has already discussed, Lantower residential continues to see significant demand for our Sunbelt residential properties leading to substantial rent increases on new leases and renewals.
Same property NOI on a cash basis from office properties increased 5.2% compared to Q3 2021, primarily due to a $2.3 million lease termination fee. Excluding the lease termination fees, same-property NOI growth was 0.6%. Our office properties are located in strong urban centers with a weighted average lease term of and leads to strong creditworthy tenants.
Only 5.3% of our total office square footage is expiring between now and the end of 2023. 14,000 square feet expired during the remainder of 2022 and 349,000 square feet expires in 2023. Retail same-property net operating income on a cash basis increased by 4.2% compared to Q3 2021, primarily driven by the strengthening of the U.S. dollar. Industrial same-property NOI on a cash basis increased by 6.9% compared to Q3 2021, driven by increased occupancy and contractual rental escalations. For Q3 2022, FFO was $0.302 per unit and AFFO was $0.255 per unit.
Excluding the lease termination fees of $2.3 million, the AFFO would have been $0.294 per unit, and AFFO would have been $0.247 per unit. Based on our distributions of $0.137 per unit for the quarter, our AFFO payout ratio was a very healthy 53.7%. Based on our announced distribution increase to $0.60 per annum, set to begin in 2023, Our FFO payout ratio for the quarter would have been 50% if the distribution increase had already been in effect, and the AFFO payout ratio would have been 59%.
I’d like to mention that during the quarter, we received USD 85.7 million as a repayment of a mortgage receivable. As a result, interest income in Q3 decreased by $650,000 from Q2 2022, and we are expecting a further decrease of $1.1 million in Q4. Debt to total assets at quarter end was 43.6% with total liquidity of $712 million. Our unencumbered asset pool continues to grow and is currently $5 billion, up from $4.6 billion at Q2.
Notwithstanding our fair value adjustments, which resulted in our real estate assets decreasing by $307 million, our net asset value per unit grew from $22.14 at June 30, 2022, to $22.58 at September 30, 2022, primarily due to the strengthening of the U.S. dollar and the purchase and cancellation of 22.9 million units under our normal course issuer bid year-to-date. In summary, we are very pleased with our Q3 results. Our high-quality portfolio of properties are well positioned to produce strong operating results going forward.
And with that, I’d like to turn the call back to Philippe.
Philippe Lapointe
Thank you, Larry. In closing, I want to thank our investors for their time, patience and feedback. We have spent a lot of time with the investment community communicating our strategy and plan and listening to investor feedback.
Despite the persistent volatility in the markets, our strategy is resonating, and investors are positive on our plan, our execution to date and the direction in which we are heading. Recognizing that there is still significant important work ahead of us, we are well on our way to creating a simplified growth-oriented company that will serve the significant value for our shareholders.
We’d now be pleased to answer any questions from call participants. Operator, please open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from Sam Damiani from TD Securities.
Sam Damiani
Congratulations on a good quarter and the distribution bump. Maybe just to clarify the background to the distribution increase and particularly the actually. Was that driven by the transaction activity in 2022 specifically? Or is this something from a tax perspective, the REIT will be facing pressure on in future years?
Larry Froom
The special distribution, yes, was a result of the capital dispositions that we’ve done during the year, and the results are having to distribute it to shareholders. The increase for next year was more a result of our operating results to date and are a lower payout ratio, which we’re targeting of around 50% on an FFO basis.
Sam Damiani
Okay. Good. That’s good. And maybe another one for you, Larry. Just on the debt refinancing activity today and what you see for the remainder of ’22 and then into next year, what sort of coupons are you seeing in the marketplace between commercial property and apartments as we go forward over the next several quarters?
Larry Froom
So for our commercial properties, we’re seeing probably spreads of between 190 to 220 bps over a 5-year mortgage renewal. So that kind of would give you guidelines of what we currently can finance it. On the apartments, we haven’t had one come up for a while. I don’t really know on the apartments in the U.S., Philippe, do you have any?
Philippe Lapointe
Sure. If we did, depending on LTV, it would be somewhere in the ballpark of 150 to 200 basis points above whichever index it was ultimately used.
Sam Damiani
And does the REIT have any capacity to source debt on your Lantower assets over the next year or so? Or most of the refinancing going to be happening at the corporate or commercial property level.
Philippe Lapointe
I think it has its capacity, whether it has its willingness, I think we’re going to be judicious in seeking the best cost of capital, but we certainly have the capacity to do so in the U.S.
Sam Damiani
Okay. And last one for me. I wonder if you could just comment on transaction activity in the marketplace supporting the change in valuations that you put through in the third quarter generally and specifically on the industrial and residential side.
Philippe Lapointe
Well, I can speak on the multifamily. The problem that we’re having that everyone having including our U.S. peers is the lack of visibility in transactions. And so obviously, the treasury has increased and as of late, decreased substantially, but still is elevated. I think it’s anyone’s guess — safe to say that cap rates have certainly expanded, we thought it would be prudent and conservative to expand the cap rate that we use for our fair market value in [indiscernible]. So frankly, every one of us is in price discovery mode as it stands right there. Unless you have to sell or you have to buy, you’re not transacting, which makes visibility tremendously difficult.
Sam Damiani
Is that generally or specific to the apartment side of the business?
Philippe Lapointe
No. The comment was for the U.S. multifamily, but I would suggest it’s probably fair to say that it’s a comment that is fair for just about any asset class right now.
Operator
Your next question comes from Matt Kornack from National Bank Financial.
Matt Kornack
Just a few for Larry to start. With regards to the Caledon development properties, the leases don’t commence until later this year. But can you tell us, is there any income in the current results and presumably the capitalized interest has come off?
Larry Froom
Yes, for the properties that we moved into income-producing properties, they really came in at the end of the quarter, so there was no income, no NOI associated with them in the quarter, and the capitalization of interest had ceased in the quarter. I’m pretty sure the interest capitalized to have to start for Q3.
Matt Kornack
Okay. No, that’s fair enough. And then on the Montreal transaction, with regards to that lease termination in 4 years. Is that a property that you would see potentially developing yourself? Or is that something that you’ll ultimately get — go through the process, look at the city and their master plan and then sell it when that termination comes to fruition or maybe sometime in advance.
Larry Froom
I’m speaking out of [indiscernible], over the time offers, but I think we’ll go through the process, which will take quite a number of years first. We’ll get the rezoning and go through that process. We’ll go through till 2026 before leaves that property. So we’ve got quite a way off to decide.
Philippe Lapointe
Yes. I think, Matt, the important part of that transaction is it provides us additional flexibility and optionality at some point in the future. And so at the time when we obtain the zoning, we’ll make a risk assessment depending on where we stand and where the capital markets and where the potential for redevelopment is and make a decision then.
Thomas Hofstedter
And more specifically, that was not really the accurate answers. The accurate answer is that this zoning, it will be completed by the end of 2024. It’s going to be reserved for 850 townhouses and 1.1 million square feet of high-rise, 6 to 8 stories.
The question is, are we going to be building it and that we probably will not, but we don’t have to size that until the zone. The combination of the lease termination and the value that we’re expecting on the rezoning using a very conservative value of $25 a square foot, we’ll achieve a higher value than the asset is worth prior to doing that transaction. And that’s why that transaction was done.
Matt Kornack
Fair enough. And presumably, you can sell it before and the $70 million termination income in 2026 would accrue to the buyer like at the time of the cancellation?
Thomas Hofstedter
No, no. I wouldn’t say that. I wouldn’t say presumably, we’ll see.
Matt Kornack
Okay. And then with regards to the removal of bayside in Tampa and then maybe a broader comment with regards to your appetite to continue to develop U.S. multifamily in the current environment.
Could you give us a sense as to why that specific asset was removed? And then just sense on the prospects for continuing the development of U.S. Sunbelt multifamily assets.
Philippe Lapointe
Yes. There’s a kind of 2-part answers. The first answer is, frankly, we don’t have tremendous visibility as to what 2023 has in store for us. And so as an abundance of precaution, we found it best to pause bayside and get a better read on where the market is more, frankly, where the financial markets are, where cap rates are and more importantly, where the development delta would be between the development yield and a stabilized product would be until we’re still very bullish on the property.
As a matter of fact, we’re very bullish on our entire pipeline. But again, one must exercise some caution in the environment in which we find ourselves. The other, frankly, the reason why we paused it is we found and we firmly believe that there is no more compelling investment than buy your own shares. And at this point in time, moving forward, we’ve been — if not the most active the second most, but I think we’re the most active NCIB participant in Canada and the REIT space. And so for us, it really comes down to ultimately an allocation of capital. [indiscernible] — yes, go ahead.
Matt Kornack
No, that’s perfect. I guess just as a follow-up, I would presume you guys are not the only ones potentially putting new development on pause or reassessing the market. Can you give us a sense as to how that may play out with regards to the fundamentals for your existing assets a few years out if development doesn’t go ahead in the broader market?
Philippe Lapointe
It’s a great question. This marks my 30th call at H&R REIT, and I would tell you that I’ve never been this bullish on our space, namely because I think supply is about to fall off a cliff. Not only us, but the publicly traded REITs, the private synergies are rather the private developers, the U.S. merchant developers. Everyone has stopped any developments or generally speaking, any developments that have not been ongoing.
And so the ’23 deliveries and ’24 deliveries are somewhat because it takes 2.5 years to kind of get going. But I would submit that on the second half of ’24 and into ’25, this persists and remains, we’re going to see the U.S. market, specifically the U.S. multifamily market, which is already undersupplied being down much more dramatically than the supplied, which leads us to believe that we are in for another healthy runway of increase in run [indiscernible]
Matt Kornack
Okay. That makes sense. And the last one for me, I guess it’s maybe for you as well as Larry. But on Jackson Park, I didn’t parse the exact numbers, but I’m just looking at the equity-accounted figures. It looks like there’s a sequential increase in rent, but costs are up.
Is there still some of that kind of higher transaction expense in this quarter with regards to NOI from Jackson Park. So should we expect kind of Q4 to get back to the prior kind of peak levels or maybe a bit higher from an NOI standpoint.
Larry Froom
Yes. Because of the large turnover in Q3, we had a large turnover at the property and launched renewables. So there was higher commissions and incentives for leasing. So here, we are expecting — or I’m expecting Q4 to be higher than Q3 ones in terms of NOI [indiscernible].
Philippe Lapointe
Yes. And certainly, from a year-over-year basis, ’23 should prove to be a way healthier or a significantly healthier NOI year than 2022. Just for additional context, the property is no longer offering any marketing incentives to tenants. So no rental inducements or concessions, which were a significant expense in 2022 as we are retenanting the property.
Matt Kornack
Okay. So Q4 onward is kind of back to a normal asset from a sequential standpoint year-over-year, it will still be — well, year-over-year, I think it’d actually be back to normal as well.
Philippe Lapointe
That’s right.
Operator
Your next question comes from Jenny Ma from BMO Capital Markets.
Jenny Ma
I think earlier in the year, you talked about development spend of about $200 million for 2023 or so. Wondering if you could provide an update on what the — I’m — yes, for 2023. Can you provide an update on that outlook and maybe venture an estimate for 2024 as well?
Larry Froom
That $250 million that we had indicated in the past has decreased as we put on hold [indiscernible]. I believe we have in our disclosure while expecting the balance to be, and I believe the balance for 2023 is about USD 117 million.
Philippe Lapointe
Sorry, Jenny, you said 2024, but you meant ’23, right?
Jenny Ma
Well, an update on ’23, and ’24 would be great, too.
Larry Froom
So I can give you on ’23, we’re expecting $117 million spend on our U.S. developments for . We’re not sure yet what ’24 is going to hold, but that is what we’re expecting for ’23.
Philippe Lapointe
Yes, I think it would be too premature to give a figure for ’24 at this point.
Jenny Ma
So based on the commentary, though, directionally, perhaps a little bit less than ’23 might be approved outlook at this point.
Thomas Hofstedter
Jenny, we have the industrial buildings, which we have 2 under construction. We have another property in Mississauga, which we may or may not commence in ’23. What you’re really looking at your numbers is, therefore, the commitments that we’ve made that can take us to ’23. And what you’re speculating on and we’re speculating on is what are the new commitments that we can’t answer at this point in time.
So we can only answer that contractually, we have the 2 industrials. We have the 2 residentials, and we probably have more than likely the Mississauga industrials going forward. Beyond that, we can’t give you any numbers, any commitments because it’s too far into the future. We’ll see where the world is at that point in time, where our stock is trading, what the best use of our funds are.
Jenny Ma
Okay. Okay. That’s fair. On the industrial leasing that you’re doing, particularly on the Meadow Vail, can you comment on what kind of annual rent steps you’re achieving in the current market conditions?
Thomas Hofstedter
It’s — right now, rental rate is $17.50 to $19 a square foot, trying to achieve 4% — have achieved 4% on one and the other was somewhere between 3% and 4% on an annual basis.
Jenny Ma
And these are 10-year deals?
Larry Froom
These are all 10-year deals.
Jenny Ma
10-year deals. Okay, great. That’s great to hear. And then turning to dispositions. I’m just wondering if you could comment on what you’re seeing in the marketplace in terms of transaction volume. Clearly, there’s been some slowing down, but maybe you can give us some more color on what asset classes, what markets you’re seeing activity in and then what you’re expecting for the next, let’s say, 12, 24 months on the disposition volume front?
Thomas Hofstedter
So we’re — specific to H&R as far as disposition goes, we’re still attempting to stick to our plan of selling — trading out of office and retail. It really depends on the market strength. And at this point in time, the market is very weak. All the office deals that are happening are structured deals with VTBs, prices are all over the map.
And a lot of the deals are not happening. The deals that are in the market right now, there has been an awful lot of drop. So going into 2022, we have no visibility as to the strength of the market is going to get better or not in the office class. Industrial has weakened as well. There are far less industrial trades happening. We don’t plan to have any dispositions in the industrial front. And retail, again, has weakened, but not to the same extent as office, but retail for the most part, has weakened. The REITs are not acquiring the pension funds, insurance companies are not acquiring retail and office. And the industrials are, I think, are more specific, whether it’s value add or hot. But the core industrials are also struggling to achieve the pricing they achieved around a year ago. So it’s kind of sloppy out there, and a lot is going to be predicated on where interest rates lie because right now, [indiscernible] interest rates stay at the current level, let’s call it, 6% in Canada, even higher in the United States.
It’s underwater as far as where cap rates are. So not a great lot of visibility is what the real pricing is going to look like next year, again, predicated on if we’re going to enter a recession, and where interest rates are going to lie.
Philippe Lapointe
Yes. Jenny, if I may. If I can answer the question differently, I would just say we absolutely remain committed to the plan. What was changed due to the volatility and where we find ourselves in the capital markets is the sequencing and the dispositions may be a little bit choppier than we anticipated. However, there’s absolutely no wavering away from the plan. It’s just the sequencing may change as a result of that.
Jenny Ma
Okay. And you’re kind of half answered my next question. So you’re committed to the plan. Is it fair to say that you would have more wiggle room on timing and push out some of the dispositions later on in your 5-year plan versus compromising on pricing. Is that a fair comment?
Philippe Lapointe
Yes. I think when we put the plan that we said 5 years, it could take less, certainly will take more. What we want to impress upon everyone who’s on this call is we — where large REITs were in unprecedented times, and we want to be mindful of unitholder value. Nothing is for sale. We’re not pressed to sale. We’re committed to simplifying this REIT, but not at any cost. And so I believe our unitholders want us to be careful, mindful of their investment, but also to be opportunistic when the opportunity presents itself.
And I think I speak for Tom, Larry, and I, when I say, right now, I don’t think the opportunity is presenting itself, but we’re very attentive to anything and everything. And we hope to have some news on upcoming dispositions at some point in the future.
Operator
[Operator Instructions]. Your next question comes from Jeremy Shan from RBC Capital Markets.
Jeremy Shan
Just a question for Larry, just on the debt refinancing. You have a debenture coming in 2023, I believe. Just kind of how are you thinking about that piece of paper.
Larry Froom
Yes, you’re right. We have a debenture of coming due in 2023. We actually have talks with our bankers to give us term loans, so it will be unsecured term loans to replace that debenture. Interest rates will be around all in around 5.5%, but that’s still subject to fluctuations going forward between now and when we close.
Jeremy Shan
Okay. Got it. And then the interest income comment you made a $1.1 million, that’s for the quarter decline, not an annualized decline, right, from Q3?
Larry Froom
Sorry, I couldn’t hear that. The — which [indiscernible]?
Jeremy Shan
You said in Q4, the interest income will decline by $1.1 million.
Larry Froom
Yes, I do. That is correct. It will decline further by $1.1 million.
Philippe Lapointe
For the quarter — in the quarter.
Larry Froom
In the quarter. Yes.
Jeremy Shan
And then just lastly on Lantower. So maybe 2 questions there. Just what is the loss to lease look like currently? And then in light of your comment about the cost of debt, as well as your bullishness on the development pipeline still. And how are you thinking about the development hurdle rate today for you to push through more developments here.
Philippe Lapointe
I think Jimmy, I’ll answer the second part of your question first. I think the hurdle rate in development is — it kind of ties into my earlier comment, which is if we, as an industry, have a lack of visibility of stabilized cap rates, it becomes a very difficult thing to the question on hurdle rates for development yields. My bullishness stems on the fact that we have bought what I believe to be A+ sites at below market pricing, which allows us to set on this pipeline for a few years, kudos to our team in Dallas for those acquisitions.
But in terms of what yield we would have to achieve for us to be developing those assets internally. I don’t have the visibility, nor do I think anyone has currently, which is probably why there’s been an almost complete the resting of all development activity that hasn’t begun as an industry. As you’re asking for the loss to lease of the earn-in, our earn-in is similar to our U.S. peers in the ballpark of 5% to 7%. I anticipate as it relates to us, we’re in that ballpark as well.
Jeremy Shan
Okay. And sorry, just one more. On the industrial — Canadian industrial portfolio, I think the in-place rent is about $8. And I think I heard you’re doing lease deals in the high teens. Would it be fair to say that the $8 on the market rent equivalent would be in the mid- to high teens.
Thomas Hofstedter
As a generalization of what’s obviously specific to each individual asset. But…
Jeremy Shan
On a blended basis, where would you put the market rent for the portfolio?
Thomas Hofstedter
That’s — you’re asking the question that goes across Canada into provincial with different markets. Let’s be more specific. Once your assets are located in Toronto and GTA, Toronto. There, you are talking rents as high as $19.50, but let’s say, for the older, older property is $15 to max of $19, that’s the range. you are seeing healthy steady 3% to 4% annual growth.
In Vancouver, BC, you’re going to see even higher numbers, but that’s but we don’t have a lot of product there. In Calgary, you’re probably going to see, I would say, where we see $19, over here, they probably see $15, or we see $15, they probably see $11. So probably $4 to $5 is different in the Alberta market. In Eastern Canada, you have a whole bunch of older product. So it’s really all over the map. Hard to give you an answer for it on a national basis, but really specific to where your properties are since ours are so heavily weighted to Ontario, we’re going to see a higher level of rental rates than you will see for the average across Canada.
Philippe Lapointe
Suffice it to say, Jimmy, that now you’re seeing why we’re so confident [indiscernible] and excited about our NCIB activity and why we think that what we’re trading now is a significant discount to where we think the property values are.
Operator
Your next question comes from Sam Damiani from TD Securities.
Sam Damiani
Just one additional follow-up. On the industrial development program, the REIT has been quite successful, quickly putting up buildings, leasing them at high rents and attractive development yields and clipping sizable gains. Going forward, how do you look at the pipeline on balance sheet for land that you could continue to develop in that regard? Are you happy with it? Or do you see the need to add the opportunity to see — add more land to the balance sheet and is it a good time to do that today.
Thomas Hofstedter
That’s a very good question because the real answer is we have — we are adjusting now in the industrial world for the recession for what’s — for the higher interest rates. So land values are coming up — have come off and will continue to come off in 2023. And rental rates, if you look across the national average, including the United States, expectation is that rental rates will start easing off there as well, especially with the big users such as Amazon, not only ceasing to absorb more space, but actually giving back more space into the market.
It’s not a good time to buy land at this point in time. I think you’re, let’s call it, $3.5 million an acre is probably going to trend down a bit. I think the pension funds are loaded up with land. H&R’s balance sheet would allow us to buy the land. But the buying land at today’s market value probably is not the right thing to do. So 2023, same as residential. I think we basically build out what we have and we take a pause to see to or to reanalyze where we will be going forward with further commitments. I wouldn’t buy land today for the 2024 launch.
Sam Damiani
Okay. That’s helpful. And sorry, how much more GLA could you commence construction on your existing lands?
Thomas Hofstedter
It’s just bits and pieces on the — except for the piece, which we haven’t made a commitment to, whether we’re going to be selling it to the province or not, which is 100 acres. We have just bits and pieces here there, nothing of any huge consequence around 0.5 million square feet is the Mississauga property that we’re expected to launch later on in 2023.
Operator
Presenters, there are no further questions at this time. Please proceed.
Philippe Lapointe
Thank you, everyone, for joining us today. We look forward to continuing or update or to update you rather on our progress over the upcoming quarters. Thank you, and goodbye.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and ask that you please disconnect your lines. Thank you.
Be the first to comment