CA - H&R Real Estate Investment Trust (HRUFF) Q3 2023 Earnings Call Transcript
2023-11-15 16:09:02 ET
H&R Real Estate Investment Trust (HRUFF)
Q3 2023 Earnings Conference Call
November 15, 2023 09:30 ET
Company Participants
Tom Hofstedter - Chief Executive Officer
Larry Froom - Chief Financial Officer
Emily Watson - Chief Operating Officer, Lantower Residential Division
Matt Kingston - Executive Vice President Development, Construction
Conference Call Participants
Sam Damiani - TD Cowen
Mario Saric - Scotiabank
Jimmy Chen - RBC Capital Markets
Presentation
Operator
Good morning and welcome to H&R REIT’s Q3 2023 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 and 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 the 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 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
Thank you and good morning, everybody. I’d like to thank everyone for joining us this morning to discuss H&R’s third quarter financial and operating results and strategy. With me on the call are Larry Froom, our Chief Financial Officer and Emily Watson, Chief Operating Officer from our Lantower Residential Division.
Year-to-date, our portfolio and team are producing strong financial and operating results across all our property classes. Residential continued to see rental rate growth or high-quality well-located office properties with long weighted average lease terms remained attractive investments for potential buyers at 98% occupancy. Industrial properties located in key industrial markets remain in high demand as we realize continued rental rate growth and our high quality grocery anchored and single tenant retail property portfolio are performing well providing essential services to the respective communities.
Our capital structure remains very conservative with low leverage and a low payout ratio with limited exposure to floating rate debt. During the quarter, we sold 4 Quebec retail properties for $68 million, a small office property in Temple Terrace in Florida with $32.3 million, and an automotive tenant for the Tennessee related property in Roswell, Georgia for approximately $3.6 million.
Net proceeds from these dispositions were used to repay debt and repurchase units under the NCIB. With these sales completed during the quarter, H&R’s 2023 non-core property sales totaled $431.7 million. Given the line of sight we have into our current disposition pipeline, we plan to sell or have under contract to sell an additional $170 million of non-core assets by the end of the year. During the 9 months of the year, the REIT purchased and cancelled over 4 million units at a weighted average price of $10.30 per unit or $42.7 million representing an approximately 52.1% discount to NAV per unit.
As a result of our disciplined capital allocation approach, we have augmented our growth profile meaningfully achieving double-digit growth and same-property NOI with the announcement of our repositioning strategy, increased our allocation to residential industrial from 25% and 10% respectively in Q2 2021 to 42% and 18% respectively, a total of 60% as of Q3 of this year. Over this time period, our office exposure, excluding rezoning portfolio has declined from 36% to 17%. Coinciding with this progress is the improvement in our liquidity position and balance sheet metrics.
And with that, I’ll turn it over to Larry.
Larry Froom
Thank you, Tom and good morning everyone. I will start on the operating results. In my comments to follow, references to growth and increases in operating results are in reference to the 3 months ended September 30, 2023 compared to the 3 months ended September 30, 2022. H&R same-property net operating income on a cash basis increased by 12.6%. Breaking the growth down between our segments, Lantower, our residential division, led the way with a 19.5% increase or a 15.2% increase in U.S. dollars. Emily will provide more details on this growth shortly.
Industrial same-property net operating income on a cash basis increased by 11.1% driven by rent increases for new and renewed tenants. Office same-property net operating income on a cash basis increased by 9.9%. This increase was largely attributable to lease termination payments, bad debt recoveries, and the strengthening U.S. dollar. For the 9 months ended September 30, 2023, same-property net operating income from our office portfolio increased by 6.3% compared to the same period in 2022. Our office properties are in strong urban centers. Occupancy at September 30, 2023 was 98% and the weighted average lease term is approximately 7 years. H&R received the termination payment of $856,000 in Q1 2023 and received an additional $2.5 million in Q3 2023 from a suburban office tenant occupying 105,000 square feet whose lease will now end on December 31, 2023.
In October last month, H&R submitted a site plan application to the City of Mississauga, for a new single storey 122,400 square foot industrial building to replace the 105,000 square foot office building. Site plan approval is expected during Q1 2024. And lastly, retail same-property net operating income on a cash basis increased by 8.8% primarily driven by increased occupancy at river landing and the strengthening of the U.S. dollar.
Q3 2023 FFO, fund from operations was $0.42 per unit compared to $0.30 per unit in Q3 2022. Included in FFO for Q3 2023 is $30.6 million of proceeds from a sale of an option to purchase land. Excluding this item and other non-recurring items such as lease termination fees, FFO would have been $86 million for the 3 months ended September 30, 2023 for $0.307 per unit.
FFO for the 9 months ended September 30, 2023 was $1.03 per unit and excluding the unusual items would have been $0.923 per unit, a 7% increase from $0.862 per unit for the respective 2022 period. We are proud of our FFO growth despite the current headwinds of high interest rates facing all real estate classes and the current headwinds facing the office sector.
Commencing in January 2023, H&R’s monthly cash distributions increased to $0.05 per unit or $0.60 per annum, an 11% increase over the 2022 distribution, excluding the special distributions in December. H&R’s Q3 2023 payout ratios remained healthy at 35.7% of FFO and 41.6% of AFFO. Net asset per value as at September 30, 2023 was $21.49 per unit, an increase from $21.04 at June 30, 2023.
The following overall weighted average cap rates were used in deriving the fair values of our investment properties, 4.49% overall for the residential properties, which was split between Sunbelt properties at an average cap rate of 4.75% and gateway cities at 4.1%, 5.28% for industrial properties, 6.47% for retail properties, 7.65% for our U.S. office properties, and 6.25% for the Canadian office portfolio. The increase in cap rates used to value our properties resulted in a downward fair value adjustment of $139.9 million for Q3 2023 at the risk proportionate share. The fair value adjustment for the 9 months ended September 30, 2023 was $328.9 million at the risk proportionate share. As at September 30, our office portfolio of 22 properties comprised 24% of our total real estate assets.
Debt to total assets at September 30, 2023 was 43.9% compared to 44% at the end of 2022 and liquidity at September 30, 2023 was in excess of $1 billion. Debt to adjusted EBITDA at September 30, 2023 based on the trailing 12 months was 8.7x.
And with that, I’ll now turn the call over to Emily.
Emily Watson
Thanks, Larry and good morning everyone. Today, I will cover our third quarter same-store results from our multifamily platform as well as discuss some operational updates. Same-store revenue growth for the quarter was in line with expectations. Demand fundamentals continued to be favorable. Positive migration trends and continued job and wage growth in our markets, combined with the relative affordability of our renting versus owning are evidenced in our increasing resident retention and strong traffic trends.
We believe Lantower’s market diversification, with Sunbelt, gateway cities, infill and suburban exposure continues to serve us well. During the third quarter, we saw an increase in supply pressure in our Sunbelt region, which resulted in flat blended lease over lease pricing for Q3. As discussed on our last quarter’s call, we are focused on increasing resident retention as the new supply is absorbed. With our diversification strategy, innovative tools focused on increased efficiency and customer experience and a deeply experienced operating team. We believe we are positioned well to outperform our markets.
We continue to deliver solid operating results with same asset revenue growth in U.S. dollars increasing by 8.1% for the third quarter and same asset net operating income from our portfolio in U.S. dollars increasing by 15.2% for the 3 months ending on September 30, 2023 compared to the respective 2022 period. Occupancy ended the quarter at 95.2%, 21 basis points increase over the second quarter and 79 basis points over Q3 of ‘22.
Despite some supply headwinds in the Sunbelt, occupancy remain stable as a result of our strong consumer base, with a 20% rent to income ratio and strong retention, underscoring the continued positive fundamentals for Sunbelt multifamily. Lingering high interest rates continue to dampen the number of deals traded during the third quarter. Based on our recent internal third-party appraisals and a handful of recent Sunbelt sales comps, holding our S&P cap rates at 4.75% is appropriate and supported. We expect demand to remain healthy for institutional quality assets in the Sunbelt given the substantial capital flows interested and focused on long-term heavy Sunbelt multifamily allocation.
On the development front, Lantower West Love in Dallas, Texas remains on schedule and budget with framing nearly complete. Turns 1 and 2 have painted and textured drywall installed and the interior pool courtyard has fully installed facade materials which will allow for the pool construction to start by the end of the year. We expect to start pre-leasing Lantower West Love in early January of the upcoming year with first TCOs and occupancy starting at the end of first quarter 2024. Also in Dallas, Texas, Lantower Midtown has progressed considerably with framing reaching Floor 5, the top floor in most of Turns 1 and 2. We expect to start pre-leasing Lantower Midtown near the end of the first quarter 2024.
As mentioned in previous quarters, we are progressing through the different phases of design, drawing and permitting on the remainder of our Sunbelt development pipeline. Lantower currently has 4 fully permitted developments that can be started at any time, with 5 more developments expected to be ready in 2024. On the operational front, we continue to focus on what we control versus managing to the headlines.
As part of our innovation strategy, we made large strides in launching our centralization platform in the third quarter. Through enhanced technology including a new CRM system and artificial intelligence we are focused on increasing our bottom line while improving the customer experience. Our office associate to residents ratios started at one per 100 and ended the quarter at one per 115 with the target to increase to one per 120 to 30 range. Our technology enhancements are focused on improving efficiencies and expanding NOI margin.
In summary, the Lantower platform continues to achieve positive results and performance relative to our multifamily counterparts. It all starts with our people and it is a true testament to their commitment especially as market conditions that come more and more competitive, I’d like to say thank you to the Lantower team for their fortitude and success in delivering top tier results.
And with that, I’ll pass the conversation back to Tom.
Tom Hofstedter
Thanks, Emily. We will open up the call for questions, Operator.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] First question comes from Sam Damiani from TD Cowen. Please go ahead.
Sam Damiani
Thank you. Good morning, everyone. Emily, if you don’t mind the first question just for you with the same property NOI growth, quite strong. In the residential portfolio. I didn’t see the split up between Jackson Park and everything else in this quarter. But if you could provide that and give us a sense on as to how you see same property NOI in the Sunbelt portfolio, migrating over the Q4 and into 2024. Thank you.
Emily Watson
Sure. The NOI for Q3 was still pretty strong actually in Sunbelt, because despite the headwinds, we almost a 5% TAM. 4.9% for NOI. We did have some texture ups and so forth that affected our NOI, and Sunbelt, but not anything that that we’re concerned about, ongoing and quite frankly, was the thing that we weren’t expecting.
Sam Damiani
So the implication was Jackson Park was quite strong again this quarter. I wonder if you have some thoughts there. And also, again, what you’re what you’re thinking about for Q4 into 2024.
Emily Watson
Sure. Yes, I again, I think that one of our strengths is the diversification of location of our assets. So I think it makes sense, a little mutual fund effect, if you will, to have the Sunbelt along with the gateway cities to be able to depending on what part of the market so there will always be an imbalance of supply and demand somewhere. So I think that diversification will help us now but also ongoing. We are – we have always projected kind of a low teens for NOI we’re on track to hit that for 2023. For 2024, Sam, we’re in the middle of our budgets now. So I don’t want to opine and kind of tell you where they are in 2024, we’ll have our California bill come into our same store universe as well. So we’ll take time to get those budgets and kind of digest them and be able to come out and Q1 with a little better idea of what that looks like.
But I think 2024 in the Sunbelt will continue to add supply headphones, I think will peak probably in the second third quarter for that. And then 2025, I’ve told you last quarter, I think that I never saw ‘22 probably will never again in my career. But I think 2025 is really poised to do extremely well, given the drop off of the supply that we’re seeing in the Sunbelt.
Sam Damiani
Thank you. That’s helpful. And Tom, maybe for you just on the disposition side, obviously, you’re still fully confident you’re going to another deal before year end. So look forward to that. But how are you thinking about your disposition goal for next year, still focusing on office. And I wonder if you’ve listed any rezoning properties for sale at this point.
Tom Hofstedter
We haven’t listed any – we are not ready to be listed yet. They need another year. And we have – the market as you well know is very, very dead right now. If you’re going to mark something, it’s kind of I don’t think that’s the right approach and things off market is the way to go. Now you’ve probably heard that many others say the same thing. Line of sight to off market deals is not visible. You can’t predict what your off market deals are going to look like. I expect to be able to do sales I don’t expect to sales on market and therefore there’ll be choppy and very unpredictable.
Sam Damiani
Okay, thank you. I’ll turn it back.
Operator
Thank you. The next question comes from Mario Saric from Scotiabank. Please go ahead.
Mario Saric
Hi, good morning. Maybe just sticking to the disposition team, Tom, what do you think needs to happen in order for liquidity in the market to really pick up? For the types of assets that you are looking to sell.
Tom Hofstedter
Well, obviously the answer is lower interest rates, right? And the numbers, we hit the forehand well, when you have lower interest rates, all of a sudden you can deal with positive leverage, which you’re not dealing with right now and liquidity. So, lower interest rates will bring liquidity. Liquidity will bring the ability for buyers to finance right now, again, as you’ve probably heard from many others, a lot of the deals that are being structured right now or with VTVs and that doesn’t create much of a depth of the market, and that’s not necessarily much of disposition either, if it’s really 80% on a VTV. So lower interest rates are going to be the answer to that my own personal prediction is you’re going to see interest rates come down very rapidly than another by Q3 in 2024. But the first half has happened for years, going to be very difficult.
Mario Saric
Got it. Okay. And then on the $170 million of planned admissions for ‘23, can you give us a cap rate range on that?
Tom Hofstedter
Very healthy. And I can’t give you a range, but it won’t be indicative of the market. As we said beforehand, it’s an off-market deal and it’s whether it’s retail, whatever sector is, you won’t be able to use that transaction as a talking point to with the strength of the sector enough.
Mario Saric
Okay. Maybe switching over to Lantower, and Emily, I think you mentioned that the blended spread was flat in Q3. Was there a discernible difference between new lease spreads and renewal spreads during the quarter?
Emily Watson
Yes, Q3 actually, we were still, if you remember, we give our offers for renewal is 70 days prior. So the renewal average that we hit in Q3 was 6% to 7%. So that is that was really strong. Some of our markets, Austin, particularly was a little weaker. So we had some negative trade outs in some of the market. So we don’t expect a 6% to 7% renewal increase in fact again the retention is where we’re focused now, so we’re Q4, we’re already really strong and should hit a 60% retention with a 4% renewal. It’s kind of that range is what we’re seeing so far in Q4. So we’re seeing that kind of come down but remaining flat and I that’s what I anticipate to happen not only in Q4, but really probably through 2024 as well.
Mario Saric
Got it. So just to clarify, you’re expecting kind of blended flat spreads in ‘24 to focus on markets...
Emily Watson
Right. Exactly.
Mario Saric
Okay. And it was nice to see the occupancy tick up sequentially quarter-over-quarter. Were there specific markets that drove the 20 basis point increase or was it fairly uniform outside of Boston?
Emily Watson
Across the Sunbelt states it was fairly uniform. The market in New York is really tight. So that in fact, right now, I think Jackson Parks 99%, but they came through their Q3 kind of seasonality of the students transitioning really strong with the 70% retention there and maintained a 96%, 97% occupancy so that, that really gave the portfolio boost kind of another nod to the diversification strength of the portfolio.
Mario Saric
Got it. And when you are on the tenant retention, what percentage of renewals are turnovers are you having to offer concessions in the portfolio today relative to 3 months ago?
Emily Watson
Yes. Our concession levels are really small, in fact, less than 5% of the portfolio offered concessions in really the average of 2 weeks. So, we are a net effective shop. So we in fact even Jackson Park which is for the student portfolio last year we didn’t have to do that this year. So not very much, especially compared to some of our peers, we would – people want to know what they need to write their check for every month. We just think that’s the stronger way to go for our rent roll.
Mario Saric
Got it. Okay, last one for me, I think Emily you mentioned there were some deals in your markets that supported the four and three quarter cap rate this quarter. Can you share maybe the quantum of the sales volume that you are seeing out there that supports the valuations?
Emily Watson
Sure. We did see a couple of trades actually in the month of October here in Dallas that were at 4.75, but we also additionally that we cracked kind of everything that’s on the market, even though we are not actively pursuing anything, we still track it. So in the Q3, we tracked 20 properties that average 7,000 units, with the vintage of 2019 and those were all in the mid to high 4s. So depending on sub-market and loan assumptions with all of them kind of in every talking to brokers in our own internal values and then certainly the trades that came through in October were good to see. So lots of different data points that suggest we are right on target.
Mario Saric
Okay. That’s really helpful. Thanks for the info.
Emily Watson
Pleasure.
Operator
Thank you. The next question comes from Jimmy Chen from RBC Capital Markets. Please go ahead.
Jimmy Chen
Thanks. So just on Lantower and I know it sounds like you talked about 2025 potentially looking pretty strong as supply drops off quite dramatically and maybe alluding to perhaps even looking like 2022, just kind of want to understand kind of how you’re thinking about it and whether that’s part of the reason why we’re seeing some of those trades at these seemly still low cap rate?
Emily Watson
Yes, I think I think that’s exactly right. I think with the supply at the end of the day, the glut of supply long-term will still not create – will still have a shortage of housing. So – and that’s not going to go away and even if you put a shovel in the ground in 25, you are still 18 months out before you are being able to address that shortage. So there is laws of supply and demand that when that comes off and we are already seeing kind of those supply starts drop 45%, I think was the last real page number that I came – that I saw kind of Q3 of last year to this Q3 and then certainly starts that just aren’t penciling anymore. So I think ‘25 we are still going to have people and just to give you kind of frame of reference as well, Jimmy, the migration to the Sunbelt states for us is still over 10% of our leases are coming from other parts of the United States. So I don’t see that going away and they will still need a place to live. And I think 2025 is going to be hopefully another double-digit, but gosh, I’d take, 7 or 8 and I think it’s really kind of setting itself up to be a remarkable year.
Jimmy Chen
Okay. And so how are you thinking about business growth of Lantower, just people talking about potentially seeing opportunities to buy assets from developers who need to reequitize, is it – how are you thinking of allocating capital from those opportunities or still the development pipeline that you have currently?
Tom Hofstedter
I’ll take that. So sorry, the simple answer is really a cash management right now. We are not in equity raise mode obviously. And any sales that we do have to be realized, the opportunity cost is really buying back your own stock and paying down your debt. So I don’t think any division is really in strong growth mode. We will see growth mode in the residential on the intensification of properties and on the Lantower side structured on more of a JV basis, more fee-oriented with maybe some optionality buyback, but in a straight acquisition basis to go ahead and take advantage of a weak market, I don’t think we’re going to allocate funds to that right now.
Jimmy Chen
Okay. And then just last for me, in the news has being acquired by Chevron. I know there is a lot of term left, but any sort of preliminary thoughts or discussion on what could happen there and whether that changes, how you think about selling that asset going forward?
Tom Hofstedter
So, it’s early days. We reached out to them earlier last week and I would say some six months before we have visibility. I don’t think there is any synergies between Chevron and Hess, so I think they are in different businesses. And Chevron does own buildings in the Houston markets, two of them, one of them, they occupied fully. The other one I think is redundant. My guess is they will move out of there, so they could consolidate within the Hess Tower. I don’t think Hess is going to have to themselves and any need to as I have mentioned with consolidation merger of the two companies to have any less of the space requirements. So, the question is, are they going to move everything back into Hess and have one tower at the Chevron Tower, which is only a few blocks away and the Hess Tower to be renamed or not. But again, it’s early days. I think nothing really changed thing. I think we have a long-term at Hess. So, they are there, they are not going anywhere. And on the balance of the building, we have to discuss with them as they get to the appropriate time to see if they want to consolidate further into the building. As far as sales of the building goes, and I think it will be on track to look at potential sales. I think this does cloud the issue to an extent, but I don’t think it clouds it negatively. I think it clouds it positively, so just a question if there’s a willing buyer out there.
Jimmy Chen
Okay. Thank you.
Operator
[Operator Instructions] Next question is a follow-up from Sam Damiani from TD Cowen. Please go ahead.
Sam Damiani
Thanks. I just wanted to talk about the lease expires over the next couple of years within the Canadian office portfolio. There is 300,000 feet in Q4, another 400,000 square feet in each of the next 2 years, then a million feet coming up, I think in the industrial portfolio next year, any thoughts on retention or specific spaces that you know will or have renewed or were vaccant?
Tom Hofstedter
So, in the near-term, it’s more like a little bit further off than that. We don’t really have any looming 2024 issues that we have there. We have the TELUS which we have the right to give back to a third, which we did, that’s redevelopment play. Most of the deals that we are talking about are part of the redevelopment play. So, I don’t think there is any issues, whether they – we are not, we will never do long-term renewals anyhow. We will probably be relatively short night event, so there are no looming renewals that are bothering us in the short-term, short term meaning in the next couple of years.
Matt Kingston
Okay. I will just add that there is 105,000 square feet in the office that we spoke about – that I spoke about on my remarks that’s coming up in December 31, 20263 and that’s on a building that’s going to be rezoned into industrial. So, that’s part of it.
Tom Hofstedter
Yes. That’s a little further ahead than that, go ahead, Matt.
Matt Kingston
I am sorry, construction on that one is actually going to start in Q1 of next year.
Tom Hofstedter
Right. So, that’s I said a little bit ahead of that, that one is irrelevant. Yes, there was a buy out over there and it’s the value of the land is higher than the value of [indiscernible]. The value of the land for industrial is higher than the value of the building that we had on the books.
Matt Kingston
Right. Another one is, its front street has quite a lot coming up in ‘24, but that is also a redevelopment plate. So, that dovetails with our plans in terms of redevelopment and rezoning and another one would be 55 Yonge. Again we have consequentially proceeded with redevelopment plans for that. So, as Tom was mentioning, all of these files, we have a strategy for. Another one would be 77 Union, which we purchased a little over a year ago and with that one the city has been delayed a bit by some fun now with the province. And so in that case, we are actually seeking an extension with the vendor and the current tenant. So, we are strategizing around if we are able to extend them, we will and otherwise we are proceeding as rapidly as we can with redevelopment plans on it.
Sam Damiani
Appreciate that. Thank you, Matt. And I guess just on these some of these spaces be at TELUS Front Street or 55 Yonge, I mean you have obviously got redevelopment plans for all. But I guess just in terms of a rental revenue and FFO perspective, there will be a drop off on those spaces in those buildings that are expiring over the next couple of years?
Tom Hofstedter
Yes, so I think one of the things just our team is thinking about as well is looking at the tax classifications on these. So, we have had a lot of runway on this and we have been planning ahead. So, looking at reducing our operational costs both in terms of heating and cooling the buildings, what the tax class is, how we get our operational costs down as quickly as possible. All that is part of the strategy and we are not booking the new funds from things like merits and other files that we are working on the construction of.
Matt Kingston
Is it’s – but its straight answer to your questions. Obviously that we follow-up obviously other than the case of 55 Yonge which is a single tenant, TELUS which is single tenant. Unless they are a single tenant, the redevelopment is going to have some deterioration as tenants slowly move out. So, I think that is part of the given to create an overall, higher value through the process of residential development.
Sam Damiani
Okay. And I guess Tom, how would you characterize the value for, these types of buildings that are redevelopment plays right now in Canada?
Tom Hofstedter
So, again, I think I used the same numbers as I did a quarter ago because I don’t have any data to suggest otherwise. At the height of the room, let’s call it was Downtown Toronto, 325 available square foot. Matt spoke to that today. I think you are going to see evidence of sales at $200 a square foot. So, we would be using the $200 number. But we don’t expect to sell at $200 or we expect to build at $200, we expect to get a higher price in market of this.
Sam Damiani
And how about the liquidity on that, how would you characterize that?
Tom Hofstedter
At the $200 of a square foot level, that’s fine. And you want to get higher than that, it’s not. So, the challenge is going to be the some of the size of these buildings. And the other challenge, of course is if you have to replace the office, which is I think going to become extinct as far as the planning concept then you have a issue. But it’s a pure play residential, I think you are fine.
Matt Kingston
And Sam, I will just add the other piece of it is trying not to get over a certain size. So, when we have a site like 77 Union, which could be 1.41 million, 1.5 million square feet, we want to make sure it can be taken down in smaller chunks than that. So, we are pre-planning so that you are not trying to forward sell the entire site, but pieces of it, because right now we are seeing larger sites that are multi phase are also really struggling to get value on the Phase 2, Phase 3, etcetera parts of that site.
Tom Hofstedter
And we just clarified 77 is not the $200 asset. That’s more than $100 asset.
Matt Kingston
Yes, right.
Tom Hofstedter
Yes, that’s bite size. You take 500,000 square feet at $100 a square foot, that’s affordable, that’s buildable and the metrics of that can work for residential rental or condo. But of course it’s going to need someone’s vision as to where they expect them straight to lie 3 years, 4 years down the road.
Sam Damiani
For sure. Thank you all. It was very helpful. Thank you.
Operator
Thank you. The next question is a follow-up from Mario Saric from Scotiabank. Please go ahead.
Mario Saric
Hi. Sorry. One more for me, just on the back of Sam’s question. Tom, when you talk about it taking about a year to sell some of these rezoning assets, is that a function of your expectation that the $200 a square feet, it’s going to be higher a year from now, or is that…?
Tom Hofstedter
No, no, no, Mario, it’s not a year from now, we finish the zoning process, but let Matt speak to that. I am not the expert.
Matt Kingston
Yes. Hi Mario. So, I think it’s a couple of things. The first is that we have approvals in place now for almost all of our assets or imminently will. So, 55 Yonge is the final one that we are probably weeks away from being done. The issue is that our existing approvals have office components to them. Because that was the rule at the time we applied 2 years ago. We are seeing a change with the City of Toronto. They are finally having some common sense listening to us and so we are going back in to find a compromise where we do not have to replace the office and we instead do something else. So, some other quid-pro-quo that like affordable housing or community benefits instead of the office. And so that is hugely advantageous to the city and to us. So, it’s a win-win and as a result of that we are going to be resubmitting on a number of files. We don’t expect the process to take as long as traditional because we have already haggled out how tall they are, how setback they are from things, etcetera, etcetera. We are really just talking office versus something else. So, that’s why we need time to finish a new approval on them. And just further to what Tom was saying earlier, our issue right now is there are deals that are out in the market like Dream is marketing King and SEMCO as an example, the Elephant and Castle projects from our intelligence on it, there are maybe three or four bidders, may be. A site like that 2 years ago would have garnered 20 bids. It’s centralized…
Tom Hofstedter
That’s a little bit of footnote on that too. That’s a mixed-use project as well. It’s not a pure play and it’s a pure play 200 – as I mentioned for our 200,000 square foot is DFM residential that would sell at a premium. It has a hotel component on that, which is a hell of a lot better than office component of course. So, now you have to find a player who is a hotel player and a condo. Next, one of the reasons you don’t have 10 buyers besides their market conditions, it’s also a unique asset. In that case it’s 55145, its front street, etcetera. All it includes extending. All of our projects we expect to be totally residential and fairness to the King Street project that was referred to. He also, Matt also went in a while ago when there was office replacement and he was wise enough to use hotel as a replacement for the office component. In all municipalities, including New York, you name it, right across the board this concept of more housing, getting rid of the office component, which is just as a year ago we wanted to have office because of the high tax assessment that were achieved from office replacement, that’s now being abandoned in lieu of the negotiation and we are probably going to be the front runners to a great extent on that negotiation. John Love [ph] did at Kings that did achieve a negotiation on blur and we sold 1235 pay your cost in the old days. He did achieve somewhat of a milestone by taking the 1235 Bay which was ours and he had 1255 Bay. One is going to be a high rise residential, the other one he made the commitment to keep the office building as an office building of course down the road, who knows. But right now he created that milestone to stepping stone. So, we expect very much that the market this city is going to be receptive for negotiation. In all cities, there is cash, there is either cash in lieu or it’s going to be some form of affordable housing. So, all of them are better for both the city and for the development.
Matt Kingston
So, we basically we want to do better on the approval we have and we think the market is not great right now. So, we are not in a rush to go to market. It really is a function of not only interest rates, but we are at 12,000 sales year-over-year. If you go from October of last year to September of this year, that means we are down 47%. But as Tom pointed out to me yesterday, if you look just at the last three months, we only did 2,500 deals in the last quarter. So, if you extrapolate that out over the next year, that means only doing 10,000 deals. So, then you are down 60% year-over-year. So, the challenge is that the market is not in a great state right now. Builders are not doing fantastically well. So, we are not going to get a great value. So, we are waiting for the tides to turn and we are also trying to do better on our approval. That’s why we are saying late next year.
Tom Hofstedter
But just remember one last point, timing is not of the essence,t he simple reason that on our 55 Yonge union streets, when it’s not a single tenant or tailless, we have an unusually high percentage of buildings that have single tenant that you do deal with the tenant who has gone. And now all of a sudden you have your residential project. When its multi-tenant, it’s very difficult because you have to wait till the last tenant is there and have a buyout. So, we have Bell which in case of Bouchard we have got to deal with. We have TELUS which we have done deal with and you go through this 55 Yonge, we did a deal with CIBC. We have the ability to go ahead 69 Yonge. We have the ability to go ahead and put a timeline to it and say hey this is not going to be dragged out with tenants having office to renew this into another 25 years. We have a site that basically says that within a certain 2 years to 10 years, 8 years, 7 years at the latest, we have ability to go ahead and have a natural vacate – where the tents naturally vacate. So, timing is not the essence on that for 55 Yonge and for – I would say 55 Yonge, 69 Yonge Street. And TELUS and Bell are done already, so those are there because we have ability to vacate there, do the deal with the tenants. Otherwise time there is another essence as I said it takes a little longer.
Mario Saric
Okay, that is all very clear and makes sense. Thank you.
Tom Hofstedter
Thanks.
Operator
Thank you. There no further questions. I will turn the call back over for closing comments.
Tom Hofstedter
Thanks everybody and have a great day.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.
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H&R Real Estate Investment Trust (HRUFF) Q3 2023 Earnings Call Transcript