H&R Real Estate Investment Trust

TSX:HR.UN

Earnings Call Transcript

[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 in the forward-looking information.In discussing H&R's financial and operating performance and in responding to your questions, we may reference certain financial measures, which do not have a meaning recognized or standardized under IFRS or Canadian Generally Accepted Accounting Principles and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net income or comparable metrics determined in accordance with IFRS as indicators of H&R's performance, liquidity, cash flows and profitability. H&R's management uses these measures to aid in assessing the REIT's underlying performance and provides these additional measures so that investors can do the same. Additional information about the material factors, assumptions, risks and uncertainties that could cause actual results to differ materially from 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 at www.sedar.com.I would now like to introduce Mr. Mr. Hofstedter, Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstedter.

[Thomas Hofstedter, executive]

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 companies with long weighted average lease terms remain 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 their 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 of USD 13.3 million, and an automotive tenant with tenancy-related property in Roswell, Georgia for approximately USD 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 noncore assets by the end of the year.During the 9 months of the year, the repurchase and canceled 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 in same-property NOI since 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 closure, excluding rezoning portfolio has declined from 36% to 17%. Coinciding this progress is the improvement in liquidity position and balance sheet metrics.And with that, I'll turn it over to Larry.

[Larry Froom, executive]

Thank you, Tom, and good morning, everyone. I'll start on 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 a 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 who lease will now end on December 31, 2023. In October, last month, H&R submitted site plan application to the City of Mississauga for a new single story, 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. In Q3, 2023 FFO funds 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 the sale of an option to purchase land. Excluding this item and other nonrecurring items such as lease termination fees, FFO would have been $86 million for the 3 months ended December 30, 2023, or $30.07 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 REIT's proportionate share.The fair value adjustment for the 9 months ended September 30, 2023, was $328.9 million at the REIT's 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 will now turn the call over to Emily.

[Emily Watson, executive]

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 continue 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 supply headwinds in the Sunbelt, occupancy remains 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 F&B 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 fascade materials, which will allow for the pool construction to start by the end of the year. We expect to start preleasing 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 preleasing Lantower Midtown near the end of the first quarter of 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 four fully permitted developments that could 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 resident ratio started at 1:100 and ended the quarter at 1:115, with the target to increase to 1:120 to 1:130 range. Our technology enhancements are focused on improving efficiencies and expanding NOI margins.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, become 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 will pass the conversation back to Tom.

[Thomas Hofstedter, executive]

Thanks. And we'll open up the call for questions. Operator?

[Operator]

[Operator Instructions] First question comes from Sam Damiani from TD Cowen.

[Sam Damiani, analyst]

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 out between Jackson Park and everything else in this quarter. 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?

[Emily Watson, executive]

Sure. CNOI for Q3 was still pretty strong actually in the Sunbelt despite the headwinds, we almost 5%, Sam, 4.9% for CNOI. We did have some tax true-ups and so forth that affected our NOI in Sunbelt, but not anything that we're concerned about ongoing and quite frankly wasn't something that we weren't expecting. So it was in line with our expectation.

[Sam Damiani, analyst]

So the implication was Jackson Park was quite strong again this quarter. I'm wondering if you have some thoughts there and also again, what you're thinking about for Q4 into 2024?

[Emily Watson, executive]

Sure. Yes again, I think that one of our strengths is the diversification of a location of our assets. So I think it makes sense for the 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 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 deals come into our same-store universe as well. So we'll need some time to get those budgets and kind of digest them and be able to come out in Q1 with a little better -- of what that looks like. But I think 2024, and the Sunbelt will continue to have supply headwinds. I think we'll peak probably in the second, third quarter for that. And then 2025, I told you last quarter, I think that I never saw a [ 22 ] and 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, analyst]

That's helpful. And Tom, maybe for you, just on the disposition side. Obviously, you're still confident you're going to ink 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?

[Thomas Hofstedter, executive]

We haven't listed and we said they're 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 way to approach to things off-market is the way to go now. You've probably heard that from 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 do sales on market, and therefore, it will be choppy and very unpredictable.

[Operator]

The next question comes from Mario Saric from Scotiabank.

[Mario Saric, analyst]

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, so types of assets that you're looking to sell?

[Thomas Hofstedter, executive]

Well, obviously, the answer is lower interest rates, right. And we are not hitting the numbers we hit beforehand. But 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 probably heard from many others, a lot of the deals that are being structured right now are with VTB's, and that doesn't create much of a depth of the market. And that's not necessarily much of a disposition either if it's really 80% on the VTB. 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 in another -- by Q3, 2024. But the first half is past and the year is going to be very difficult.

[Mario Saric, analyst]

Got it. Okay. And then on the $170 million of planned distributions for '23, can you give us a cap rate range on that?

[Thomas Hofstedter, executive]

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, we won't be able to use that transaction as a talking point to the strength of the sector or not.

[Mario Saric, analyst]

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, executive]

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 was really strong. Some of our markets, Austin, particularly was a little weaker. So, we had some negative trade-outs in some of the markets. 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 off to 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 that's what I anticipate to happen, not only in Q4, but really probably through 2024 as well.

[Mario Saric, analyst]

Got it. So just to clarify, you're expecting kind of blended flat spreads in '24 to focus -- your attention?

[Emily Watson, executive]

Exactly.

[Mario Saric, analyst]

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 inside of Austin?

[Emily Watson, executive]

Yes. Across the Sunbelt states, it's fairly uniform. The market in New York is really tight. So that, in fact right now, I think Jackson Park 99%, but they came through their Q3 kind of seasonality -- the 2 transitioning really strong with a 70% retention there and maintain the 96%, 97% occupancy. So that really gave the portfolio a boost kind of another nod to the diversification strength of the portfolio.

[Mario Saric, analyst]

Got it. And when you're on the tenant retention, what percentage of renewals, or turnovers are you having to offer concessions in the portfolio today relative to 3 months ago?

[Emily Watson, executive]

Yes. Our concession levels are really small. In fact, less than 5% of the portfolio offered concessions and really at 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 rolls.

[Mario Saric, analyst]

Okay. Last one from me. I think Emily, you mentioned that there were some deals in your markets that supported the 4.75% cap rate this quarter. Can you share maybe the quantum of the sales volume that you're seeing out there that supports the valuation?

[Emily Watson, executive]

Sure. We did see a couple of trades actually in the month of October here in Dallas, that worth 4.75%. But we also additionally to that, we track everything that's on the market, even though we're not actively pursuing anything we still track it. So in the Q3, we tracked 20 properties that average 7,000 units is with the vintage of 2019. And those were all in the mid to high 4s. So depending on submarket and loan assumptions, but all of them kind of every talking to brokers and 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're right on target.

[Operator]

The next question comes from Jimmy Shan from RBC Capital Markets.

[Khing Shan, analyst]

So just on Lantower 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. And just kind of sure I 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 I'm seeing these still low cap rate?

[Emily Watson, executive]

Yes, 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 -- we'll still have a shortage of housing. So -- and that's not going to go away. And even if you put a shovel on the ground in '25, you're still 18 months out, before you're being able to address that shortage. So there's laws of supply and demand that -- when that comes off, and we're already seeing kind of those supply starts drop 45%, I think, was the last real page number 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're still going to have people. And just to give you kind of a 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'll still need a place to live. And I think 2025 is going to be hopefully another double-digit, but gosh, I'd take 6, 7 or 8. And I think it's really kind of setting itself up to be a remarkable year.

[Khing Shan, analyst]

Okay. And so how are you thinking about business growth of Lantower is people talking about potentially seeing opportunities to buy assets from developers who need to re-equitize. Is it -- how are you thinking of allocating capital? Is it from those opportunities or still -- the development pipeline that you have currently?

[Thomas Hofstedter, executive]

Sorry, the simple answer, it's really a cash management right now. We're not in an equity raise mode, obviously. And any sales that we do have to be realized that 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 property down on the Lantower side, structure on more of a JV basis, more fee-oriented with maybe some optionality buyback. But on 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.

[Khing Shan, analyst]

Okay. Okay. And then just last from me. In the new test being acquired by Chevron, I know there's 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?

[Thomas Hofstedter, executive]

So it's early days. We reached out to them earlier last week, and I'd say some 6 months before we have visibility. I don't think there's any synergies between Chevron and Hess, so I think they're in different businesses. Chevron does own buildings in the Houston market, 2 of them; one of them they also supply fully. The other one, I think, is redundant. My guess is they'll move out of there. So they could consolidate within the Hess Tower. I don't think Hess is going to have themselves and may need to, as I mentioned, with consolidation, merger of the 2 companies to have any less of the space requirement. So the question is, are they going to move everything back into Hess and have one tower, the Chevron tower, which is only a few blocks away and Hess tower to be renamed or not. But again, it's early days. I think nothing really changed.I think, we have a long-term with Hess so they're there. They're not going anywhere. And on the balance of the building, we have to discuss with them how to get to the appropriate time to see if they want to consolidate further into the building. As far as sales of the building goes, 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 negatively. I think it clouds it positively. So it just a question if there's a willing buyer out there.

[Operator]

[Operator Instructions] Next question is the follow-up from Sam Damiani from TD Cowen.

[Sam Damiani, analyst]

I just wanted to talk about the lease expiries over the next couple of years. Within the Canadian office portfolio, there's 300,000 feet in Q4, another 400,000 square feet in each of the next 2 years, then 1 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 will vacate?

[Larry Froom, executive]

So in the near term, it's more like a little further off than that. We don't really have any looming 2024 issues that we were aware of. We have the Telus Tower, which we -- they had the right to go back to third, which we did, that's a redevelopment play. Most of the deals that we're talking about are part of the redevelopment play. So I don't think there's any issues whether they -- we're not -- we wouldn't ever do long-term renewals anyhow -- probably relatively short in neither event. So there's no looming renewals that are bothering us in the short-term, short term meaning in the next couple of years.

[Thomas Hofstedter, executive]

Sam, I'll just add that there's a 105,000 square feet in the office that we spoke about that I spoke about in my remarks that's coming up in December 31 this year, and that's on third building that's going to be rezoned into industrial better part of it. A little further ahead than that. Go ahead, Matt.

[Matt Kingston, executive]

I'm sorry, construction on that one is actually going to start in Q1 of next year.

[Thomas Hofstedter, executive]

Right. So that's why I say a little bit ahead of that. That one is irrelevant. There was a buyout over there, and it's -- the value of the land is higher than the value of building. The value of the land for industrial is higher than the value of the building that we had on the place.

[Matt Kingston, executive]

Right. Another one is Front Street, has quite a lot coming up in '24, but that is also a redevelopment play. So that dovetails with our plans in terms of redevelopment and rezoning. And another one would be 55 Young. 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 with province. And so in that case, we're actually seeking an extension with the vendor and the current tenant. So, we're strategizing around. If we're able to extend them, we will. And otherwise, we're proceeding as rapidly as we can with redevelopment plans on them.

[Sam Damiani, analyst]

Appreciate that. I guess just on these -- some of these spaces, be it Telus, Front Street or 55 Young, I mean you've 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?

[Matt Kingston, executive]

Yes, right, 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've 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're not booking the new funds from things like Moritz and other files that we're working on the construction of.

[Thomas Hofstedter, executive]

The straight answer to your question, obviously, that we follow-up, obviously, other than the case of 55 Young, which is a single tenant, Telus, which is single tenant, unless there's a single tenant, the redevelopment is going to have some deterioration as tenants only 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, analyst]

Okay. And I guess, Tom, how would you characterize the value for these types of buildings that are redevelopment plays right now in Canada?

[Thomas Hofstedter, executive]

So again, I think I used the same numbers as I did a quarter ago, because I don't have any data that suggests otherwise, I'd say at the high of the let's call it a in Toronto was 325-mile square foot. And I spoke to that, today, I think you're going to see evidence of sales at $200 a square foot. So, we'll be using the $200 of them. But we don't expect to sell at $200 nor, we expect to build at $200. We expect to get a higher price in market for this.

[Sam Damiani, analyst]

And how about the liquidity on that? How would you characterize that?

[Thomas Hofstedter, executive]

$200 a square foot level, it's fine, if you want to get higher than that it's not. The challenge is going to be some of the size of these buildings. And the other challenge, of course, is if you get to replace the office, which is I think going to become extinct as far as planning concept, then you have an issue. But it's a pure-play residential, I think you're fine.

[Matt Kingston, executive]

And Sam, I'll 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 1.4 million, 1.5 million square feet, we want to make sure it can be taken down in smaller chunks than that. So we're preplanning so that you're not trying to forward sell the entire site. But pieces of it. Because right now, we're seeing larger sites that are multiphase are also really struggling to get value on the Phase II, Phase III, et cetera, parts of that site.

[Thomas Hofstedter, executive]

Let me just clarify, 77 Union is not the $200 asset, that's more than [ $100 plus ]. Let's bitesize. We get 5,000 square feet, it's $100 a square foot, that's affordable, that's billable. 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 interest rates to like 3, 4 years down the road. For sure.

[Operator]

The next question is a follow-up from Mario Saric from Scotiabank.

[Mario Saric, analyst]

One more for me just on the back of Sam's question. Tom, when you talk about taking about a year to sell some of these rezoning assets, is that a function of your expectation that the $2 a square foot is going to be higher a year from now? Or is that?

[Thomas Hofstedter, executive]

No, no, no -- look a year from now we'll finish the zoning process, but let Matt speak to that. I'm not the expert.

[Matt Kingston, executive]

Yes. 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 Young is the final one that we're 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 two years ago. We are seeing a change with the City of Toronto.They are finally having some common sense of listening to us. And so, we're 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 benefit 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're going to be resubmitting on a number of files. We don't expect the process to take as long as traditional, because we've already handled out how tall they are, how set back they are from things, et cetera, et cetera, we're 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 CIMCO as an example, the Elephant & Castle project. From our intelligence on it, there are maybe 3 or 4 bidders maybe. A site like that 2 years ago would have garnered 20 bps. It's center…

[Thomas Hofstedter, executive]

A little bit of footnote on that, too. That's a mixed-use project as well. Yes. It's not a pure play. And it's a pure play, as I mentioned, 200,000 square foot of 38.12 residential that would sell at a premium. It has a hotel component on that, which is a hell a lot better than that of course. So now you have to find a player who is a hotel player and had a condo, next, one of the reasons you don't have 10 buyers besides the market conditions.It's also a unique asset. In that case of 55, 145 at Front Street, et cetera, all includes [ extension ]. All of our projects we expect to be totally residential. In 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 which just is a year ago, everyone -- wanted to have office, because of the high tax assessment that we achieved from office replacement, that's now being abandoned in loop over negotiation. And we are probably going to be the frontrunners to a great extent on that negotiation. Jon Love at KingSett did achieve a negotiation on Bloor, and we sold them 1235 Bay, of course, 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 a commitment to keep the office building as an office building. Of course, down the road, who knows, but right now, he created that milestone, it's a stepping stone. So, we expect very much that it's going to be receptive for negotiation. And all cities just cash, there's either cash and new awards going to be some form of affordable housing cost. All of them are better for both the city and for the development.

[Matt Kingston, executive]

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're not in a rush to go to market. It really is a function of not only interest rates, but we're at 12,000 sales year-over-year if you go from October of last year to September of this year. That means we're down 47%. But as Tom pointed out to me yesterday, if you look just at the last 3 months, we only did 2,500 deals in the last quarter. So if you extrapolate that out over the next year that means you're only doing 10,000 deals. So then you're down 60% year-over-year. So the challenge is that the market is not in a great state by now.Builders are not doing fantastically well. So we're not going to get a great value. So we're waiting for the tide to turn and we're also trying to do better on our approval that's why we're saying late next year.

[Thomas Hofstedter, executive]

But just remember one last point. Timing is not of the essence for the simple reason unlike 55 Young or Union Street whether it's not a single tenant or tell us. We have an unusually high percentage of buildings that have single tenant that you do a deal with the tenant he's 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 to the last tenant is there and have a buyout.So we have bell which in the case of Bouchard, we've done a deal with -- we had Telus which we've done a deal with -- and we go through the 55 Young, we did a deal with CIBC. We have the ability to go ahead 69 Young. We have the ability to go ahead and put a time line to it and say, "Hey, this is not going to be dragged out with -- tenants having an office, knew this, another 25 years.We have a site that basically said that within a certain 2 years to 10, 8, 7 years at the latest, we have the ability to go ahead and have an actual vacate -- where the tenant can actually vacate. So timing is not the essence of the 55 Young and for -- I would say, 55 Young, 69 Young Street, Yong Street, and Telus and Bell are done already. So those are there, because we have building to vacate that deal with the tenants. Otherwise, time is not an issue, it takes a little longer.

[Operator]

There are no further questions. I will turn the call back over for closing comments.

[Thomas Hofstedter, executive]

Thanks, everybody. 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.