H&R Real Estate Investment Trust

Good morning and welcome to H&R Real Estate Investment Trust's 2020 First Quarter Earnings Conference Call. Before beginning the call, H&R would like to remind listeners that certain statements, which may include predictions, conclusions, forecasts, or projections, in the remarks that follow may contain forward-looking information, which reflects the current expectations of management regarding future events and performance and speak only of today's date. Forward-looking information requires management to make assumptions or rely on certain material factors and is subject to inherent risks and uncertainties, and actual results could differ materially from the statements in the forward-looking information. 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 our website and on www.cdar.com. I would now like to introduce Mr. Tom Hofstetter, Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstetter.

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

Thank you, Tom. Good morning, everyone, and thank you for joining us today. Starting with funds from operations, FFO, Q1 2020 basic and diluted FFOs was 45 cents per unit compared to 45 cents per unit in Q1 2019. Included in net income and FFO were lease termination fees of $200,000 in Q1 2020 compared to 6 million in Q1 2019. For the quarter, normalized FFO was 46 cents per unit compared to 44 cents per unit in Q1 2019. We view this as quite an achievement given that we have completed approximately $1 billion of asset sales over the past 15 months compared to approximately $206 million of property acquisitions during the same period. Our office portfolio occupancy at March 31st was 99.3% and committed occupancy was 99.8%. Excluding the lease termination fees mentioned previously, the same asset property operating income from our office portfolio increased by 1.2% over Q1 2019. Our industrial portfolio's occupancy at March 31st was 98.9%. The same as the property operating income from our industrial portfolio increased by 2.8% over Q1 2019. Construction is continuing in Caledon, Ontario on the 343,000 square foot industrial building we have leased to DataPost for 10 years. Occupancy is expected to commence in Q4 2020, and as a result of COVID-19, we have temporarily suspended all other industrial construction. Same as the property operating income from our retail portfolio decreased by 2.1% as compared to Q1 2019, mainly as a result of Q1 2019 benefiting from certain 2018 final tenant billings. Same asset property operating income from our residential portfolio in U.S. dollars increased by 33% over Q1 2019 due to properties including Jackson Park that were in lease up last year. Excluding these properties in lease up, same asset property operating income increased by 8%. Included in our net loss for Q1 is a fair value adjustment on real estate assets of $1.3 billion. This is by far the largest fair value adjustment to date. These adjustments are a result of our regularly, quarterly R4S value process and include the following two trends resulting from COVID. One, an acceleration of challenging conditions in the retail landscape impacting the market pricing of retail properties. And two, energy sector challenges that have impacted the credit quality of many companies operating in this industry. and the related impacts on property market fundamentals in markets significantly influenced by energy industry employment and profitability. The IRS fair value of H&R's retail portfolio has been reduced by approximately $660 million, with the changes relating primarily to inputs into the forecasting of cash flows, including normalized vacancy rates, market rental rates, tenant retention rates, and releasing assumptions. The revised inputs into discounted cash flow models have resulted in lower fair value market values and higher implied overall cap rates, in particular for our enclosed mall properties. The average fair value of H&R's office portfolio with significant energy sector tendencies has been reduced by approximately $680 million. These properties are generally subject to long-term leases and as such there have been limited changes to cash flow models but more significant changes to the discount rates. While there have been very few recent transactions for comparable properties, our valuation team used prudent assumptions reflecting pricing signals observed in oil prices and the energy sector corporate credit markets. These fair value adjustments have hit our portfolio in Alberta the hardest, as shown by the decline in fair value in Alberta of approximately $900 million. from $3.2 billion at year end to $2.3 billion at March 31, 2020. The fair value adjustment was the primary reason for our net asset value decreasing from $25.79 per unit at year end to $22.26 per unit as at March 31, 2020. Management of the Board strongly supported taking a more proactive approach to updating fair market values to ensure prudent financial reporting practices. Should retail industries' plans recover and or energy industry conditions improve, we will have the opportunity to update fair values. As at March 31, 2020, debt-to-total assets was 47.9% compared to 44.4% at December 31, 2019. The increase in debt-to-total assets is primarily due to the fair value adjustment discussed previously. In February 2020, H&R repaid all of its Series P senior debentures upon maturity for a cash payment of $125 million. In March 2020, H&R repaid all of its Senior Series F debentures upon maturity for a cash payment of $175 million. There are no further debenture maturities this year or in 2021. Our next venture maturity will be in May 2022. And as at March 31, 2020, H&R only had $116.3 million of debt maturing during the remainder of 2020, consisting of $64.8 million in mortgages and the balance from a secured line of credit from a Canadian bank. Subsequent to March 31, 2020, we bolstered our liquidity by securing a $425 million line of credit from a syndicate of four Canadian banks and secured a $100 million mortgage, secured by a previously unencumbered property. This new credit facility and mortgage were arranged following the onset of COVID and demonstrate H&R's strong access to capital. Rent collection has been a key focus during the pandemic and one we believe we have performed well while also accommodating the needs of our tenant partners. To date, Our rent collections for April amounted to 85% and rent collections for May amounts to 80% currently. I will now turn the call over to Pat to give an update on our retail division.