H&R Real Estate Investment Trust

Good morning and welcome to H&R Real Estate Investment Trust 2020 Fourth 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 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 www.cdar.com. I would now like to introduce Mr. Tom Hofstadter, Chief Executive of H&R REIT. Please go ahead, Mr. Hofstadter.

Thank you, and good morning, everyone. I'm Tom Hofstadter, H&R's CEO, and I'd like to thank everyone for joining us on today's call. With me here virtually are Larry Froome, our CFO, Philippe Lapointe, CEO of LandTower, Pat Sullivan, CEO of Primaris, Alex Avery, EVP Asset Management and Strategic Initiatives, and Robin Kestenberg, EVP Corporate Development. We are gathered here today to celebrate the end of 2020 and a good riddance to 2020. Despite being one of the worst years for humanity in a long time, we're pleased to report solid financial operating results. We responded to the challenges of 2020 in a manner consistent with the conservative nature of H&R Reid. We prioritized the safety of our employees, tenants, and visitors to our properties and followed all recommended protocols, including social distancing, frequent cleaning, and temporary closure of select properties. From a business perspective, we battened down the hatches, focused on both ensuring smooth operations and maintaining a strong financial position. As the team is about to discuss, we are pleased with how well our portfolio has performed, underlining the stability and resilience of our business. Now I'll turn it over to Philippe, who will review our multi-residential operations, followed by Pat, who will provide an update on our retail portfolio, and then to Larry, who will provide some context on our financial results. And finally, I'll make some closing remarks. Philippe, over to you.

Thanks, Tom. Good morning, everyone. As we report on the closing of 2020, I'd like to begin by revisiting the dedication of our on-site and corporate staff members. As mentioned in previous quarters, our collections rate remains above the industry average, largely due to their exceptional work. On the JV development front, the Pearl in Austin, Texas is scheduled to fully deliver in the third quarter of 2021. Nightingale in Seattle, Washington is in the early stages of pre-leasing, and the project will be fully delivered in April of this year. Phase one of our Hercules development north of San Francisco, named The Exchange, is currently 74% occupied. Construction of Phase 2, named The Grand, has remained on schedule and is expected to deliver in the second quarter of 2021. Lastly, Shoreline Gateway, our 35-story tower in Long Beach, California, is also on schedule and expected to be delivered in the summer of 2021. To supplement our JV development partnerships in the U.S. Gateway markets, LandTower has been increasingly focused on expanding its wholly-owned ground-up development platform. Internally managed multifamily development is, in our opinion... the best strategy to increase shareholder value within our space. The expected development yields relative to historically low Class A cap rates provide strong value creation and risk-adjusted returns. With over 175 bps of yield coverage, coupled with the benefit of retaining 100% of the upside economics, our recent land purchases in Dallas, Texas and Tampa, Florida, underscore our intent to capitalize on this development strategy. LandTower is able to leverage its brand and network to source opportunities its market-level experience to select sites, and its property management division to help design, plan, and operate an exceptional multifamily community. The synergies between our divisions bolster our competitive advantage as a vertically integrated multifamily investment platform and operating company. As previously mentioned, Landtower has been able to secure additional Class A sites for development in our target markets and expects to source additional opportunities in the upcoming quarters. For instance, we recently acquired an infill site in Dallas, Texas, in proximity to the Dallas Love Field Airport and Medical District. The plan for the 5.4-acre site is a five-story community with approximately 415 units. Additionally, on January 28th, we purchased a 4.2-acre infill site with direct frontage to Highway 75 North Central Expressway, one of the most trafficked thoroughfares in the core of Dallas. we expect to build a similar five-story wrap product with approximately 360 units on that site. As always, we look forward to sharing more information on the timing of these developments next quarter. On the topic of prevailing Class A multifamily cap rates, we found it prudent to convey what we're seeing in a private market from a valuation perspective. Due to favorable debt terms stemming from historically low interest rates, paired with an increased institutional appetite and capital allocation for multifamily investment, we're seeing substantial cap rate compression in our Sunbelt markets. For context, we witnessed cap rates for comparable land-tower assets decreased by well over 50 bps on average across all of our markets in 2020. This sentiment is shared by most of our peers, both public and private. Quite counterintuitively, public real estate valuations are trading at an elevated discount, illustrating an increasing detachment from valuations of the underlying real estate. Consequently, this reiterates our observation that many publicly traded multi-family REITs are thus undervalued. On the Lantara River landing front, our leasing pace continues to beat expectations. As of today, we are 28% occupied and have leased 169 apartments. We are pleased with the leasing velocity that we experienced during the fall and winter months and expect an even more impressive spring and summer leasing season. On to Jackson Park, as we mentioned last quarter, we're encouraged what we believe to be the start of a rebound from an operational perspective. The return to stabilization will largely be driven by the vaccine rollout, workers returning to the office, and students returning to the classroom. With that said, the property is expected to gain positive absorption as we enter the favorable spring and summer leasing season, and we hope to experience a noticeable recovery by the end of 2021. We remain confident that Jackson Park is one of the best, if not the best, value proposition for prospective residents in the submarket when considering location, amenities, and quality of construction. We have been encouraged by the elevated recent traffic and, most importantly, the stronger lease conversion rates. As an anecdote, the average lease conversion rate over the past few weeks has been over double the historical average, underscoring our belief that a recovery is in sight. On the financial front, when excluding Jackson Parker, same asset quarter-over-quarter operating income growth equates to a positive 2.5% for the fourth quarter and a positive 6.9% for the 12 months ending December 2020 compared to the respective 2019 periods. Lastly, on a personal note, I'm very pleased with the positive same-store growth achieved in 2020, quite exceptional when considering all of the challenges related to COVID. And quite frankly, all the credit must go to my colleagues in our U.S. markets and at our corporate office who work tirelessly for the betterment of our communities. And with that, I will pass along the conversation to Pat.