H&R Real Estate Investment Trust

Good morning and welcome to H&R Real Estate Investment Trust 2021 Second 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, 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 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 Hofstetter. Chief Executive Officer of H&R Retail. Please go ahead, Mr. Hofstadter.

Good morning. I'd like to thank everyone for joining us today. With me on the call are Larry Frum, our CFO, Patrick Sullivan, COO of Primaris, Philippe Lapointe, COO of Landtower, Alex Avery, Executive Vice President, Asset Management and Strategic Initiatives, and Robin Kestenberg, Executive Vice President, Corporate Development. I'm very pleased to report H&R's stable and consistent second quarter financial and operating results reflecting the quality, strength, and resilience of our portfolio and balance sheet. We are in exciting times with H&R with the impact of the pandemic fading, accelerating lease up of our residential development properties, and of course, the execution of our strategic initiatives. As we detailed in our announcement last week with the $1.5 billion office portfolio sales of the Bell and the Bell office campus, we have laid the foundation for the next steps. Post-transaction, H&L will improve its tenant concentration profile, reduce Calgary office exposure, enhance our strategic flexibility. I'll now turn it over to our team to provide details of the second quarter 2021 financial and operating results. Philippe will review our multi-residential operations, followed by Pat, who will provide an update on our retail portfolio. Larry will then provide a brief update on office and industrial before providing some context for our financial results. And finally, I'll make some closing remarks.

over to you philippe good morning everyone i'm delighted to be on this call today to provide you with the latest significant progress made within the land tower residential platform we continue to make strides with our strategic initiatives referenced in the past while also adding new and innovative strategies to further our mission of becoming amongst the best fully integrated residential operating and development platforms in north america on the topic of portfolio performance When excluding Jackson Park, same asset property operating income from our portfolio in the U.S. dollar has increased by 5.7% and 4.9% respectively for the three- and six-month periods ending on June 30, 2021, compared to the respective 2020 periods. As you've probably heard from our publicly traded peers in Canada and the U.S., the U.S. multifamily industry is experiencing explosive leasing momentum today. supported by pent-up demand and favorable supply and demand fundamentals predominantly in the U.S. Sunbelt markets. Landtower's lease tradeouts, with a delta between a unit's previous lease rate to its new lease rate, has drastically increased over the past few months. For example, our lease tradeout for our entire portfolio, excluding Jackson Park, was over 18% in the month of July, led by the Tampa market at over 30% and the Austin market at over 25%. Additionally, our same-store occupancy as of this week is over 96% compared to 92% 12 months prior. While we certainly do not expect this rental rate growth trend to continue at this level for an extended period of time, we are certainly encouraged by the strong demand fundamentals in the residential sector. Furthermore, we are proud to announce that our Q2 operating income growth represents over 13 consecutive quarters of same-asset quarter-over-quarter positive NOI growth, once again, when excluding Jackson Park. Despite COVID's impact on our industry in 2020, in addition to the reinstated yet legally questionable CDC eviction moratorium, Lantau's ability to produce consecutive quarters of positive growth during this turmoil is particularly remarkable. And I'd like to personally thank our property management division, led by Emily Watson, and her team who are entitled to most of the credit. Furthermore, we are especially proud that Lantau Residential is only one of few publicly traded multifamily platforms that reported positive quarter-over-quarter net operating income growth throughout 2020 and 2021, when excluding Jackson Park. On the technology front, I'd like to provide an exciting update on our Smart Apartment Strategic Initiative Program. By the end of this upcoming September, our entire portfolio will have been fully converted to smart apartments. As a reminder, these smart apartment packages include smart locks, smart thermostats, and leak sensors that will provide the resident full apartment control, all from a single app. The results to date have been nothing short but exceptional as we are experiencing operational efficiencies and NOI growth, namely thanks to the keyless and remote access unit control, as well as the ability to climate control the few remaining vacant units more efficiently by leveraging the management software. While we are pleased with the smart apartment packages installed to date, we are continuing to further expand our technology-based initiatives to drive NOI growth and further differentiate LandTower's offerings. We are in the early stages of implementation of our virtual leasing platform to be rolled out across our entire portfolio, allowing future residents to tour and lease an apartment 24-7 without requiring a visit to our leasing office. We are extremely excited about this next strategic initiative as we expect it to yield numerous additional financial and operational benefits. As mentioned last quarter, our primary strategic growth initiative is our wholly owned development platform within LandTower. We currently have three active development projects in our U.S. Sunbelt markets. Firstly, I would like to provide an update on Landtower West Love, our infill site in Dallas, Texas, with proximity to the Dallas Love Field Airport and Medical District. The five-story, 413-unit WRAP development is expected to break ground around the end of this year. Also in the works in Dallas, Texas, is Landtower Midtown, a 4.2-acre infill site with direct frontage and visibility to the north central expressway and it's over 275,000 vehicles per day. We are currently drafting construction drawings on this five-story wrap development that will include approximately 351 units, and we expect to break ground on Lantower Midtown in the first quarter of 2022. Lastly, we are commencing construction drawings for a garden-style property called Lantower Bayside in Tampa, Florida. This development with approximately 271 units is adjacent to Highway 19, one of the most dominant thoroughfares in all of Pinellas County. This development is also expected to break ground in the first quarter of 2022. As a follow-up to our ESG initiatives mentioned in previous quarters, it is worth noting that we are carrying that same focus into our land tower development efforts. Every land tower development will be pursuing a National Green Building Standard, or NGBS certification, which is one of the most prominent and recognized certifications in the residential sector. In addition to these pipeline developments, we have additional owned sites and sites under contract that will soon join the land tower development pipeline. For context, if we continue our projected development pipeline on the developments under our control, we will add over 2,000 units or over half a billion U.S. dollars worth of multifamily over the next few years, eclipsing the 10,000-unit portfolio mark. From a return perspective, we are targeting development yields between 5.5% and 6%. for all projects in Landtower's development pipeline. The expected development yields relative to historically low Class A cap rates provide strong value creation and risk-adjusted returns. And with over 175 bps of yield coverage, coupled with the benefit of retaining the upside economics, and almost just as importantly, designing to Landtower's best-in-class design and quality standards, our intent is to continue the expansion of this highly accretive growth strategy for the foreseeable future. On the Lantau River landing front, our leasing pace continues to beat our expectations in budget. As of today, we are 78% occupied and have leased 466 apartments, or over 88% leased. Since September, when we opened our doors, we have averaged over 45 leases per month and have increased rents multiple times while simultaneously decreasing leasing concessions without any noticeable reduction in traffic. On the Jackson Park front, we would like to share a very promising update. As we have disclosed in recent weeks, Jackson Park's recovery has been nothing short but exceptional. Signed leases over the last few months have returned a property to stabilization. For example, Jackson Park signed a record 456 leases in June, which represented the most leases ever signed in a single month at Jackson Park by a large margin. For context, the most leases signed in one month during the original 2018 lease-up was under 200 leases. When including pending applications and leases out for signature, the property is 99% leased as of July 31st. We expect the occupancy to catch up to our lease percentage at the end of the third quarter or early fourth quarter, as this is when the majority of our pre-lease units will take occupancy. On the JV development front, we and our partners have taken advantage of the favorable disposition environment and have successfully marketed for sale a few of our JV developments. Over the next 60 days, we intend to close on the disposition of Hercules Phase 1 in Hercules, California, and Astera Park in the Seattle, Washington market. With a weighted IOR of nearly 30% and an equity multiple of 2x, we are proud to dispose of these two successful developments and redeploy into creative opportunities. We would also like to highlight the hard work of our JV partners, and just as importantly, congratulate them on two very successful developments. As for the JV developments that are not currently on the market, the Pearl in Austin, Texas is scheduled to fully deliver in the third quarter of 2021. Leasing has begun and been met with incredible demand, as evidenced by a lease percentage of 42%. Construction of phase two of our Hercules development named The Grand has remained on schedule and is set to be delivered in the third quarter of 2021. Lastly, Shoreline Gateway, or a 35-story tower in Long Beach, California, is also on schedule and expected to obtain final CO in in early September 2021. In summary, there's lots of good news coming from Lantau Residential, and I'm excited to deliver more news next quarter. And with that, I will pass along the conversation to Pat.