H&R Real Estate Investment Trust

Good morning and welcome to H&R Real Estate Investment Trust's 2021 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 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 our website at 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 everyone for joining us today to discuss H&R's fourth quarter and year-end financial and operating results and provide an update on our strategic repositioning plan. With me on the call are Larry Frum, our CFO, Philippe Lapointe, President of Land Tower Residential. 2021 was a truly transformational year for the REIT. Despite the enduring global pandemic, our teams accomplished many substantial milestones. Through transactions valuing over $4 billion, we successfully enhanced our portfolio's geographical exposure, asset mix, and tenant diversification, while also lowering leverage and increasing liquidity. In the fall, H&R announced its transformational strategic repositioning plan to create a simplified, growth-oriented business focusing on residential and industrial properties to serve a significant value for our unit holders. Our target is to be a leading owner, operator, and developer of residential and industrial properties creating value through redevelopment and greenfield development in prime locations within Toronto, Montreal, Vancouver, and high-growth U.S. Sunbelt and Gateway cities. The strategic plan encompasses four key initiatives. The first initiative was the tax-free spin-off to unit holders of all of H&R's enclosed malls and to Primera Suites, a new, completely independent, stand-alone publicly traded entity. The spin-off simplifies and enhances H&R's asset mix, and enables investors to value Pimerix's full-service internal national management platform and properties. The second initiative will be the exit of our remaining retail assets, including our grocery-anchored and essential service retail properties, and our interest in Echo Realty. Our $600 million grocery-anchored and essential service portfolio is comprised of high-quality properties anchored by strong covenant tenants such as Lowe's, Metro, Sobeys, and Walmart. These 55 properties comprising 2.7 million square feet are 98.5% leased and are primarily located in Ontario. Our investment in Echo Realty comprises 236 grocery anchorage shopping centers. This portfolio is similarly 95.8% leased, primarily to Giant Eagle, the largest supermarket chain in Ohio and Pennsylvania. Our third initiative is strategic disposition over time. Of all our offers, office properties do not offer significant redevelopment potential. There are currently 16 unique high quality office properties located in central business districts in major cities across the United States of Canada that meet this criteria. These properties are 99.5% occupied with a weighted average remaining lease term of 9.3 years and are leased primarily to strong investment grade tenants. The development team has been working diligently on the balance of the office portfolio to advance them through rezoning. We expect these 11 properties to yield 5,300 residential units and 390,000 square feet of industrial space upon approval. Last summer, we commenced the execution of our strategy to exit the office market with a successful sale of the Bowe, a 2 million square foot office building in Calgary, Alberta, and the sale of the Bell Office Campus in Mississauga, Ontario. We are very confident in our ability to sell the remaining office portfolio in line with our IFRS fair values. The fourth leg of our strategy is to grow our residential and industrial portfolios through the development in prime locations in high-growth U.S. Sunbelt and Gateway cities. We launched LandTower Residential in 2014, and to date have invested over $2.3 billion with construction of six developments expected to start later this year. 2021 was a monumental year for capital allocation, where we made huge strides forward in repositioning the REIT, To date, we have significantly transformed our portfolio composition, geographical exposure, tenant mix, growth profile, and balance sheet. These steps are moving us closer to our goals of streamlining and simplifying our portfolio and company. We have no doubt that we will achieve our disposition objectives. We would like to be in a position to give you more concrete guidance at this time on our disposition program. But in order to prudently manage earnings, make sure we always maintain our investment grade rating, this position should be timed with capital deployment, whether it be for development to buy back units or for acquisitions as funds are required. At this time, the best use of our capital is buying back our units, which are trading at a substantial discount now. In 2022, we plan to continue allocating capital diligently, starting with the utilization of our NCIB, buying back $4.2 million H&R units to date were $55 million at a weighted average cost of $13, representing a 27% discount to our net asset value per unit of $17.70. We plan to continue to buy back units if this significant discount persists. With our path forward now clearly established, our teams are executing efficiently and effectively on our plan to create a simplified, growth-oriented company focusing on expanding our residential land tower platform and industrial portfolio operations. to serve a significant value for our unit owners. And with that, I'll turn it over to Philippe to discuss our residential platform.

Philippe? Good morning, everyone. With the release of our strategic repositioning plan in October that carefully laid out H&R's vision, we are delighted to have successfully executed on the first key parts of this plan. We have shifted our focus to the next steps and are preparing to redeploy capital into our development pipeline as we manage through the remaining divestitures of the legacy office and retail properties. Jackson Park and Lantara Residential developments are especially relevant in giving comfort to unit holders that a creative redeployment of capital into the residential sector is weaved into H&R's DNA. And with that, let's dive into Lantara Residential's impressive quarterly results. When excluding Jackson Park, same asset property operating income from our portfolio in U.S. dollars increased by 9% and 7.8%, respectively, respectively. for the three months ending on December 31st, 2021, and the full four-year 2021 compared to the respective 2020 periods. Including Jackson Park, same asset property operating income from our portfolio in U.S. dollars increased by 33% and decreased by 3.5%, respectively, for the three months ending on December 31st, 2021, and for the full 2020 years compared to the respective 2020 periods. River Landing is a unique $500 million mixed-use development located in Miami, Florida. Its residential component leased up a full year ahead of schedule while also capturing market rents above our expectations after increasing rents seven times throughout the lease-up period. For example, on that effective basis, our current lease rate is over 40% over our initial lease rate when the lease-up began. River Landing is truly a one-of-a-kind asset for the Miami market, and its exceptional design will provide H&R with a tremendous competitive advantage for years to come. As we mentioned previously, we are experiencing substantial rental growth momentum in all of our U.S. Sunbelt markets. By way of example, our new lease tradeoff for our entire portfolio, excluding Jackson Park, was approximately 14.7% throughout Q4. As an additional interesting data point, we have renewed or released approximately 55% of our rent roll during those eight months. Thus, we are encouraged by the strong demand fundamentals in the residential sector and very excited by the expected future value creation. On the development front, Light Tower currently expects to break ground on at least six distinct projects in 2022 and further developments to follow in 2023. In 2022, we expect to break ground on six projects. West Love, Midtown, and City Line are all three in Dallas, Bayside in Tampa, Sunrise in Orlando, and the first faves of the Cove in Jersey City, which represent on a combined basis 2,147 apartments, which would grow our portfolio by nearly 25%. Anecdotally, we would like to highlight that current demand for multifamily has all but eliminated the lease-up discount as properties are valued at their full stabilized value upon receiving their final certificate of occupancy. regardless of their lease status. And in 2023, we intend to break ground on at least six more projects in our existing markets, nine sites that are either currently owned or under contract, which combined would be over 2,200 additional units further growing a portfolio by an additional 25%. On the JV development front, the Pearl in Austin is under contract to sell with a closing anticipated in March of 2022. Phase two of our herd-to-lease development named The Grand at Bayfront has begun its leasing and is currently 23% leased. And lastly, Shoreline Gateway in Long Beach, California is now 31.4% leased. In conclusion, and on behalf of H&R REIT's executive team, I can unequivocally state that we understand how much work is in front of us, and accordingly, that we embrace their responsibility and look forward to continuing our strategic repositioning and creating unit holders for value for years to come. And with that, I will pass along the conversation to Larry.