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.

Thank you, Philippe, and good morning, everyone. The fourth quarter of 2021 was a very active quarter for H&R with a number of moving parts. We've added additional disclosures to the financial statement notes and MD&A to help understand the effects of the boat sale and primary spin-off. In October 2021, the REIT sold its ownership in the property known as the Bowen Calgary, Alberta to Oak Street Real Estate Capital. The sale to Oak Street included a sale of 40% of the future income stream derived from the Bow's lease with Avinciv until the end of the lease term in May 2038. In a separate transaction, H&R sold a further 45% of the future Avinciv lease stream to DejaVan. Total gross proceeds from the two transactions were $946 million. Effectively, after these two transactions, H&R is left with a 15% interest in the boat lease preventive, which runs to May 2038. The REIT has an option to repurchase 100% of the boat for approximately $737 million, or $368 per square foot, in 2038 or earlier, this favourable call option is substantially below the current sales proceeds and provides H&R the ability to capture potential future upside in the Calgary office market over the next 16 years. Although the REIT has legally conferred ownership of the both Oak Streets, Because of the favourable option to repurchase, the transaction did not meet the criteria of a transfer of control under IOPR S15 and as a result we A. continued to account for the Boeing investment properties on the balance sheet B. recorded the net proceeds received by the REIT from these transactions as deferred revenue to be amortised over the remaining term of the lease And C, we'll continue to record 100% of the lease revenues from the boat, even though we only actually received 15%. For FFO purposes, we have deducted the accrued rent from the event of lease, as well as added back the accretion finance expense on the boat's deferred revenue. I encourage all of you to read note 10 to the financial statement. In that note we have also disclosed the income statement of the BOW for the quarter and for the year ended December 31st 2021 and have disclosed how much of that income was received in cash and how much revenue has been accrued for RFRS accounting. On page 9 of the MGMA and in the press release, we have also expanded the financial statement notes to reconcile the both net income to SFO and ASFO for the quarter and year. We will continue to include this information going forward and welcome feedback as to how we can improve the disclosure and our border disclosure as a whole. The successful sale of the Bowling Bell office campus significantly reduced H&R's Calgary office exposure improved the REIT asset and concentration risk, and improved our overall credit metrics. This transaction was critical to enable the successful spin-off of Primaris with the low leverage capital structure that it has, while at the same time reducing H&R's overall leverage. The results from the Primaris spin-off of the Primaris properties are included in our results for the quarter and year end of December 31st, 2021. but the property's assets and liabilities were not consolidated into H&R's balance sheet at December 31st, 2021. Under IFRS, the spin-off is treated as a distribution to unit holders on December 31st and the details of this can be seen in Note 13d to our financial statements. We have also provided disclosure isolating Primaris' financial results for the three months and year ended December 31st, 2021 including reconciliations to FFO and AFFO. This can be found on page 11 of the MD&A and is included in our press release. Included in H&R's property operating income for the three months and year end of December 31, 2021 was $34.6 million and $134.1 million respectively relating to the 27 properties being contributed by H&R to Primaris REITs. Turning to our offer segments. Same asset property operating income on a cash basis increased by 4.9% as compared to Q4 2020 and was primarily due to HES Corporation's lease extension agreement with full rent commencing in July 2021. Office occupancy was 99.2%, a testament to the high quality nature of our office portfolio. Retail same asset property operating income on a cash basis decreased by 0.7% for the three-month end of December 31, 2021, compared to Q4 2020, primarily due to the weakening of the US dollar. Excluding this impact, the foreign exchange, same as the property operating income, increased by 2.2%. As a reminder, the primary properties were excluded from same assets. For our industrial segment, Same as the property operating income on a cash basis decreased 3.4% compared to Q4 2020, primarily due to vacancy at an local Ontario industrial property. Overall, FFO per unit decreased from $0.42 in Q4 2020 to $0.35 in Q4 2021, primarily due to the property sales. Included in Q4 2021's FFO are debt prepayment costs, totaling $4.7 million. Excluding the prepayment costs, FFO for Q4 2021 would have been $0.36 per unit. Moving to the balance sheet, at your end, debt to total assets at the reached proportionate share, which has been adjusted to exclude the borrowers, 46.6%, compared to 51.1% at the start of the year. And debt to adjusted EBITDA was 7.2 times. Unencumbered assets as a percentage of unsecured debt was 1.95 times coverage, an improvement from 1.48 times at the beginning of the year. H&R ended the year with ample liquidity. We have cash on hand of approximately $124.1 million and $952.4 million available under our unused lines of credit. In addition, we have an unencumbered property pool of approximately $4 billion. And with that, I'll turn it back to Tom.

Thank you, Larry. I'm very proud of what we have accomplished in 2021. Transacting on over $4 billion of real estate is no small feat, and I thank our loyal and hardworking employees for their tireless dedication, flexibility, and adaptability through this considerable period of change at H&R. We will endeavor to continue the cadence of our work and perform in 2022, executing against our strategic repositioning plan. Management of the board remain fully committed and are actively evaluating opportunities to increase unit holder value and address the significant discount at which our units trade to the reach of $17.70 net asset value per unit. Management, members of the board, and their families collectively own more than $300 million, or possibly 8% of the equity in H&R REIT, providing strong alignment with unit holders in pursuit of the REIT's objectives. Looking ahead, we recognize that we have an opportunity for better and broader communication of our strategic repositioning plan, in addition to continuing to demonstrate meaningful steps to arrive at our capital allocation goals. We are very excited about the future of H&R and want to impress upon everyone on the call that 2022 marks the beginning of a new era for our company. Equipped with a strong balance sheet, significant liquidity, enhanced portfolio concentration to large primary markets with strong population and economic growth, we are very well positioned to take advantage of opportunities. We'd now be pleased to answer any questions. Operator, please open the line for questions.

Certainly. If you'd like to ask a question at this time, please press star then one on your telephone keypad. Our first question is from Mario Sarich with Scotiabank. Your line is open.

Hi, good morning. Just with respect to the planned dispositions over the next five years, inflation is a really hot topic these days. But when you think about the disposition program that you're having and the conversations that you're having with potential buyers, How has that evolved over the past six to nine months as inflation becomes kind of increasingly a subject of discussion?

That's an interesting question. So because you targeted it to inflation, which is quite – I don't think that's paramount in everyone's mind. It's more the – what I would have thought. It's more the uncertainty about the future of office, which we all know is a question mark, and the future of retail in light of what's going on out there and has gone on through the pandemic. I never actually heard, Mary, anybody ask the question the way you have, which is in light of how does inflation affect, although you could be off to something, I don't think that's a concern of the market. In the case of H&R, we've had numerous discussions, obviously we're looking to sell what we should be selling, so we've had numerous discussions, and nothing surrounds around inflation, it surrounds around the uncertainty, but in the case of our assets, we have long-term leases with credit tenants, and good location, so it really doesn't have a big impact on our valuations or on the demand for our assets. I think our assets are better positioned even than Royal Bank, which is one of the few assets that actually sold recently, because it's more bite-sized than that large asset. Our largest asset, which was the boat, involved creativity in selling it. The balance of our portfolio we're looking to sell does not involve a level of creativity. It's straightforward real estate. In all cases, just about the rents are below market, almost all cases. And so we're expecting high demand. We don't think that's a very big challenge to achieve our goal and be able to sell at RFS values. Probably we'll be able to sell at significant values in excess of that. I give you our course, Asset on the Waterfront in Toronto, is a good example. Long-term lease, good tenant, very desirable asset. Very typical of a lot of the assets we own. I don't think inflation is our problem. Inflation only manifests itself into what your opinion is on interest rates, and everyone will have different opinions on that. And that will affect every sector of real estate, whether it's in our land power division or our office division. But right now, the inflation is not the issue. It's really the sectors and what are the demands and what are the buyers' expectations in the sectors of office and retail. And again, for our portfolio, which is high quality, you know, surprisingly enough, through this pandemic, retail has survived in the form of a single-tenant grocery. The Echo portfolio is probably worth more, substantially more than it was pre-pandemic. Sales are way, way higher. The company's way, way stronger. It paid off all its debt. And all of our single-tenant retail assets are very simply sold without any question at all. So I don't have any hesitation to tell you that I'm very confident we'll be able to transact on a very timely basis. I don't think inflation is really key on everybody's mind.

Yeah, I guess rather than classifying it as a potential challenge, that's perhaps maybe coming at it from the opposite end of the spectrum insofar as presumably a lot of that $3.4 billion has contractual rent increases, whether it's inflation indexed or based on some other measure. which in an inflationary environment would be more attractive as opposed to less attractive. Do you have a sense in terms of what percentage of that $3.4 billion would have inflation index leases or contractual rent step-ups, which are annually five years or so on and so forth?

Yeah, I can honestly tell you the answer is zero. None of our leases are CPI-oriented, only upon when you have a catch-up upon expiry. Everything else, for the past many years, are 10%, which is 10% every five or 2% annually. Other than the latest trend in industrial, it's seeing 3% to 4% annual escalators, but that's just the industrial world. Retail, as you well know, does not even have the 2%. You take a Shoppers or you take a Metro, it's a 50 cents on a $13 rent. It doesn't align itself with the historical 2% or 10% every five. Our portfolio, therefore, whatever is leased, it has the contractual rental escalations. We've been using 2%, 1.5%, 2%. annually for a long time. I think inflation may have an impact on the rental growth, and as I said, you've seen it dramatically change overnight in the industrial world, where it is. In Canada, it's 3%. In the United States, it's tracking 4% on annual escalators.

Good morning, Mary. Just to be clear, most of our property on our office is long-term lease that doesn't have contractual rental funds. Some are saying they're not linked to inflation, but they do have contextual escalators.

Yeah, 10% every 5% or 2% annually, whatever the case may be. None of them are annual escalators based on CPI. The industry doesn't even have that. Not even industrially you see that. You see, again, a higher level of 3% to 4%, but you never find annually contracted based on CPI. I don't think you'd find tenants very receptive to that formula in America.

Okay, two more quick ones on my end, then I'll hand it back. In terms of the targeted 3% same-population wide growth in 2022, could you perhaps break that down by vertical and how much of that would be as a result of what we're expected by that expense in 2022 versus 2021? And then secondly, is the 3% essentially your long-term annual target growth with the revised portfolio?

I'll try and answer that question. Basically, most of that growth will be coming from the residential portfolio. We're targeting on the residential portfolio significantly higher growth, so that's 3%, which will be offset by the rest of the portfolio, which is probably slightly below the 3%. We call it opposite industrial around 1%. A lot of industrial and office has, although it has contractual rental insulators, those will affect cash, but don't affect FFO. They only affect AFFO, not FFO. But overall, 3% is a reasonable overall portfolio.

Okay. And the last question, just in the past, you provided some disclosure on the Jackson Park and Rivers Landing and Align FFO. I may have missed it this quarter, but if I haven't, is that something you can provide for Q4?

No, good question. We did not provide the disclosure. Jackson Park basically is, for Q4, was operating pretty close to stable operating income, so no need to adjust for that. However, I do want to caution, going forward into 2022, Most of the lease up that happened at Jackson Park happened in Q2 and Q3. There were concessions given when that lease up occurred in terms of free rent months to the tenants. Some of that occurred at the beginning of the lease and some of it occurred at the end of the lease. So we're expecting in Q2 and Q3 of this year, 2022, that there will be a slight drop-off from the current level that Jackson Park achieved in Q4, so that those concessions come up in Q2 and Q3. As far as river landing goes, as Philippe mentioned, The residential is fully stabilised. The retail has been slower due to COVID and so that is not operating as near stabilised yet. but probably won't be stable until the end of 2022.

Well, I'll give you an update on River Landing. Just on the point of LIC, the reason that Larry's mentioned the concessions go over a period of time is because we didn't want to have roles where the tenants are competing with each other, which is typical industry. So an incentivized tenant to take long-term leases so we don't have expiries banging up against each other. We staggered the concessions depending on whether it was a year, two- or three-year lease, and that's why you're seeing them go into the future longer than they normally would have. In the case of River Landing, as Larry said, the residential is totally stabilized for the lease. Its rents are obviously hugely statistically higher than originally forecasted. It was usually at $2.40 going back when we did our projections, and we're hitting $4 right now, so way, way higher. The office, thank God, is doing very, very well. We have three and a half floors of office in total. Let's call it 140,000 square feet. The top floor is now leased long-term, 10 years to the county. That's floor number seven and part of six. Floor number five is now leased fully on a 20-year basis to Jackson Memorial Hospital. 1M, which is a 17,000-square-foot floor, has basically been approved and done through Jackson Memorial, not gone through the board yet. It went through the board once. Board member got COVID, which seems to be the story of life right now. So the meeting was delayed to February 24th. And the final little bits and pieces that are left, the partial of the sixth floor, it's right now bidding war between three tenants that are in the area that have to move because their building is being demolished. So we expect the office building to be fully leased within the next, I don't know, 90 days or so. At least everything other than maybe a slight part of the sixth. And it'll take us, the first tenant moving into the county, that's in March of this year. Paying rent, Jackson Memorial starts construction of the leaseholds in around 30 days or 45 days once the plans are approved and we have permits. So I expect the rest of the office to be up and fully paying rent by Q4. It's towards the end of the year for sure. The retail, now all of the restaurant space on the river is done, leased. Construction, it's an expensive build-out. It's a very high profile. It's very high-demand river restaurant space today. So it's leased. It's leased to quality tenants. The build-out's going to be expensive, as I said. You can have the anchor tenant, which is the oldest restaurant chain in America, coming in and taking their flagship, which is a 17,000-square-foot store comprised of riverfront space, ground isn't even rooftop. And that will be commencing construction probably in 45 days. All of the restaurant space on the river should be occupied by the end of the year. It's fully leased, as I said. It's just a question of the buildup. And the balance of the retail space is substantially leased or under LOI. Again, it should be totally stabilized by the end of the year.

Okay. Thanks for the color and the detail, Tom. And I, for one, am looking forward to the property tour if and when H&R organizes one.

So we're dying to take everyone there. The sooner the better. I'm just waiting for, as you are, I'd love to show you the property. It's really a spectacular.

Thank you. The next question is from Matt Kornack with National Bank Financial. Your line is open.

Good morning, guys. Just quickly, Larry, going back on the Jackson Park impact, in terms of that higher cost in Q2 and Q3, can you give us a sense as to the quantum of that number? Because I did notice sequentially the JV costs came down quite a bit quarter over quarter.

Matt, I expect it will be somewhere in terms of the overall annual basis, somewhere between $5 and $6 million lower than on an annual basis. We'll take a 5 to 6 million U.S. for the concessions that are coming due in Q2 and Q3.

Okay, so that's helpful. With regards to the U.S. multifamily development, can you give us a sense as to the CAPEX outlay, when those projects ultimately will start throughout the course of this year, and maybe an expected spend for the next two years on that development?

Lee, do you want to take it? Yeah, sure. Excluding the Cove, which is kind of a different animal in and of itself, the five in the Sunbelts, we're actually launching Westlove, Midtown, and Bayside. Westlove and Midtown are being launched in about 30 days. Bayside should be within the next 60 days. And then in the fourth quarter of this year, I think we launched Sunrise and CityLine. So we should have five active developments by the end of this year. As it relates to total spend for 2022, I think obviously the sequence, are you asking how much we're going to spend in 2022 or what is the total construction budget for all five?

If you could give both and kind of the ramp up as to how that construction process looks and how the capital outlay looks.

Sure. I mean, Larry, chime in whenever you want. But as it relates to kind of the spend for 22, we're looking somewhere in the ballpark of about 150 million. In 23, a blend of obviously the six additional starts in addition to continuing the construction for five. So we're looking at probably another 380 million. Those figures, by the way, are in US dollars. On total spend, approximately I'll have the exact numbers in front of us because we have it on a blended basis. But if I was to take the 2022 starts in total, their construction budget is going to be somewhere in the realm of about, let's say, $400 million to $450 million. As a matter of fact, I've got the data somewhere here. But that's pretty much the right ballpark.

Okay. And then construction timeline, it seems like it's around two years to complete those projects. And then I guess from a capital allocation and financing standpoint. In terms of the asset sales that would ultimately go to fund those, are you thinking of pre-financing, financing for the development costs itself, or waiting until completion and then selling assets thereafter?

Yeah, so Matt, obviously all great questions. First of all, let me just circle back. So I have the data in front of me. It's about $408 million for the five assets that are launching in 2022. As it relates to financing, frankly, we have a ton of optionality, and I think we're exploring all avenues as of right now. I don't know that we've landed on one, frankly, because of how dynamic, but frankly, how plentiful the financing options are for our developments. The point of the construction period, which I thought was really interesting, which is a departure from our past, is that the full recognition of the FMV of the asset is really done upon receiving the certificate of occupancy. And so I know that we were once upon a time asking ourselves, well, when does that full value recognition happen as we're looking at a Gantt chart of all of these 11 starts, and obviously delighted to see them impacting NAV in a positive matter, probably towards the fourth quarter 2024. So we lease up the lease up for the 15 Sorry, the 2022 starts actually begin next year. And so by the end of 23, we'll have 11 development projects. We're going to be nearing the end of the three of the five launched in 22, but we're also going to be in the middle of our lease up for the three that we're launching within the next 60 days. So by the end, in other words, by the end of 24, sorry, by the end of 23, early 24, I expect the completion of some of these assets in addition to the full recognition of the fair market value and an important contribution to FFO.

Okay. Sounds like you've got a lot of exciting things ahead of you on that front. Just quickly on the Oakville industrial asset, obviously it's a strong market. Can you give us a sense on the timing of when that should be into same property and why?

I would say with Nagoshi, with Three players right now. You're right. The market's very strong. We initially had it under contract at around $9. It was initially rented to $5 a square foot when the tenant rolled out. It went to $9 and the tenant that we lost. And right now we're circling more like $14 a square foot. I think you'll see it leased up within the next 120 days and then up to 60 days thereafter. And there's no problem with the asset. What happened was A name that you know, leased it up. We had some issues. We had to rezone excess parking to make it part of the building. We got through all of that, and that tenant couldn't wait around. Meanwhile, the tenant paid for all the costs. So the downtime was paid for by the tenant, and now it's just back in the market. There's no problem with the asset. It is state-of-the-art, and as I said, it should lease in the $14 range.

Okay. That's good. And then last one for me. I mean, you don't have much in the way of lease maturities. It sounds like at least Q1 you should have very strong same property NOI growth. We'll have to adjust for some of the stuff on Jackson Park. But is there anything we should be concerned about? It seems like you've got a pretty good profile from a same property NOI growth on the residential and industrial side and the office is stable, retail stable. Nothing in the office or retail that we need to worry about in the next 12 to 20. No, no.

No, they're really nothing. Nothing that we worried about, and we stopped at 2021.

And that's why we say we're confident we can sell the assets back to Mario's initial question. We really are. These are assets that are bite-sized. They are high-quality tenants, a long-term lease, and they're good properties. We'll have no problem selling them, and I don't think that'll be an impairment to our interest values.

Okay, great. And congrats on finishing a busy year, and it looks like you've got a few more ahead of you.

So have a good one.

Thank you. The next question is from Jimmy Shan with RBC. Your line is open.

Thanks. Good morning. In your MD&A, there's a reference made to the 52 cents distribution resulting in a FFO payout ratio of 45 to 55%. I'm just going to say I would imply an FFO of between $0.95 to $1.16. So I was wondering, how do we think about that number? Is that a run rate? And what kind of assumptions are embedded in that comment?

Thanks, Henry. That's Larry. That's a good question. Our FFO distribution is about $0.52. We try to give you as best guidance as we can, expecting the payout ratio to be between 45% and 55%. Obviously, there's a lot of moving parts between when potential dispositions may happen, and so we really can't give you any further clarity as far as that's our expectation, I think, on our numbers. Okay. Other comments that were given on the call? up until now.

Don't forget, it depends on how we redeploy the policies and dispositions. If it goes into development, it's not accretive. If it goes into selling a 3% cap versus a 7% cap, it's going to have a huge impact. And that's why it's almost impossible for us to... to answer that question accurately.

Right. I mean, also, the dispositions, I think I'm going to buy back our units or, you know, there's a lot of moving costs.

Right.

Overall, it's just giving you the gossip. Right. We can't even tell you how many units we're buying back.

No, no, that's fair. That's why I was wondering, like, what are the assumptions embedded in those two goalposts, right? Like, it is a range, but, like, on one end, are you assuming a lot of asset sales or is that just a a rough target that you think you'll hit at some point in time.

If a target is based on certain functions, I just don't think it's appropriate to keep going through all the details of how much dispositions we're expecting to scale. It may or may not happen. We don't want to get any false information or misleading information.

As I did mention, the timing of the disposition is going to be very much geared to the use of proceeds and how much of our NCIB we actually act upon So we can't just sell and record cash. We have ample liquidity, as you well know right now, to really do notice positions. So we're going to sell on an early basis when the opportunity is there to get above market pricing or when we have a strong use of proceeds. So it's very, very difficult for us to answer that accurately. If we knew the answer, we'd give it to you.

Okay. Fair enough. Just on the multi-res development, clearly you have an active pipeline and And the development yields look pretty interesting. Are you seeing any cost pressures at all perhaps eating away at those yields? And then the second comment on that is you mentioned the properties are now being valued without lease at discount. I was curious as to kind of what you're seeing out there in terms of how investors are underwriting rent growth in this market.

Hi, Jimmy. Two great questions. The first is, yeah, obviously we're seeing a lot of upward pressure in some of the prices, specifically lumber and the unavailability of labor. But I would say that we've accounted for all of that in our yields and then some. And so I don't want to tempt faith, but I think we can withstand a normal plan increase up until we sign, obviously, our GMP contract, at which point the burden for these cost overruns now shifts from us to our nationally recognized general contractors that we select in our respective markets. And so I'm not – while I am seeing what you're seeing, I am not all that worried because of, again, the cushion, but also not to mention the fact that we are underwriting conservative rents. And so kind of dovetailing in the second part of your question, that rental growth that we're noticing across the board, we've only partially underwritten in our development yields. And so I think all in all, net-net, we have enough of a cushion there to give me the confidence in obviously sharing those development yields. As it relates to my comments on no lease up for discounts and how people are underwriting rental growth, yeah, I mean, the amount of equity, frankly, that is entering our space on a monthly basis just does not seem to increase, sorry, to decrease. It's just constantly increasing and increasing. And so what that ends up happening is ultimately there's a very limited supply of available opportunities and the demand makes it so that everyone is rushing to buy assets, income producing or not. As far as what they're underwriting on rental assumptions, frankly, I wouldn't be able to speculate as to what the other groups are doing. But suffice it to say that I'm sure most groups are underwriting a healthy renewal and new lease increases above and beyond, frankly, the historical averages that we've seen. And that probably translates into why we're seeing record-level low cap rates for available U.S. multifamily, especially in the Class A space.

Got it. Okay.

Thanks, guys. The next question is from Sumaya Syed with CIBC. Your line is open.

Thanks, good morning. This is a question on the Union Street property and . Just wondering if you're seeing more of those kinds of deals in the pipeline as part of the residential development strategy or is the thought to primarily utilize the existing assets for residential redevelopment?

Sorry, it didn't come out clear. Can you repeat, please?

Yeah, just wondering about the Union Street acquisition in the quarter. and if you should see more of those kinds of deals in the pipeline.

Oh, I see, Union Street, sorry, come here. So will you, it's opportunistic, we have a division run by Matt Kingston that goes after, who's actually doing all of the re-intensification projects in Toronto, for example, or the Berber, in Vancouver we have the old Hell's Tower that's being re-intensified over there as well. So that is his level of expertise. We haven't made the commitment to go to residential in Canada, and that's why we didn't want to get involved in Dufferin Grove. Nothing wrong with Dufferin Grove. Obviously, it's a great asset. We just didn't want to make the commitment that we'd be building residential vertical in Canada. So this is a sale and lease back. It's not dilutive to us, and as such, it forces the luxury of buying it wholesale. before the process of zoning is going to happen. That's not the issue. But it allows us to buy at $75, available until later on in a couple years now at $125 a square foot. In the three years when the lease is up, we expect the value to increase substantially. At that point in time, we'll elect either to sell or develop, but definitely no commitment to develop. Will you be seeing further these properties if the opportunity arises where we can buy it at a wholesale pricing not diluted to our FFO, then we will consider them.

Okay, thanks. And then just wondering about the cap rate move on the multi-residential assignment. It declined a bit from last quarter. And I was wondering if that's just a result of the strong rent growth and recovery or, you know, based on any specific transactions. Any comment that would be helpful?

I'm sorry, Sway, you're not, maybe it's on my end, but you're not coming in clearly. Would you mind reading the question a little bit louder?

It's not a question louder, it's a gurgle. Sorry, I apologize. We have the same problem. For some reason, it's muffled.

Okay, let's try it again. Hopefully it's better. My question was around the slight movement decline in the multi-risk cap rate. And just wondering the assumptions behind that if that's just based on the all around strong rent growth or any specific transactions that you can speak to?

Yeah, okay, so thank you. Sorry, Philippe, I'll just start on the historical and you can give a forward looking maybe a bit of color on what you're seeing in the market. But I think the decrease in our cap rate was just due to Jackson Park and the leak up that we've achieved here and now through occupancy. That was the result of the decrease in our cap rates to now Q4 versus Q3. And then, Philippe, I don't know if you want to get some color on the cap rates in the market?

Sure. I mean, I think this ties into the answer I gave previously, I believe, to Jimmy. But the demand for multifamily is obviously record level high. Cap rates are definitely in the threes. Now, the issue is we've got two things. Cap rates have compressed very, very quickly. And so we did not want to be overly aggressive with some of our assumptions, which is why we applied the current cap rate that we have on the IFRS while recognizing that it probably will need adjustment at some point in the future. But frankly, the other mitigant is this increase in interest rates. And so if this were to continue and the rate hikes were to materialize, What does that mean for cap rates on a going forward basis? Frankly, there's a little bit too much volatility, in our opinion, regarding cap rates, and so we're trying to be prudent with a, some may say overly conservative cap rate applied to our NAV. But right now, cap rates are definitely well into the threes, not the fours.

Okay, thanks for the color. I'll turn it back.

The next question is from Jenny Ma with BMO Capital Markets. Your line is open.

Thanks. Good morning. So just continue on the multifamily development. I'm not sure if I missed it, but did you disclose a yield on the 2022 project? Or in other words, would it be similar to what we've seen for some of the current development projects from that low 6% range?

Hi, Jenny. Yes, I believe in the latest publication, the last quarter's publication, we did apply a development yield. Those development yields remain, generally speaking, unchanged. I don't know that they're low sixes. I would say on a blended basis, they're, let's say, a shade under six.

Okay. So when we look at the 2022 starts, and you guys have been selling some of the partial interest in the development. So the six that are slated to start this year are all at 100%. Is it fair to say that that suggests these are sort of built to keep and really it was the partial interest we're looking at selling?

Yeah, the modus operandi, or at least the investment thesis behind the partial developments were frankly optionality. It was the opportunity at no cost to us, so no promote to the developer, to tag along and to benefit from their expertise in gateway markets, specifically on the West Coast. And frankly, get a better feel for the market, identify whether or not we want to expand in those markets. And what we've, you know, I think I mentioned this on a previous call, what we quickly realized was the appetite for those assets versus, frankly, where we can redeploy that equity, but also on a risk-adjusted basis, we thought was a little bit out of whack. And so we're more than happy to disposed of the assets at obviously record prices. I think that should that continue, we would welcome another opportunity to co-develop or participate in JV developments on the West Coast with that group. We're currently looking at other opportunities. I wouldn't be surprised if we had more to announce in the future. But those developments, the delta, frankly, between the going in cap rate, the stabilized development yield and ultimately the going in cap rates is too wide for us to meaningfully expand that presence. Now, dovetailing to our 100% developments, yes, so we're developing all of those assets with the intent on bringing them into our portfolio. Now, that's not to say that all of them will fit the bill, but that's certainly the intent initially.

Okay. Okay. So when we consider that against your comments about the market cap rate sort of in that 3% range, and that was very helpful, thank you. Are you looking across your portfolio to see if there's any of those out-of-whack opportunities where you might be able to crystallize some value? Like how do you consider the potential for that versus the desire to continue to build out the multifamily portfolio for H&R? Like are you going to strike while the iron's hot or are you going to take a much longer-term view and try to build up as much of a portfolio as you can and as quickly as you can?

Yeah, it's a great question. It's something that I, with our portfolio managers here in Dallas, probably meet once a month and have those conversations, which we take a look at their entire portfolio and come up with a buy, hold, sell recommendation and explore that. I would say, though, in today's market where we've got rents increasing very, very quickly with very low or minimal capital investment, where back in the day you had to have a significant value-add strategy to achieve these returns. I would say that now is probably not the right time to dispose of any existing assets because of the exploding NOI. In other words, I don't know that we would be able to sell at a price where we would be rewarded as opposed to just managing the asset for another year or two and seeing where this NOI kind of stabilizes. That's not to say that we won't be selling our assets. We've got, you know, on average age, we're about six years old portfolio-wide, but there's some assets that were built in the early 2000s Those may represent, on a risk-adjusted basis, especially as we look at the CapEx coming down the line, we may look to sell. But, again, with the disposition in the U.S., you have to always look at the potential 1031 exchange in the acquisition. So you're essentially buying into the markets you're selling. And so that's not to say we wouldn't do it, but I would like to see an arbitrage opportunity where I could benefit from today's market while not necessarily buying a fully-priced asset. Those opportunities will happen. I just don't think they'll come soon.

Okay. Well, then maybe those prices aren't so out of whack if you think about that. Okay. So there was a comment, maybe this is for Larry, in the MD&A about H&R's ownership of some primarist units. I'm not sure I've followed that. So I guess my question is, you know, right now, are there some primarist units on the books? Yes. Is that something that's really a technical residual from the spinoff, or is that something strategic and you might be looking to hold some Primaris units to some extent on a constant basis?

Hey, Jamie. Yes, we do have Primaris units on the books. That is also from the spinoff of getting them in return for the exchangeable units that we hold. that, in other words, the exchangeable units were supposed to be switched into H&R units and primarist units, and so we've got primarist units to satisfy that obligation.

Okay, so is it just something you hold in anticipation of fulfilling that obligation? So it's really just like a stagnant piece of it, or how should we think about it?

It's not strategic, Jenny. Okay. There's no relationship between primarists and H&R, and it's not strategic.

Okay, okay, so this is just a technical... Oh, comment off of the spinoff. Okay, perfect. And then lastly, when we're thinking about leverage, you had a nice step down as a result of all that's happening in Q4. Do you have a specific target leverage you're getting to? How do you consider paying down debt versus buying back stock? Is the latter really dependent on pricing? How should we think about your target leverage, say, in the next 12 to 24 months?

That's a good question Jenny and again there are many moving parts to it but we'd like to keep it in the range where it is. It may trend slightly higher and then come back down as you do a disposition. So it may flow up and then come back down as we sell assets but basically we'd like to try and keep it where it is and we'd like to try to keep our credit rating. Not secure credit rating.

No, we will keep our credit rating. We understand that very clearly.

It is our goal that we are trying to keep trouble behind. But we're going to leave that level pretty much where it is. Where it is. Yeah.

Okay. So the capital allocation towards unit buybacks, Tom, I think you had mentioned was really a function of where the stock would be trading.

Right.

Okay. Okay.

What was I going to tell you? We hope it trades nice and low.

Okay. That's it from me. I'll turn it back. Thank you.

Thank you. Thanks, Jenny.

The next question is from Sam Damiani with TD Securities. Your line is open.

Thanks, and good morning. Two questions. The first one sort of following up on one of the ones that Jenny just asked. On the unit count, there was some discussion, some reference to the gross up. in the MD&A with potentially somatic units of H&R being issued post-quarter end. Is that true and is that basically meant to offset the NCID activity year to date?

Or vice versa, I should say. Yes, that is true. Subsequent to the year end, January 4th, what happened was, and it was all outlaid in the circular to unit holders, that the exchangeable unit holders, for tax reasons and many other reasons, wanted to only have H&R units. They didn't want to get their primary units. So while we got primary units in order to exchange for them, we had to promise them a gross up of their exchangeables so that they were economically equivalent to what they were before without getting primary units. So those primary units, in short answer, we don't have to hold on our balance sheets. We are free to sell them. And instead, the exchangeable unit holders will now get more H&R units than they previously had. And that's a doubt. Subsequent events, no disclosure.

But it has nothing to do with our NCIB. Our NCIB is totally related to the fact that we have capacity and we're trading at a huge discount on that. So it's our best use of proceeds right now.

Okay, two quick follow-ups. So the unit count for H&R is higher today than it was at year-end?

The exchangeable units, yes, are higher. They went from 13.4 million to roughly 18 million units outstanding for the exchangeable unit numbers. Okay.

And then secondly, if you have the Primaris units to... And then, sorry, Sam, just to interrupt.

And then, obviously, the regular units have decreased by the activity that we've been doing on the normal cold issue of it.

Right. That's separate. Exactly. I understand. Right. Okay. And then, so is there any reason you wouldn't continue buying back stock, given the development starts that you're planning for the rest of the year, and I guess so far the lack of disposition activity?

There's no reason.

And just on the disposition side, is there a level of dispositions by year end 22 below which you'd be disappointed?

That's a really vague question. I didn't take my heart gauge to know what disappoints me right now.

I can't answer that.

I don't know. There's no answer. We're definitely going to sell something. It'd be very disappointing if we sell nothing. And that really doesn't answer your question.

That's an answer. Maybe one quick one since those were quick. The yields on your 22 starts, I think you were saying before sort of low high fives or a stick below six on your current. Are you thinking close to six on the 22 and 23 starts?

Sorry. Are we thinking below call it 5.5, 5.75 on the 22 starts?

Yes.

We've said that already, haven't we? What's your question?

I just wanted to clarify.

Thank you. Sorry, Sam. Are you asking about whether or not the starts in 23 are in line with our development yields for 22?

Asking whether or not the comment you made, Philippe, earlier about sort of a sneak below 6% was in reference to the 22 starts.

Yeah, so it was referencing the 22 starts, but I would say the 23 starts are going to fall in line, if not higher, just given the benefit of time and increased rents I mean, I suspect that you're probably focusing on what everyone else is focusing, which is ultimately the unbelievable value creation that these 11 starts are going to contribute to H&R. And if you take the delta between, frankly, those yields and where current cap rates are, it becomes very clear to us that that's where an interesting component of the value creation for the upcoming years is going to come from and why, frankly, you can see the excitement in my voice and everyone else's.

Yeah, but Sam, just a little note of caution. You know, so just your cap rates are now values for the residential. It hasn't happened that quickly as it should because the cap rates have come down too quickly, which means that when it was four and a quarter six months ago, it could have a three handle on it, a 3.75. I don't know that's sustainable. So, Philippe's talking about 5.75 to 3.5. The 3.5 is probably not necessarily sustainable. If interest rates rise, the 3.5 will go up. In Canada versus the United States... which is a more mature market in the United States because it's much smaller. You have Toronto, Vancouver, and Toronto and Vancouver. You really don't have a whole lot else. Sometimes you have Montreal. You saw the land values go up. So there's a lot of developers in Canada. The prices got frothy. And the profit accrues to the landowner. In the United States, because there's so much more abundance of land and so many more cities to participate in, the land values didn't go up as so acutely as they did in Toronto. Therefore, there's still a lot of room to make profit in the United States until those land values go up. Now, in some cities, Orlando, Tampa, they have pretty close to doubled since pre-pandemic to today. But that still doesn't take under the effect that the cap rate has gone up 4.5 to call it 3.75 or something. I don't know when you're talking in your numbers you should use 3.75 as sustainable. I think you should go back to your modeling and say two years from now, we're building it today at 5.75. We're probably going to be looking more like pre-pandemic 4.5. Therefore, if it does stay at 3.5, I can assure you that the costs are going to go up, but they're going to translate into going up in land, not necessarily in building. Building is a commodity. Land is not. The profit always will through the land guy. So I don't think you can use 3.5. I don't think we're going to take down our Everest Valley for 3.5 just because there was a couple transactions that Blackstone bought at 3.5. That's not necessarily indicative of the future.

That's a good call. Thank you very much.

We have no further questions at this time. I'll turn the call back over to the presenters.

Thanks, everyone, for joining us today. We look forward to continuing to update you on our progress over the upcoming quarters.

Have a great day. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.