H&R Real Estate Investment Trust

Good morning and welcome to H&R Real Estate Investment Trust's 2022 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, 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. It 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 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 H&R's website and www.cdar.com. I would now like to introduce Mr. Tom Hofstetter, Chief Executive Officer of H&R. Please go ahead, Mr. Hofstetter.

Good morning. I'm Tom Hofstetter, and I'd like to thank everyone for joining us today to discuss H&R's first quarterly financial and operating results and to provide an update on our transformational strategic repositioning plan. With me on the call are Larry Frum, our Chief Financial Officer, and Philippe Lapointe, the week's newly appointed President. Our strong first quarter financial results mark a pivotal moment in the continuation of our strategic transformation and the servicing of the better value within our portfolio. Following the successful spin-out of our enclosed shopping center division and the sale of the Bow and Bell office campus, our portfolio today is significantly more concentrated on higher growth asset classes within strong urban markets. Since the launch of the REIT's transformational strategic repositioning plan, we have spent considerable time meeting with many of our unit holders and are encouraged by their helpful comments and feedback regarding our strategy, our team, and our disclosure. We recognize that we have an opportunity for better and broader communication in addition to continuing to demonstrate meaningful steps to arrive at our capital allocation goals. As we move through our repositioning plan, increasing our allocation to the REIT's U.S. residential platform, I'm thrilled to announce that Philippe Lapointe has accepted the role as president of the REIT. Philippe's leadership capabilities and achievements in the creation and development of the REIT's residential platform make him exceptionally well-qualified to further contribute during our exciting phase of transition and growth. Philippe will continue to oversee our growing residential platform, as well as have a more influential role in investment strategy, capital redeployment, and investor relations. Our portfolio of high-quality properties with long-weighted lease terms and credit-worthy tenants holds great value. This quarter, our net asset value per unit increased to $21.06 as same-property net operating income quickly rebounded and surpassed our projections, while cap rates continued to compress in our industrial and residential portfolios. This added value is captured in our $1 billion in favorable fare adjustments over the fourth quarter, equating to an increase of $3.36 per on a per-unit basis. Capital allocation is our top priority, and at this time, one of the best uses of our capital is buying back our units, which are trading at a substantial discount to net asset value. Year-to-date, we have bought back 13.7 million H&R units for $178 million at a weighted average cost of $12.96, representing a 38% discount to our net asset value per unit of $21.06. We plan to continue to buy back our units if the significant discount persists. With today's strong quarterly results, we are on our way to creating a simplified, growth-oriented company that will serve a significant value for our unit holders. And with that, I will turn it over to Philippe to discuss our residential platform.

Good morning, everyone. I'm delighted to be on this call during these monumental changes to discuss our residential updates over the last couple of months and to go over our first quarter highlights. Starting from a high level, as you've heard from Tom, we've continued to execute on our strategic plan by redeploying capital into our residential development pipeline while managing the remaining divestitures of our legacy assets. Before I launch into our updates, I would like to take a moment to comment on our residential platform's founding and its ensuing growth. Since our residential platform's founding in 2014, we have steadily increased our footprint in the U.S. dumbbell markets via timely acquisitions. Those acquisitions were funded with recycled capital from dispositions of other non-residential assets. In essence, a near identical strategy as our ongoing repositioning plan. That very recycling of our capital is deeply embedded in our corporate DNA, and I would humbly submit that over the last eight years, this formula has proven to be quite accretive to our unit holders. As such, and in light of a recently published strategic repositioning plan, we would like to reiterate that the remaining steps of our plan are a continuation of that exact process that has brought us much success. And on a more personal note, therein lies the main reason why I'm very motivated to move into the role of president of H&R REIT. I'm very optimistic about our future and of the upcoming value that we intend to create for our unit holders. And so thank you for indulging me for a moment, and let's jump into a review of yet another quarter of strong multi-family fundamentals. When excluding Jackson Park, same property net operating income from our portfolio in U.S. dollars increased by 11.1% for the three months ending on March 31, 2022, compared to the respective 2021 period. When including Jackson Park, same asset property income from our portfolio in U.S. dollars increased by 31.2%, for the three months ending on March 31st, 2022, compared to the respective 2021 period. As we have seen in previous quarters, we are continuing to experience substantial rental rate growth in all of our U.S. Sunbelt markets. By way of example, our new lease trade-outs for our entire portfolio, excluding Jackson Park, was approximately 12.4% in the first quarter. This represents nearly an entire year of double-digit increases of new leases across our entire portfolio. And for additional context, we are still observing comparable elevated renewal rates as of the date of this call. Moving on to Jackson Park, we continue to see positive trends in the amount of traffic, renewal rates, and number of leases executed. At the end of the first quarter, Jackson Park's occupancy was 98%, and the percent of residents renewing their leases hovered in the mid-60s percent range, which represents a renewal rate of over double that of Q1 last year. Furthermore, in March, the team signed the lease for the last remaining retail space at Jackson Park, bringing retail occupancy to 100%, an anecdote that we believe marks the full return of the city. As for River Landing, Atlanta River Landing, the property has continued its strong performance. As of the end of the first quarter, the property was nearly 95% occupied, and for the month of April, new lease rates increased 32.9%. and renewal lease rates increased 19.8% compared to previous leases. River Landing continues to outpay for performance budget and we're preparing for future fair market value increases as we capitalize on these outsized rental rates. As previously mentioned in our disclosure, the first quarter saw a material increase to our fair value and I would like to cover the adjustments to our residential fair market values. In a nutshell, compressing cap rates coupled with continued double-digit NOI growth have supported substantial increases to our multifamily values. Our valuation cap rates are supported by an independent appraisal and several market research reports. Furthermore, our valuations are also supported by multiple recent U.S. multifamily reprivatizations. The market recognizes that Sunbelt Multifamily has proven to be a recession-resilient asset class, with many years of strong historical fundamentals underscoring the strength of the asset class as a long-term investment. Additionally, due to the shorter-term duration of the leases and the additional disposable income available to renters during times of wage growth, multifamily represents one of the best inflation hedge investments, furthering the appeal to private and institutional capital. The fair value cap rates paired with the demonstrated organic NOI growth supported a fair market value adjustment of over $500 million this quarter. On the JV development front, we are pleased to report that the Pearl in Austin, Texas was successfully sold after a very active sale process. The return calculations equate to a 3.15 times return on invested equity and a 41% IRR for the REITs. In Hercules, California, phase two of our development named the Granite Bayfront received its final certificate of occupancy in March of this year and is currently 43% leased. Lastly, Shoreline Gateway, Long Beach's tallest residential tower, 35 stories, has seen strong renter demand since receiving its final certificate of occupancy in late 2021. The asset is now 47% leased and is achieving higher rental rates than originally budgeted. On the wholly owned development front, we expect to break ground on at least 11 distinct projects in 2022 and 2023 in our Sunbelt markets. In 2022, we expect to break ground of five projects, West Love, Midtown, and City Line, all in Dallas, Bayside in Tampa, and Sunrise Phase One in Orlando, which represents on a combined basis 1,661 apartments. First, I would like to provide an update on LandTower West Love in Dallas, Texas. We're happy to announce that we broke ground on this five-story, 413-unit RAP development last month, and we expect to turn the clubhouse and commence leasing of the first units in approximately 18 months. Also in Dallas, Texas, is LandTower Midtown, a five-story, 350-unit RAP development with direct frontage to the north central expressway, and is expected to break ground this quarter. Our third Dallas development, Lantower City Line, a 295-unit, five-story rep development in the City Line mixed-use development is expected to break ground in the fourth quarter of this year. The 186-acre City Line development includes major employers like State Farm's regional headquarters that employs over 10,000 employees and with walkable access to a Whole Foods market. In Tampa, Florida, we are wrapping up the building permit for a development called Land Tower Bayside. This development will consist of 271 units and is expected to break ground this quarter. Lastly, in Orlando, we are currently designing Phase 1 of our Sunrise development. The 332-unit garden-style development is located within a short drive of Disney World in the I-4 commercial corridor of Orlando. We expect to break ground on this development in the fourth quarter of this year. In 2023, we intend to break around at least six more projects in our existing markets on land sites that we either currently own or are under contract, which combined would be an additional 2,200 units. We expect this pipeline to grow as our in-house development team leverages its relationships and local expertise to secure institutional quality development opportunities. LandTower has processed and fostered partnerships with best-in-class brokers, consultants, architects, and engineers, allow our platform to scale to support the needs of our repositioning plan. We are currently under contract and pursuing rezoning on multiple tracks across Florida and Texas, and so we look forward to provide more color on our expanding pipeline and recent projects additions next quarter. Lastly, as part of our ESG commitment, we are pursuing an NGDS green certification on all new developments. LandTower's pursuit of a silver or better rating from this nationally recognized green building certifier represents our promise of providing sustainable, energy-efficient homes to our residents and to our communities. Lastly, in alignment with our past initiatives ever since our founding, we have welcomed two refugee families from Ukraine into one of our communities in Florida at no cost to them. And in the first quarter of this year, our employees donated, with a dollar-for-dollar match from H&R, over $17,000 to UNICEF Ukraine, and we continue to look for additional ways to help the cause. In summary, we are excited about the future value creation opportunities at H&R Reef, and I look forward to contributing even more to those efforts in my capacity of president. And with that, I will pass along the conversation to Larry.