H&R Real Estate Investment Trust

Good morning and welcome to H&R Real Estate Investment Trust's 2022 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 expectation of management regarding the future events and performance and speak only as of today's date. Forward-looking information requires management to make assumptions or rely on certain material factors and is subject to inherent risks and uncertainties, and actual results could differ materially from the statements in the forward-looking information. In discussing H&R's financial and operating performance, and in responding to your questions, we may reference certain financial measures which do not have a meaning recognized or standardized under IFRS, or Canadian Generally Accepted Accounting Principles. and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net income or comparable metrics determined in accordance with IFRS as indicators of H&R's performance, liquidity, cash flows, and profitability. H&R's management uses these measures to aid in assessing the REIT's underlying performance and provides these additional measures so that investors can do the same. Additional information about the material factors, assumptions, risks, and uncertainties that could cause actual results to differ materially from statements in the forward-looking information and the material factors or assumptions that 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 REIT. Please go ahead, Mr. Hofstetter.

Good morning. I'd like to thank everyone for joining us today to discuss H&R's second quarterly financial and operating results. With me on the call are Larry Froome, our CFO, and Philippe Lapointe, President. I'm delighted to share with you today our strong second quarter results. Our results highlight the quality of our properties and embedded growth within our portfolios. The portfolio's organic growth coupled with unit buybacks are creating value for our unit holders. This position is announced to date furthering our portfolio simplification strategy. Capital allocation is our utmost top priority and where our focus remains. Year to date, we have recycled capital out of or have under contract to sell $406 million of office, retail, and other non-core assets and repurchase and cancel $250 million of our units. Highlighting a few key dispositions is the $120.7 million agreement executed in July to sell the Canadian office property located at 100 Winford Drive in Toronto. H&R will have an option to repurchase the property, thereby retaining future redevelopment optionality at no cost to our unit holders. We also entered into a $47 million agreement to sell the second Canadian office property in Calgary and two Canadian retail properties, in line with our RFS values, providing further support to our net asset value. The closing of these sales remains subject to certain customary conditions being satisfied and are expected to occur in September 2022. Our net asset value per unit grew to $21.06 at Q1 to $20.14 at June 30, 2022, driven by the 10.5 million units that we purchased and canceled at our NCAB during the quarter, organic net offering income, and the growth and strengthening of the U.S. dollar. Year to date, we have bought back $22.1 million units at a weighted average cost of approximately $13 a unit, representing a substantial 41% discount to our NAV per unit of $22.14. Our active unit buyback, a very strong same property net offering income growth, are driving NAV growth and financial results. With today's strong quarter results, we are on our way to creating a simplified growth-oriented company that will serve a significant value to our unit holders. And with that, I'll turn it over to Philippe to discuss our residential platform, LandTower.

Good morning, everyone. I'm happy to be on this call to discuss the Q2 updates and to go over our quarterly highlights. But before I do, I wanted to thank our investors for their time, generosity, and feedback over the last 90 days. While the team and I are encouraged, as H&R has been among the best-performing Canadian REITs here to date, we still have a lot of work to do and look forward to sharing more exciting updates before year's end. The U.S. Sunbelt and Gateway markets continue to experience amplified population and income growth, driving affordability in our rental portfolio. As of Q2, our rent-to-income ratio sits at approximately 20%, well below the standard benchmark for affordability, and so we are confident that we will continue to see strong future rental growth, however not at the detriment of a resident's ability to pay. Inflation is undoubtedly another area of conversation regarding how the overall economy will impact multifamily fundamentals. The common thinking goes that with inflation comes equivalent expense increases. While we do expect some increased cost creep in the future, we have experienced only marginal increases in most expense categories. Through operational efficiencies stemming from our smart technology initiatives, self-guided leasing, and negotiated national accounts, Our quarter-over-quarter and six-month year-to-date expenses have actually decreased slightly compared to the same time period for 2021. And more good news, 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, during Q2, our new lease trade-out for the entire portfolio, excluding Jackson Park, was approximately 16.6%. 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 second quarter, Jackson Park's occupancy was 97.2%, and the percent of residents renewing their leases during the second quarter hovered in the high 50% range, which reflects another quarter of continued strength in demand fundamentals for the New York City submarket. On to dispositions, in June we strategically disposed of our only asset in San Antonio, Texas. Given that San Antonio did not fit in our long-term growth strategy, we felt it prudent to dispose of that asset at a premium to our fair market values, further reinforcing our conviction in our now. We intend to reinvest the proceeds in our core markets and to transfer the equity in a tax-efficient manner into more creative long-term investments. On the portfolio evaluation front, considering what is occurring in the capital markets and the ongoing adjustment to monetary policy, we erred on the side of caution. regarding valuation cap rates. While we are still witnessing competitive sale processes and believe in the sustainability of our values, we have elected to increase our portfolio's cap rates by an eighth of a point. However, in light of our rent and NOI growth, our overall portfolio value actually increased slightly in Q2. We feel confident that our strong NOI growth fundamentals will support our valuations despite the potential headwinds of future cap rate expansion. On the JV development front in Hercules, California, phase two of our development named the Granite Bayfront received its final certificate of occupancy in March and is currently 59% leased. Shoreline Gateway, our Long Beach tallest residential tower at 35 stories, has seen strong render demand and is now 69% leased. On the wholly owned development front, Land Tower West Love in Dallas, Texas is on schedule as we expect to lay the foundation for the tower crane in the coming weeks. Also in Dallas, Texas, Landtower Midtown recently broke ground with site work well underway. And lastly, in Tampa, Florida, we are wrapping up the building permit for a development called Landtower Bayside. This development will consist of 271 units and is expected to break ground in the coming months. More good news on the development front. Again, during the second quarter, we successfully rezoned a 5.8-acre landsite from industrial to multifamily. This project will consist of 430 apartments, and is adjacent to downtown Dallas. Also in Dallas, we closed on Sea Line Phase 2 landslides, which will accommodate 250 apartments on an eight-story podium development next to our currently planned 295-apartment five-story raft development in North Dallas. In April, we closed on an infill site along Highway 19 in Clearwater that will accommodate a 400-unit five-story raft development. Lastly, in late June, we closed on a 381 apartment garden-style development site in South Atlanta, Florida that sits at the entrance of Neo City, a mixed-use development anchored by a planned research park. Our residential development platform is supported by our land pipeline of over 5,000 potential units at a basis of approximately $28,000 in US dollars per unit, which is a substantial discount to the $50,000-plus per unit pricing that we are seeing in the Sunbelt markets for similar A-plus sites, such as Alice. In summary, we have continued excitement about the future value creation opportunities at H&R, and with that, I will pass along the conversation to Larry.