H&R Real Estate Investment Trust

Good morning and welcome to H&R Real Estate Investment Trust 2022 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, and 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 uncertainty. An actual result could differ materially from the statements and 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 meaning recognized or standardized 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 underlining performance and provides the 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 H&R's website and www.cedar.com. I would now like to introduce Mr. Tom Hofstetter, Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstetter.

Good morning, everyone. I'd like to thank you for joining us today to discuss H&R's fourth quarter financial and operating results. With me on the call are Philippe LaPointe, President, Larry Froome, our CFO, and Matt Kingston, Executive VP, Development and Construction. 2022 was a very important year for us. Despite the volatility in the public markets, our teams accomplished many substantial milestones aligned to our simplification strategy through capital recycling, stock buybacks, a 9.1% distribution increase, and a new focus on our investment communication program. Through these actions, we have enhanced our geographical exposure, asset mix, and tenant diversification, driving strong operating and financial results, while also strengthening relationships with the investment community. In 2022, we sold over $463 million in non-core properties, reallocating that capital to buyback stock through our NCIB. During the year, we bought back and canceled almost $300 million of our units, or 22.9 million units, at a 39% discount to our net asset value, creating 63% per unit in NAV increase. On the development front, our $370 million of industrial and U.S. Sunbelt residential properties are progressing well and embedded value and growth to be realized over the next two years. Given the current macroeconomic environment and keeping with our prudent capital location strategy, we've taken a conservative approach and have paused the majority of our development projects until we have more visibility into future stability. As a result of the heavy lifting our teams have completed during the year to streamline and simplify this company, our 2022 financial and operating results are very strong. In 2023, we plan to continue to recycle out of the non-core office and retail properties and offer a great start with anticipated $277 million sale of 160 Elgin Street in downtown Ottawa, which is expected to close in April of this year. The disposition program will continue to carefully synchronize property sales to match our capital funding requirements. With today's strong point of results, we are on our way to creating a simplified growth narrative company that will serve a significant value for our unit holders. And with that, I'll turn it over to Philippe.

Thank you, and good morning, everyone. I'm happy to be on this call to discuss our Q4 updates and to go over our quarterly highlights. But before I do, I'd like to take a moment to specifically highlight the progress to date of our strategic repositioning plan released in October of 2021. Since announcing our strategic plan, H&R has sold off or spun off over $4.2 billion worth of office and retail, including the primary spinoff, and over $1.8 billion excluding the spinoff, all figures in Canadian dollars. This includes 21 office and retail assets encompassing over 4.2 million square feet of space when excluding the primary spinoff. Our office portfolio garners a lot of attention as a legacy asset class at H&R Reads, and thus I'd like to take a moment to help unpack the remaining office portfolio. From our perspective, H&R's office portfolio consists of three segments totaling approximately $3 billion Canadian. The U.S. office segment almost exclusively consists of two high-rises in New York City and Houston, representing approximately $1.3 billion, or approximately 42% of the $3 billion office portfolio. The second office segment is Canadian Office, currently undergoing rezoning, representing $750 million using current office cap rates, which will be inapplicable once the rezoning is complete as the value created will push the entire property to be mostly valued on a developable square foot basis. And lastly, our Canadian Office segment not subject to rezoning represents the remaining $1 billion. Of this $1 billion, 160 Elegant represents 27% of that office segment's fair value and is the only office property located in Ottawa which is not considered a core market for H&R. On a square foot basis, 160 Elgin represents nearly 1 million square feet out of 3.2 million square feet. Or said differently, 160 Elgin represents approximately 30% on a square footage basis of our Canadian office not currently being rezoned. Furthermore, 160 Elgin's sale price of $277 million is in line with our IFRS value further underscoring our conviction in our office IFRS values. It is important to remind that this transaction has not closed and while we cannot share any more details about the transaction, we look forward to disclosing relevant details post-closing. However, we hope that this potential transaction further demonstrates to our unit holders of our tireless and steadfast commitment to simplifying our company despite the challenges and headwinds that the market is currently experiencing. Now moving on to Land Power Residential's results, when excluding Jackson Park's same-asset property operating income from our portfolio in U.S. dollars, increased by 11.8% and 13.6% respectively for the three months ending on December 31, 2022, and for the full year 2022 compared to the respective 21 periods. When including Jackson Park's same-asset property operating income from our portfolio in U.S. dollars, increased by 6.9%, and 25.7%, respectively, for the three months ending on December 31, 2022, and for the full year 22 compared to the respective 21 periods. In recent reports, we have read headlines describing the deceleration of rents in many of the U.S. Sunbelt markets. While we are no longer seeing 25% to 35% rental rate increases, we are still experiencing healthy and above historical rental rate trade-offs. For context, our trade-outs in rental rates in the fourth quarter was nearly 11% when excluding Jackson Park. We do expect this to revert to more sustainable and historical levels in 2023. However, it is important to remember how healthy historical rental rate growth has been in our Sunbelt markets. And secondly, the fact that our rent-to-income levels still have been increased by any meaningful measure since the beginning of COVID, allowing for future headroom and rental growth. Moving on to Jackson Park, at the end of the fourth quarter, Jackson Park's occupancy was nearly 99%. Occupied an experience of retention rate of over 50% for the fourth quarter, which reflects another quarter of continued strength in demand fundamentals for the Jackson Park sub-market. On the development front, Lantara West Love in Dallas, Texas is on schedule and on budget and started framing work this quarter. Also in Dallas, Texas, Lantara Midtown is on schedule and on budget, with the first building foundation floor expected at the end of this month. West Love's hard costs are 99% bought out, while Midtown's are approximately 90% bought out, and we have entered into guaranteed maximum price contracts with very reputable general contractors. Based on this, we expect limited variance in our hard cost budgets and timeline. Lastly, a comment on disclosures. As LandTower and the multifamily division of H&R continues on its path to becoming the majority asset class of the REIT, we wanted to provide more visibility into the platform. And to that end, we have expanded the level of disclosures, which can be found on our investor deck posted online as of yesterday. For 2022 year-end reporting, we are providing additional visibility into our operating fundamentals, such as occupancy, average monthly rent, lease trade-outs, and retention rates on an individual market basis and compared to the respective metrics in 2021. And with that, I will pass along the conversation to Larry.