H&R Real Estate Investment Trust

Good morning and welcome to H&R Real Estate Investment Trust's 2023 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 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 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 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.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 I'd like to thank everyone for joining us today to discuss our second quarter financial and operating results and strategy. With me today on the call are Larry Frum, our Chief Financial Officer, and Emily Watson, Chief Operating Officer from our Landtower Residential Division. New to date, our portfolio team are producing strong financial and operating results across all our property classes. Residential continues to see strong rental rate growth. Our well-located office properties with long-weighted average lease terms remain 98.7% leased. Industrial properties located in key markets remain in high demand as we realize continued rental rate growth, and our high-quality grocery, active, and single-tenant retail property portfolio are performing well, providing essential services to their respective communities. Given the line of sight we have into our current disposition pipeline and the demand we are seeing for our properties, we are reiterating our intent to sell approximately $600 million of non-core assets this year, of which $387 million has been sold to date. On April 20th, we closed on the successful disposition of 160 Elgin for $277 million, H&R's only Ottawa office property comprising 973,000 square feet in downtown Ottawa. Given the considerable headwinds in the public and private real estate markets, we are very pleased to have executed this transaction. This one property represented 16% of our Canadian office portfolio and reduces our total office exposure, excluding rezoning properties, to 20% on a fair value basis. We also sold four Quebec retail properties for $68 million, allocating net proceeds to repay debt and repurchase units for NCIB. During the first six months of the year, they repurchased and canceled 2.8 million units at a weighted average price of $10.26 per unit, representing an approximate 51.2% discount to NAV per unit. We intend to continue to buy back units through the NCIB with proceeds from future dispositions of non-core assets. As a result of our disciplined capital allocation approach, we have augmented our growth profile meaningfully, achieving double-digit growth in same-property NOI since announcement of our re-positioning strategy increased our allocation to residential and industrial investment properties from 23% and 8% respectively in Q2 2021 to 39% and 16%, a total of 55% as of Q2 this year. Over this time period, office exposure, excluding the rezoning portfolio, has declined from 38% to 20%. Inciting with its progress is the improvement to our liquidity position and balance sheet metrics. And on that, I'll hand it over to Larry.

Thank you, Tom, and good morning, everyone. I'll start on the operating results. In my comments to follow, references to growth and increases in operating results are in reference to the three months ended June 30th, 2023, compared to the three months ended June 30th, 2022. H&R's same property net operating income on a cash basis increased by 11.7%. Breaking the growth down between our segments, Landtower, our residential division led the way with a 22.9% increase or a 15.6% increase in US dollars. Emily will provide more details on this growth shortly. Industrial same property NOI on a cash basis increased by 18.6% driven by rent increases for new and renewed tenants. Occupancy in the industrial segment increased to 98.4% as of June 30th, 2023. Office same property NOI on a cash basis increased by 2.1%. This increase was largely attributable to the strengthening U.S. dollar. For the six months end of June 30th, 2023, same property NOI from our office portfolio increased by 4.5% compared to the same period in 2022. Our office properties are in strong urban centers with a weighted average lease term of 7.1 years and lease to strong creditworthy tenants with 81.1 percent of office revenue coming from tenants with investment grade ratings. I would like to point out that only 404,000 square feet of leases expire in our office portfolio during the remainder of 2023, which is approximately 7 percent of the total square footage of our office portfolio. Included in these 2023 expiries is 105,000 square feet at 6,900 millimetres drive in the GTA which now expires in December 2023. H&R received a termination payment of $856,000 in Q1 23 and will receive an additional $2.5 million in Q3. H&R is preparing a site plan application for submission to the City of Mississauga for a new single-story, 122,000 square foot industrial building to replace the 105,000 square foot office building. site plan approval is expected by Q4 of this year. In addition, 86,000 square feet shown as expiring in 2023 was for the Tampa office property that was subsequently sold in August for 13.3 million US dollars. And lastly, retail same property NOI on a cash basis increased by 9.1%, primarily driven by increased occupancy at River Landing and the strengthening of the U.S. dollar. Q2 2023's FFO was 29.7 cents per unit compared to 28.4 cents per unit in Q2 2022, a 4.6 percent increase driven by strong operational performance across all segments and aided by the U.S. dollar. FFO for the six months ended June 30th, 2023 was 61 cents per unit compared to 56 cents per unit in Q2 of 2022, an 8% increase. We are proud of our FFO growth despite current headwinds of higher interest rates facing all real estate classes and the current headwinds facing the office sector. Commencing in January 2023, H&R's monthly cash distributions increased to 5 cents per unit or 60 cents per annum, an 11% increase over the 2022 distribution excluding the special distribution in December. H&R's Q2 2023 payout ratios remained healthy at 51 percent of FFO and 61 percent of AFFO, notwithstanding the increase in distributions. Net asset value per unit at June 30th, 2023, was $21.04 per unit, a decrease from $21.95 on March 31st, 2023. 2.8 million units were repurchased during Q2 at an average price of $10.26 per unit for a total of $29.2 million. The following overall weighted average cap rates were used in deriving the fair values of our investment properties. 4.49% overall for the residential properties, which was split between Sunbelt properties at an average cap rate of 4.75%, and gateway cities at 4.08%. 5.28% for industrial properties, 6.35% for retail properties, 7.36% for our US office properties, 4.81% for our eight Canadian office properties, which are advancing through the rezoning and intensification process to be converted to predominantly residential properties. These eight properties comprise 30% of our office portfolio. and 7.24% for the remaining 10 Canadian office properties. The increase in cap rates used to value our properties resulted in a downward fair value adjustment of $274 million for Q2 2023 at the REITs proportionate share. As at June 30th, our office portfolio of 23 properties comprised 24.8% of total real estate assets. Page 14 of our management discussion and analyses shows the percentage allocations across all segments. Debt to total assets at June 30th, 2023 was 44.8% compared to 44% at the end of 2022, and liquidity at June 30th, 2023 was in excess of $900 million. In summary, we are very pleased with our Q2 results and confident that our high-quality properties and strong balance sheets will continue producing good results for the remainder of the year. With that, I will turn the call over to Emily.