H&R Real Estate Investment Trust

Good morning and welcome to H&R Real Estate Investment Trust 2025 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 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 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 and 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.cedarplus.com. I would now like to introduce Mr. Tom Hofstadter, Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstadter.

Good morning, everyone. Thank you for joining us.

I'll pass it on to Larry from our CFO to give you the highlights of the quarter. Larry will then pass on to Watson on the last hour to give us the highlights of the quarter. Thank you. Thank you, Tom, and good morning, everyone. In my comments to follow, references to growth and increases in operating results, unless stated otherwise, are in reference to the three-month end of March 31, 2025, completed the three-month standard March 31st, 2024. In 2024, we sold $429 million of real estate assets. In Q1 of 2025, we sold eight retail assets for $60 million. 70% of our real estate assets by value are now in the United States. Overall, given the trend we faced with multi-family supply concerns and the weak office markets, Inflation, as well as a terrible war creating general market uncertainty, will very quickly lead to the general results, and in particular, the 4.4% growth in property net operating income on a cash basis. Breaking this down between our segments, where the potential segment of property net operating income on a cash basis decreased by 0.8% in U.S. dollars. The new supply added in the residential market is being absorbed. The public immigration trend has continued, and our tenants are also staying longer. The family will provide more details shortly. Our office segment, second property net operating income and cash basis, increased 1.2%, primarily due to the strengthening of the U.S. dollar. There's been a slate of back-to-the-office policies from different companies, and it seems clear that more and more employees are heading back to office, which is positive for the sector as a whole. Our office portfolio of 60 properties, which includes four properties with residential rezoning opportunities, now only comprises 18% of H&R's total portfolio by value. 87.8% of our office revenue comes from investments in great tenants. a testament to the quality and location of our office properties. Our office occupancy at March 31st, 2025 was 96.7% with an average remaining lease term of 5.8 euros. Our retail portfolio at March 31st, 2025 comprises 15% of A&R's overall portfolio value. Retail segment same property net operating income increased 8.2% due to opportunity gains in the program landing and projects. The tenants in our retail portfolio are predominantly grocers and the portfolio has been very stable. Industrial segment same property net operating income increased 4.5%. Industrial portfolio of 65 properties in March 31st, 2025 comprises 18% of H&R's total real estate assets by value and continues to perform well. Since the announcement of H&R's strategic plan, H&R's average Canadian industrial rent increased from $7.17 per square foot as of June 30th, 2021 to $9.42 per square foot as of March 31st, 2025. In addition, Industrial properties located in the GTA make up 59% of H&R's industrial portfolio as of June 30th, 2021, compared to 69% of H&R's industrial portfolio as of March 31st, 2025. Headline at the final unit of Q1 2025 was 29.7 cents, the same as Q1 2024. We are pleased with these results as we have sold $489 million of real estate assets since January 1, 2024. Our balance sheet remains strong. Debt to total assets of the region proportionate to that of March 3, 2025 was 44.1%, and debt to EBITDA was a healthy 9.3 times. Liquidity at March 3, 2025 was in excess of $870 million, with an unencumbered property pool of approximately $4.5 billion. Unencumbered assets are unsecured. The coverage ratio was 2.3 times at March 31, 2025. And with that, I will turn the call over to Emily.

Thanks, Larry, and good morning, everyone. Today, I'm happy to share our first quarter performance for our multifamily platform and some operational highlights. Our first quarter results have aligned with our expectations. Our multifamily platform continues to benefit from strong demand as evidenced by stable resident retention and a delta to home ownership. Additionally, continued job and wage growth further demonstrate strengthening drivers for our industry. Rather than opining on headlines, we remain focused on the fundamentals of our business and continue to create NOI expansion There are repositioning opportunities and other innovative value-add strategies that add to our bottom line. Given the declining levels of new supply ahead and growing demand in our market, we are well-positioned for substantial growth and value creation in coming years. Same property net operating income from residential properties in U.S. dollars decreased by 82 basis points for three months ending March 31, 2025, compared to the respective 2024 period, primarily due to a decrease in average rental rates and higher property operating costs from H&R Sunbelt properties. This was partially offset by rental growth from H&R's Gateway City property. Same asset occupancy ended the quarter at 94.4%, a 60 basis points decrease over the fourth quarter and no change from Q1 of 2024. Same asset occupancy in Sunbelt decreased 70 basis points in Q1 to 93.7% over the fourth quarter. Jackson Park was 98.9% occupied with 75% retention. The Sunbelt continues to show strong demand metrics as supply deliveries have passed their peak. Our Sunbelt resident retention was 57% in Q1 and achieved a 60% resident retention in April. Blended lease tradeouts for the Sunbelt markets were negative 2.1% in the first quarter, an improvement of 380 basis points over fourth quarter, and Q2 blended tradeouts are positive 10 basis points to date. These results demonstrate the worst is behind us, and we will continue to see improvement as supply decreases throughout the year. Based on a third-party appraisal and a handful of Sunbelt sales comps, we have maintained our fair market value Sunbelt cap rates at 4.96 and believe the rate is appropriate and supported. Cap rates are expected to remain low, relatively speaking, for institutional quality assets in the Sunbelt with capital flows interested and focused on long-term heavy Sunbelt multifamily allocations. On the development front, Landtower West Club in Dallas, Texas continues to lease well despite the record-level deliveries in Dallas. The community is currently 65.4% occupied and 70% leased. The property was completed on time and on budget. Also in Dallas, Texas, Landtower Midtown is currently 58.6% occupied and 62.6% leased. Both properties are leasing well with an average monthly velocity of 24 leases per month, which is above industry reports for our market and a testament to the superior product and unparalleled amenities our development team has delivered. Midtown was also completed on time and on budget. Reddit properties are progressing well and remain on budget with completion expected mid-2026. LandTower currently has an additional nine development projects in the Sunbelt pipeline, totaling over 2,900 suites at H&R's ownership interest, with multiple sites ready and prepared for construction. We are progressing through different phases of design, drawing, and permitting on the remainder of our Sunbelt development pipeline and currently have four projects fully permitted. In summary, Landtower's platform has demonstrated remarkable resilience and performance relative to our peers. Our teams have navigated supply challenges and remained laser-focused on innovative practices including centralization, property-wide Wi-Fi opportunities, and AI applications that enhance NOI margins and continue to yield positive results. I want to extend my gratitude to our incredible teams whose dedication to excellence and innovation has been pivotal in achieving these outcomes. And with that, I pass along the conversation to Tom.

Operator? Thank you.

Are we ready for questions at this time?

Yes, we are.

Thank you. Ladies and gentlemen, we will now begin the question and answer sessions. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to confirm the polling process, please press star followed by the two. And if you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Mario Saric at Scotiabank. Please go ahead.

Hi, good morning. Just maybe starting off with Emily at Landtower, can you just – I may have missed the numbers, but can you just go through what the blended lease spreads were in Q1, where they kind of stand so far in Q2, and what the expectation is in terms of them becoming sustainably positive timing-wise going forward?

Good morning, Mario. That's a great question. So our same store blended tradeouts were negative 1.4%. with the new lease negative 7.3 and renewals were 3.3. For the Sunbelt specifically, the new lease trade-offs were negative 5.6, which was an improvement. It was 13.8% in the fourth quarter. And renewals were 3.3, which is an increase from 2.2% in the fourth quarter. So the blend in Sunbelt alone were negative 2.1. compared to a negative 5.9. We are positive 10 basis points in the Sun Belt as of yesterday, but we still have some headwinds ahead of us on the supply. Supply is expected to be about 75,000 units in 2025 with pretty heavily in Q1 and Q2 and then drops off in Q3 and Q4. I still maintain that I think we'll still maybe come in a little bit negative in Q2, and that will start being positive in Q3 and Q4.

Okay, so no real change from the view three months ago.

No. Our renewals are a little bit better than what I had anticipated, and retention is better. I'm real pleased with the 60% retention in April. And we've already closed out April above a 3% renewal, and we have, you know, four. It's still really early for our May, I mean, for our June renewals, but they're coming in at around 5%. So definitely see momentum picking up, but still in the same cadence that I had originally anticipated that Q3 and Q4 are going to be really where we've seen some pickups.

Got it. Okay. My second question is maybe just for Tom on capital recycling, specifically asset sales. I think in the press release, it highlighted perhaps the desire to do more transaction volume, but Larry kind of listed off a myriad of factors that may be preventing that in the short term. So can you just give us an update in terms of what your thoughts are and whether anything's changed with respect to the timing on ECHO, like HESS, and some of the other initiatives that you have in the pipeline?

There's no news on HESS as far as the Chevron HESS issue goes. We expect it to go to the courts in June with a resolution sometime in September. We're looking to put that behind us. I think what the market doesn't like about that is the uncertainty. Once there's certainty, we can actually then go forward with something. We can sell it at that point in time. Until that point in time, we really can't do anything. Nothing new on there. Nothing new on Echo. Echo, we're still planning to go forward as was previously discussed. We're not going to push sales into this illiquid world right now. I think the summer is going to be very, very sleepy overall, and we'll look to September to see if there's a little more vitality, a little more wakeness to the market, and then we'll resume some sales.

In your view, what are kind of the one or two top macro factors that are kind of driving the liquidity in the market?

Well, the liquidity in the market, there's no debt or equity. So let's start there. In order to have a sale, you need both of them. And you can't have equity without debt, and you can't have debt without equity. So both of them have to wake up. I think that Trump created with his tariffs a whole pile of uncertainty in the marketplace that's primarily obviously industrial and office. And until that's a little bit settled down, I think there's going to be people going to be reluctant to go ahead and jump into industrial or office. So I think you need a little bit more visibility of what's going on in the United States and geopolitical as well. Therefore, I expect, as I said, not a whole lot to happen, and hopefully we'll look to September where people will want to start doing business again, and hopefully it will be more of a positive momentum. But overall, the situation, not only in Canada, everywhere, is very, very... It's a wait and see game to see what happens geopolitical and the tariffs and the recession and trades and everything else that's out there.

Okay. All makes sense. Thank God.

Thank you.

Thank you. The next question comes from Sumaya Saeed at CIBC Capital Markets. Please go ahead.

Thanks. Good morning. Firstly, on land tariffs, it sounds like there was improvement there. I saw some reference in addition to the lower rent commentary around some higher operating costs. I'm just wondering what's the outlook there and were the costs just higher on seasonality or something else there?

Great question. So, not really. In Q1 of 24, we had, well, I should say in Q4 of 23, We overestimated the bad debt and a lot more people paid in Q1 than what we had anticipated or Q4 than what we anticipated. So it was really a reversal. Our bad debt, so it shows an increase in bad debt, but our bad debt in Q1 was 53 basis points, which we were really pleased with. So that was part of it. We also had a little bit higher payroll costs due to, well, a couple of things. One, we usually run about 7% vacant open positions, and we've been running about 4%, so that's kind of good news is that we are more fully staffed than what we have had in the past, as well as bonus attainment was a little higher in Q1 than what it was in Q1 of last year. So, Nothing that I think will be that concerns me at all. Our NOI margins are still 59, 60%, so I think what we're doing is working, but not anything that I'm concerned with. Rental rates, supply-driven, so we are seeing more concessions in the market that will burn off, which I'm kind of pleased that people are seeing the optimism in what's coming ahead in Q3 and Q4. So that's Nothing I'm concerned about and kind of aligned with our expectations.

Okay, got it. And then just moving on to the retail exit strategy, maybe a question for Tom. So besides Echo, you have about $600 million of other retail, and putting aside River Landing, the remaining assets, I guess, appear to be more liquid and in demand. What will be the outlook for it? disposing of that bucket, and could that be more near-term than resolving ECHO?

We don't look to sell that on bulk, so if we look to do the same program we did with our oil facilities in the United States, we'd be selling them gradually over the past few years, one at a time, and achieving solid pricing. Those assets are worth more on a one-off basis, so we could look to start the program of selling them, but it's not going to be $300 or $400 million of sales at one time. I don't think that's the right way to go with that portfolio.

Okay, got it. Thank you. I'll turn it back.

Thank you.

Thank you. The next question comes from Matt Kornack at National Bank Financial. Please go ahead.

Good morning, guys. We've talked a lot about the supply picture in the U.S. multifamily space, but just interested in your view on demand and just the drivers. I know obviously there's been a lot of interstate migration to the Sun Belt, but how should we think? I mean, interest rates are high, so presumably homeownership is not necessarily an alternative, but are you fully expecting that the demand will be stable as the supply comes off to drive kind of that inflection?

Good morning, Matt. I do. In fact, Q1 set a record for Q1 demand nationally. So, you know, in our respective markets, we absorbed 28,000 units and projected 86,000 for the year. So just to put some perspective around that, all of our sunbelt markets in 24 absorbed 98,000. So for 28,000 in Q1, we were really encouraged by that. You know, and we see the momentum picking up in different areas. So I don't, we still have people that are relocating headquarters to Dallas, you know, often. So we're not subjected really to the port, anything that happens with the tariffs in Houston. So I definitely anticipate the demand to – and so do the economists. You know, you probably read the same headlines that I do. But, yeah, we are seeing things that are supporting the forecasted demand in all of our Sunbelt markets. And it's still a 60% discount to if you owned your own home in our market. So that's a pretty big delta, but, you know, you still see delay in marriage and having babies and everything. kind of all of those fundamentals are ringing true. So I don't see anything that would suggest otherwise that the demand is not going to be sustainable.

Are we still there?

What portion of that would be? destined for redevelopment versus stuff that you'd be trying to kind of renew tenants? Or if it is destined for redevelopment, would you try to renew on a short-term basis at this point?

Matt, I'm sorry. I missed half your question because the phone cut out. Do you mind repeating it?

Oh, but it was on office. So, Emily, you're good.

Okay. Okay. Good.

Oh, I think, Matt, we all missed the question.

What was that? Oh, okay. Okay. I was looking at your lease maturity profile, and you do have about a million square feet of office maturities over the next two years in Canada. And just wondering how much of that would be destined for redevelopment versus releasing? And if it is destined for redevelopment, at this point, are you kind of trying to renew people on a short-term basis as opposed to letting those go vacant?

So there is no residential market to speak of, so we're looking to renew them on a short-term basis or with a sale of demo clause, and that will be applicable to the leases that are rolling in Front Street, the leases that are rolling in the United States and the HES. That will be where we're negotiating right now with tenants, and we have completed some of those leases. That's going to be re-leased. That's not subject to redevelopment. And Bouchard, which is 2026, that's for redevelopment. That will not be re-leased. That may be extended by bail if they need to stay on a little bit longer, but we're not looking to release that building.

Okay. So you wouldn't expect a material increase in vacancy in the office portfolio in the near term at this point?

No, what I just mentioned. You have one port each. Sorry. You have Front Street, which, again, that will be until it's released, it's vacant. And you have Bouchard, which is 2026, which will stay vacant. Okay. You have 145 Wellington, which is slated for ultimate redevelopment. That's 10 years plus down the road. So that's not – that's going to be released. There's nothing there anyhow, though. I'm just mentioning it as a footnote to the fact that it's a residential redevelopment. And HESS, as I mentioned, which is 2026, that will be released. And that will – you know, there's downtime. There's leasing up and then CIS information.

So it takes time.

Okay. Fair enough. Makes sense.

Thank you. The next question comes from Jenny Shen at RBC Capital Markets. Please go ahead.

Thanks. So just first on the HBC industrial lease, it looks like there's a decent amount of upside here. So what's the sequence of events from here, and what's the prospect of facing that space when you get the space back?

I think within a matter of weeks, subject to the courts and releasing, we're already talking to potentials. If the releasing is strong and the rental rate, my guess is it'll be $14-ish, something like that. Okay. We're already in negotiations with potential tenants. That's not going to be a problem, Charles. That'll lease.

So a little bit of a downtime and then probably sometime in the back half of the year. Yeah, I'm sure.

That's really, yes.

Okay, so on ECHO, I noticed in Q1, the NOI dropped a decent amount from Q4-24. I was wondering, is there some seasonality there, or would it count for that drop?

Good morning, Jimmy. I'll have to get back to you on that one. There wasn't anything substantial that we saw from that. I think if you're looking at it, just be careful when you're looking at it to back out the IFRIC 21 because we'd have to accrue realty taxes for the whole year in the ECHO portfolio. So maybe looking at it would be better.

Can you back that out? Yeah, that might be it. Yeah. Okay. Okay. And then still on ECHO, Tom, I think you mentioned you're not going to push a sale. Have you tried to push a sale in the last few months? And then when you're thinking about potentially putting it in the market in September? Are you looking to sell just your LP interest or could the entire portfolio be also considered for sale?

So we haven't put it on the market. We haven't awarded yet to an investment banker to proceed with. We are having discussions with the potential candidates in that regard. We don't know really. We're going to put it out there and you'll see where you land. You'll see if there's an interest for our interest or there's an interest in somebody coming and taking our interest in the Treasury. It can be anywhere where the best deal lies. Everything's on the table.

Okay. And, again, timing-wise, you're thinking probably the fall.

I don't really know. It's not market conditions driven. It's just getting all of the – again, there's many, many investors you can look at as a public company. So it's not just – it's not H&R definitely saying let's go, and it's not necessarily the board saying go. You have to appreciate the fact there's, like, I would say close to 500 investors multiple family investors. This is a company that's probably 130 years old. There's many, many layers of families. So until they get all their votes and all their ducks in a row, I can't really control the timing. So if I don't want to say fall, it's hard for me to predict that level of surety. But in the near future, in the foreseeable future, I expect it to happen. I'm not as anxious for it to happen as you may be. It's a solid company and they'll have no debt on when Custard finally closed that transaction. They'll have zero debt. Its sales are very, very strong. We have total visibility into each store how it's doing. It's primarily grocery anchored. There's no risk over here whatsoever. So it's not a burning issue for me to sell it. The only reason I'm selling it is because you guys keep on asking the question. When am I selling it? If I had my choice, I wouldn't sell it. So stop asking. I won't sell it.

Okay. Just last question. Remind me again, I know you talked about it. You get a $400 million debenture coming up. What was the plan again on the debenture?

Jeremy, we plan to use our bank accounts to pay it off. We're just trying to find out time to see what sales will come down the pond.

We haven't mentioned, Jimmy, we have the Caledon lands for the future highway extension, and that's going to happen, has to happen, they have to go to highways. So that's not really market-driven, and not dictated by us. It's dictated by the government. My guess is it'll happen sooner rather than later, and that's a significant amount of money that can come in, and that would solve this, answer this question. So when we have more visibility on this decision, we are talking to the government in that regard. That's why we are procrastinating on that debenture issue. I expect that we're going to have to make a decision sooner rather than later. But, again, we are in discussions, and we're going to have better visibility. If we don't, then obviously we'll just roll into a new insecurity.

Okay. And what would be rough quantum? Would it be half of the debenture amount? You're talking about?

Yeah, minimum 150 proceeds, minimum. Okay. Okay. Thanks. Thank you.

Thank you. We have no further questions. I will turn the call back over to Tom Hofstadter for closing comments.

Thank you, everybody, for joining us. Have a great day.

Bye. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.