Q1 2021 H&R Real Estate Investment Trust Earnings Call
Good morning, and welcome to H&R Real estate investment Trust 2021 first quarter earnings conference call.
So for beginning the call each and I would like to remind listeners that certain statements, which may include predictions conclusions forecast or projections in our 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 are subject to inherent risks and uncertainties and actual results could differ materially from the statements and the forward looking information.
In discussing <unk> financial and operating performance and then responding to your questions. We may reference certain financial measures, which do not have a meaning recognized for standardized under ifr us 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 other alternatives to net income are comparable metrics determined in accordance with I F. R. S. As indicators of H&R, it's performance liquidity cash flows and profitability.
H&R is management uses these measures to aid in assessing the real 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 each in ours the use of non-GAAP financial measure.
Yours are described in more detail in each in our public filings, which can be found on our website and www dot SEDAR dot com.
I would now like to introduce Mr. Tom Hofstadter Executive Chief Executive Officer of H&R REIT. Please go ahead Mr Hofstadter.
Good morning, everyone I'd like to thank you all for joining US here today with me on the call are Larry from our CFO, Pat Sullivan CLO, primarily for legal appointing C. O a ladder tower, Alex Avery Executive Vice President of asset management, and strategic initiatives and Robin Katzenberg Executive Vice President corporate development.
That has now been over a year since about that is again with both of them to halt the past year has had its challenges in our Q1 results remain impacted but it's difficult for some of our tech space for each business whoever has shown stability and resilience. Despite a few notable areas of softness we will continue to work hard to position H&R for success for them. It can pack shades of the economy reopens for Robyn I'll turn.
Over to over to our team provide details for the first quarter of 2021 financials and operating income.
Felipe will review, our multi residential operations policies or Pat will provide an update on our retail portfolio. Let me provide some context for financial results and finally I'll make some closing remarks.
Or what are you.
Good morning, everyone. We've got some notable updates for this quarter and so I'm delighted to share the latest from residential.
Well the JV development from the Pearl in Austin, Texas is scheduled to fully deliver in the third quarter of 2021.
19, Gail in Seattle is in the early stages of pre leasing for the project will be fully delivered by June of this year.
Construction of phase two of her Hercules Department, sorry development named the Grant has remained on schedule and is expected to deliver in the second quarter of 2021.
Lastly, surely in gateway or 35 story tower in long Beach, California is also on schedule and expected to be delivered in August of 2021.
As mentioned last quarter, we plan to supplement our JV development partnerships with our wholly owned development platform within line tower for.
First I would like to provide an update on her infill site in Dallas, Texas with proximity to the Dallas Love Field Airport and medical District.
For the five point for acre site that we referred to as West Love is a five storey wrap community with approximately 413 units.
We are finishing schematic designs as we speak it will be moving through the drawing process throughout the year with a target date to break ground by the end of this year.
Additionally on January 28, we purchased a 4.2 acre infill site with direct frontage to north Central Expressway, one of the most traffic thoroughfares in the core Dallas.
We are also in schematic design with this five storey wrapped product that will include approximately 350 units.
Lastly, we are finishing up schematic designs for garden style property in Tampa, Florida.
This development was approximately 270 units.
Jason to highway 19, what are the most dominant thoroughfare and all the Pinellas County.
The development is located in the infill location characterized by low future supply and healthy rental growth.
Also of note. We originally purchased the site with entitlements for approximately 200 units.
Over a point of working with the local municipality, we were able to increase our density to a current level at no cost, resulting in an increase in development yield.
In light of our strategic shift towards the ground up development to take advantage of the widespread between development yields and prevailing cap rates, we look forward to share more exciting developments updates in the future.
On the latter river landing front, our leasing pace continues to beat expectations and budget as of today, we have 45 per cent occupied and have leased over 280 apartments for context, our budgeted number of occupied units. At this time was approximately 200 underscoring the strength of our lease up efforts at river lending despite increasing.
We're asking rents multiple times to keep pace with the overwhelming demand for our property.
Perhaps most importantly, we would like to share an update on Jackson Park.
While the return to stabilization will largely be driven by the workers returning to the office and students returning for the classroom.
We are very encouraged by the return to normalcy in New York City.
Social activities resuming with the successful rollout of the vaccine and a declining new COVID-19 case numbers.
Just last week, New York City increase their restaurant capacity from 50 per cent to 75 per cent and the mayor has targeted a full reopening by July.
Property is expected to gain positive absorption as we enter the favorable summer leasing season.
Trend that we are already beginning to observe with an increase in traffic.
For context, we received nearly 700 pieces of prospect traffic in March and April compared to only 156 pieces of traffic in March and April of last year.
In the span of last month, when including pending applications, we've gone from 60% leased to 69% leased.
We remain called for the Jackson Park is one of the best value proposition for prospective residents and the submarket when considering location amenities and quality of construction.
On the financial front, when excluding Jackson Parker see massive quarter over quarter operating income growth equates to a positive for for 1% for the first quarter of 2021 compared to the first quarter of 2020, we are proud to announce that Q1 operating income growth represents over 12 straight quarters of same assets quarter over quarter positive NOI.
Growth when excluding Jackson Park, a feat that we are particularly proud of when considering the tumultuous 2020.
And with that I will pass a longer conversation Tibet.
Okay.
Thanks, Felipe and good morning, everyone.
Following an encouraging fourth quarter from the retail segment Q1 seen asset NOI declined $8 3 million or 13, 4% from Q1 2020.
Including an 18, 5% decline from enclosed malls.
For enclosed malls temporary rent reductions accounted for 34% of this decline 28% related to rent reductions, we view as being more lasting in nature, 11% related to lower percentage rent specialty leasing and miscellaneous revenues and the remaining 27% was due to vacancy net of new leases commencing.
Notably bad debt expense has declined sharply from the highs of last summer.
Throughout the pandemic our primary focus has been to maintain occupancy occupancy at the end of the first quarter with 91, 5% for the retail division as compared to 92% at the end of Q4 and 91, 1% at the end of Q1 2020.
In closed malls contribute 55% of the NOI in the retail division with grocery anchored centers generating generating 28% of the NOI and other retail contributing just under 17%.
For enclosed malls occupancy at the end of Q1 2021 remained relatively stable at 87, 2% compared to 88, 1% at the end of Q4, 2020, and 86, 7% at the end of Q1 2020.
The pandemic has impacted some retailers more than others with some filings <unk> as a measure of last resort.
To maintain occupancy we agreed to provide rent relief or restructured rental terms on a short term basis for those tenants, whose business has been significantly impacted by the pandemic and others that may have otherwise closed as part of their <unk> filing.
Revised terms typically involve lower base or gross rent.
Plus a percentage rent over reduced sales thresholds.
With these temporary lease terms in place for rental revenue takes on its greater seasonality consistent with the seasonality of your tenant sales are.
Our fourth quarter results benefited from the seasonality seasonally high fourth quarter Tennant sales.
However, Q1 results were negatively impacted due to first quarter sales typically representing the lowest share of annual sales compared to other quarters.
To better understand the ink the increased seasonality impact of our revised rental terms in Q1 percentage rent and Lou accounted for 4% of retail rent up from 2% in Q1 2020 with percentage rent accounting for a higher share of a lower total rent by.
By comparison in Q4, 2020 percentage Rand accounted for 12% of total rent compared to 4% in Q4 2019.
In addition to the amplified seasonality of temporary lease amendments Q1 results were impacted by the fact, Ontario, Manitoba and Quebec malls were closed for a portion of the first quarter with malls and other regions being impacted by occupancy restrictions over.
Over the balance of the year, we anticipate higher contribution from revenue categories, including percentage rent and specialty leasing as malls reopen restrictions ease as well as the return to normal lease terms for many.
Tenants currently subject to temporary temporary lease amendments.
Collection of rents in the retail portfolio continued to trend higher since a low point in May 2020.
In Q1, 2021, we collected 89% from our enclosed malls and 92% from the retail segment. Overall. This is an improvement from the 87% collected from our enclosed malls.
And 90% from the retail segment in Q4, while our April rent collection statistics lagged it.
Q1 2021 figure.
We expect improvement in time that we have consistently seen in prior periods.
With malls in Ontario, being closed again in occupancy restrictions tightened in Alberta, and Manitoba, We expect continued dragging performance during Q2 and Q3.
On a positive note we have seen good leasing traction as retailers anticipate a return to more normal operating conditions.
During the first quarter, we completed 98 lease transactions, representing 475000 square feet of which 30 for new deals.
<unk> 30, new transactions completed is greater than the figure posted during the first quarter of each Q1 2020 in Q1 2019.
Our leasing team continues to have positive discussions with retailers about opening new stores across the portfolio and we believe that we will continue making progress improving our occupancy level throughout the remainder of the year.
In terms of impacts, we anticipate $1 9 million incremental contribution from the new lease commitments Commencements.
In 2021 with large format tenants.
Excuse me, we anticipate $1 $9 million, an incremental contribution from new lease commencement commensurate with large format tenants during the remainder of 2021, including rent from a new 39000 square foot statement food store that opened from a portion of the former Sears box and killed one in place at the end of April 2020.
In addition, we've completed or are in the final stages of completing significant transactions that will create incremental rental growth of over $3 million in 2022, including a 27900 square foot lease with the city of Toronto to occupy second floor office space at Dufferin Mall.
At one point in time, one eight times higher than the prior tenant the former office tenant vacated at the end of 2020 with new rent expected to commence December 2021.
Last summer our malls had recovered well for following the closures in the spring of 2020 with sales in the third quarter climbing to 83% of Q3 2019 figures, However mall closures and occupancy restrictions reinstated in Q4 resulted in notable sales declines.
Which we which have continued through the first quarter.
Sales for the first quarter were 66% of first quarter sales last year adjusted for late March declines sales. During Q4 were 69% of Q4 2019.
Our fault for malls in Ontario, which typically accounts for 31% of annual portfolio mall sales were particularly impacted by closures, having reported Q1, 'twenty one sales equal to 41% of prior year comparable period.
The majority of our malls being located in secondary markets and typically the only regional mall in their trade area. Once closures and restrictions were lifted properties have shown showing solid gains while we.
We have example, plaster oriented chicoutimi mall sales have rebounded to 90% of pre pandemic levels in February and March following them all being closed in January and.
In areas, where malls have been open but operating with restrictions sales have been relatively strong malls in Alberta posted 77% of pre pandemic sales in Q1, despite retailers having occupancy limits in place.
Richard Park in Kelowna reported 85% of former year sales during Q1 with our new Brunswick malls at 81%.
Just on feedback from retailers that also operate in the United States. We are optimistic that our multiple experienced a return to pre pandemic sales levels once restrictions are lifted.
To close we would like to provide an update on our redevelopment plans for debt for mall.
In July 2019, we submitted combined applications for rezoning and redevelopment for the north end of the property to create different Grove village.
Project is anticipated to include approximately 200 residential rental units discussions with the city are progressing and we anticipate rezoning and site plan approval in Q4, 2021 and commencement of construction queue for 2022.
Upon completion this redevelopment project will transform our successful established inner city regional shopping center into a vibrant mixed use development.
Thank you and I will now turn it back to Larry.
Thank you Pat and good morning, everyone.
I'll start with that balance sheet.
As at March 31, 2021 debt to total assets was 46, 7% compared to 47, 7% as at December 31 2020.
The weighted average interest rate of H&R debt as at March 31, 2021 three.
Three 6% with an average term to maturity of three six years.
As at March 31, 2021 liquidity was $55 million of cash on hand, and $1 4 billion of unused borrowing capacity available under our lines of credit.
In addition, we have an unencumbered property pool of approximately three points non volume.
With the onset of COVID-19 last year, we increased our liquidity to approximately $1 billion.
The increase from current liquidity to $1 4 billion is expected to return.
For more normal levels as we expect to also utilize part of the unused facilities to repay mortgages or decrease some other facilities.
Bad debt expense has steadily decreased from $23 5 million recorded in Q2 2020 with the onset of COVID-19 to $12 6 million in Q3, $2023 2 million in Q4, 2020, and now $1 million in Q1 2021.
At March 31, 2021, we had a provision for expected credit losses of $14 4 million against the gross accounts receivable of $32 9 million.
While the same asset property operating income cash basis from our office segment decreased 10% compared to two compared to Q1 2020. It is all true to his core proceeding of seven months free rent period as part of a lease extension and amending agreement.
This rent free period ends June 30 of 2021.
<unk> continues to lease two thirds of the property for an additional 10 year term beyond the original expiry of June 2026.
Excluding the impact from the Hess lease same assets property operating income from office properties would have increased by 2%.
Same property operating income from our industrial segment decreased two 3% compared to Q1 2020 due to the decrease in occupancy from 19, 9% to 97%.
Given the pandemic back for backdrop, we are pleased to report our Q1 2021, and <unk> 40 per unit compared to <unk> 45 for.
For Q1 2021.
On last quarters core we spoke about a few items, which we expect its influence 2021 financial results.
I'd like to now review the impact from Q1's results.
Firstly as our other lending development has been completed.
Net interest has been capitalized for the project debt.
Net interest capitalized on all development projects amounted to $1 6 million for Q1 2021 compared to $5 6 million for Q1 2020.
We expect a net drag on the <unk> until the project achieved stabilized occupancy.
Property operating income from real landing only amounted to 600000 U S dollars in Q1, 2021, and we expect that to grow to approximately $6 million U S dollars, a quarter or 25 million U S annually. Once the project is fully leased.
Secondly, Jackson Park in Long Island City, New York has been particularly hard hit by COVID-19 as foreign students like New York and others left for the suburbs.
Operating income on a cash basis for Q1, 2020 was approximately 3 million U S dollars and <unk> ownership interest.
<unk> to the onset of COVID-19 Q1, 2020 profit or property operating income for <unk>.
And park was approximately 8 million U S dollars.
<unk> ownership interest.
We are encouraged by the recent pickup in leasing activity the vaccine rollout from the U S appears to be giving people the confidence sort of time for the city.
And lastly in January 2021.
<unk> converted $140 million mezzanine loan on a $12 for acre development site in Jersey city to an ownership position there.
This will reduce interest income by approximately $14 million annually in 2021 Opex for 2020.
And interest will not be capitalizing the project until development commences.
Finance income in Q1 2021, once top line 9 million compared to $8 2 million in Q1 2020.
While these sectors will temper 2021 results are expected to substantially reverse in 2022 with anticipated lease up on real landing Jackson Pollock Hercules phase, one and the commencement for future developments.
We also expect the development activities to contribute to net per unit growth and improve the overall quality of our portfolio.
And with that I'll turn it back to Tom.
Thanks, Larry.
The challenging year, where all finally, starting to see promising signs of recovery, we've seen a sharp improvement in leasing activity and occupancy at Jackson Park and strong leasing momentum at our largest most recent development relenting in Miami vaccination rates declining every day, and when where restrictions have been lifted bricks and mortar retail sales have surged.
For retail properties still close by mandate, but we expect them to reopen over the next couple of months.
We were seeing significant non solicit interest from many parties looking to acquire a broad variety of our assets and we expect to complete further dispositions over the next few quarters, taking advantage of the strong demand and pricing to further reduce our leverage.
And finally, we remain committed to maximizing value for our unit holders and continue to work towards opportunities in 2020 wanted to evolve H&R for more narrowly focused REIT consistent with investors preferences last quarter, we outlined plans to create at least one new entity in 2021 and remain on track to achieve that goal and we are concurrently working on a number of other transactions Ines.
<unk> that we believe will materially enhance H&R Reed, we look forward to providing more details in this regard over the course of the summer we'd now be pleased to answer any questions from the call participants operator. Please open the line for questions.
At this time, ladies and gentlemen, if you would like to ask a question. Please press star followed by day number one on your telephone keypad, well pause for a moment to compile the Q&A roster.
Our first question comes from Matt Logan with RBC capital markets.
Thank you Anne.
Thank you and good morning.
Good morning.
Good morning in terms of your iron for US fair value marks can you tell us what percentage of the 67 million was driven by your enclosed mall portfolio.
What cap rate you are carrying primary set today.
Hey, Matt.
For 67 million for.
Mostly due to the primary was increase in the malls.
The onset of COVID-19 hit last year, we who are.
Very conservative and reduce those cap.
Cap rates and assumptions from a leasing and rent rates.
Since then we've had a few appraisals done and showed a significantly higher than what you were carrying it some.
So most of that 6% to $7 million that you reference for salt Continental small what cap rate for all the carrying it at our investor presentation.
Overall retail.
I'm just trying to come up here now hold real retail centers calculate was.
Okay, that's not much.
But I.
I don't think we split it up between malls and other retail.
The overall cap rate of 668%.
So would it be fair to think about the enclosed malls in the order of maybe 100 basis points higher 50 basis points higher than that average.
We would say, yes, I would say.
Yes, so at least 100 basis point in time other than that average.
And in terms of your fair value markdowns in Q1 of last year. Certainly you are quite conservative in taking about a $1 three a cluster of markdowns.
Was any of that related to your Canadian grocery anchored portfolio over those assets largely stable.
No.
Last year Q1 toys assets for a stable we did not take a write down on those assets.
Assets have continued to perform well and even the chipmunks have even compressed in them.
Given the demand for growth story these days.
And if we turn to some of your strategic priorities. In 2021 can you talk about how youre thinking about the BOE and maybe give us some insight on what are you carrying that asset in terms of a cap rate today.
I'm doing all right.
Oh well.
We've always been working since the day, we built it actions to reduce our exposure as you well know and it's.
We're currently I referenced at the end of a.
What I spoke about before references about vault becomes critical and achieving our <unk> or our other our other objectives. So we are currently working on it we are in the very advanced stages, but regretfully at this stage of the am I still can't give.
To give you more details I can say as I said in the speech that I expect fully expected by end of this year, we show over the course of the summer we shall be able to make some announcements.
To be vague on purpose.
But we are this is not something initiatives that we're just looking at right now we are well advanced in our strategic.
Thinking of wherever it actually for strategic plans for where we're headed to.
So hopefully one day for.
For us.
Go ahead.
Sorry, Larry you want to give the IRS valuable when you want to do there.
I don't know if we can since we haven't put it in any other disclosures for shouldn't give it on a call because not equal opportunity.
Net.
Yes.
I would say Oh, I can't give you a bit of color on is that again in Q1.
2020, we took a substantial hit.
Total 600 million I'll now ask trust portfolio, specifically relating to.
Oil 10 until oil and gas tenants in that industry, where the Calgary and Houston and all of that 600 million write down but the biggest part of that.
For carrying out now we have not disclosed I don't I'm not sure I can kick from that I'm, sorry doesn't mean to be vague.
We think we've been conservative with the value we think.
Whether that's for sale or whatever we end up doing in the future, we'll be able to achieve at least kind of off price value if not quite quite.
Quite a bit more.
I appreciate that and completely understand it.
Maybe just changing gears for the residential side of your business you've got some great leasing traction at river landing some very healthy same property NOI growth for the Sun belt land tower portfolio.
Can you give us a sense for what's driving the lease up and the.
The performance more broadly across the sunbelt.
Hi, Matt.
So great question, so as a real as it relates to your question on <unk>.
Not to oversimplify the answer, but frankly I think we just have a terrific product I think the what was ultimately developed in.
In terms of location, but also in terms of finished product and.
The amenity base that we're able to offer prospective residents in comparison to the sub market is.
Dramatically superior and I think that plays a.
Probably an outsized role in the a and the pace of lease up.
As it relates to Sunbelt I mean.
I don't want to.
I don't want to belabor the point I think everyone's kind of read the reports of the net migrations from your core has been placed on hold please wait.
Hello.
Is it something I'm.
Still here for life.
Okay.
The operating rainwear.
I think it's just that the resilience and the strength of the Sunbelt markets I mean, it's where the jobs are being created where the from a tenant perspective the income.
Income per rent ratio is probably the healthiest.
And the nation.
Frankly, I think what can be said about the taxation or old or ultimately what the local governments have elected to do to attract those businesses and those tenants but.
Net events I think that the Sun belt markets are certainly helping river landing and attracting that.
Net migration to Miami, but I think.
First and foremost it really it really comes down for the quality of the development.
I appreciate the commentary and maybe just on that same property NOI growth print for land tower Theres, there wasn't like a weak comp in the prior quarter.
A pretty clean year over year figure.
I'm sorry, Matt could you repeat the question.
When we think about that 4% growth figure excluding Jackson Park, there was nothing in the prior period in terms of lease up of <unk>.
Assets or.
Anything anomalous that so that 4% growth was pretty clean.
I think generally speaking that's true it's difficult to parse them out to only because some assets. We bought last year were in stabilization that different levels, but I think generally speaking.
The right way in my mind to look at it as really that's just general NOI growth.
Produced with a for frankly stabilized portfolio, where generally speaking a stabilized portfolio.
I appreciate the commentary that's all from me I'll turn it back thank you.
As a reminder, ladies and gentlemen to ask a question. Please press Star then one on your telephone keypad.
No.
And we do have a question from Sam Damiani with TD Securities.
Your line is open.
Thanks, Good morning, everyone or good afternoon wherever.
Everybody is.
Just I guess on the <unk> and then the office portfolio and I think some other commentary alluded to this but just with the low interest rate environment.
Investor demand for properties coming back pretty hard in many sectors.
Do you see some some fair value write ups I guess on some of your long term leased office product.
In the near term.
I think the answer is yes, it's a little bit early days, there's a little bit of a lot of hesitation until work from home and how that's going to shake itself out, but youre right Theres a strong very strong demand for you haven't seen a lot of product change at this point in time, but I think its coming and so I expect there to be enough evidence of.
Transactions coming forward again, there has been almost nothing thats going for in the rear.
We view mirror to actually.
Give us the ability to go ahead and increase our cap rates.
Thanks, and you talk sorry.
Yeah.
And sorry, and Tom just on your comments, you mentioned theres been unsolicited bids for.
For assets and you're looking at stepping up dispositions.
Business segments are you are you focusing on in the near term in that regard.
So.
It's a cross range as it was we're not culling our portfolio necessarily.
Because we have bad assets or we have there is tremendous opportunities. Obviously, if you have a buyer, which we have right now and for our portfolio. So let's say our industrial properties that has a strategic reason for paying assets.
Solid price, we look at that otherwise were looking to raise capital to enhance our balance sheet and for their.
Go forward with our strategic strategic initiatives. So it's more of a right across the board it's not I.
I don't think it's focused on any one particular sector.
Okay last one for me is just on the on the land tower I think last call Felipe.
The messaging was pretty clear that some of those developments are most of those developments were built to sell strategies is that still the Pla.
Plan as these projects reach completion and stabilization for the next year or two.
I think that's a fair statement as it relates to the JV developments.
Not not so much as the as we regard.
We will remain opportunistic and will want to secure optionality on their own developments and the wholly owned development.
Front, but those.
Those are built to core and mid to come into our portfolio with the JV developments for <unk>.
Generally speaking, yes are meant to be sold it.
At some opportunistic moment.
Again, the strategy and why we went into those to begin with is it gives us optionality.
Get to go ahead and get the first crack at buying it and we want to bias. The challenge today is that the cap rates are so low for the assets. We are building that it's even hard even though we have a profit.
And higher return on our initial investment of let's call. It a third investment on those overall the pricing is still very expensive. So that's why our strategy underlying towers more just to turn into a developer rather than acquire today because cap rates are just quite frankly, they're very very low prices for incentives.
Thank you I'll turn it back.
Yes.
There are no further questions in queue at this time I'll turn the call over to Mr. Tom Stanton with for closing remarks.
Thanks, everybody and we look forward to.
Virtually seeing you at the AGM and have a great weekend.
Yes.
This concludes today's conference call. Thank you for participating you may now disconnect.
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