H&R Real Estate Investment Trust Q1 2023 Earnings Call
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which may include predictions, conclusions, forecasts or projections, and the remarks that follow may contain forward-looking information, which reflect the current expectations of the event 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 those statements and 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 root's underlying performancerisage.
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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
everyone for joining us today to discuss H&R's first quarter financial and operating results and strategy. With me on the call are Donnie Clow, lead independence trustee, Larry Frum, our chief financial officer, and Emily Watson, chief operating officer from our Land Tower residential division. Before I dive into my prepared remarks, I'd like to ask Donnie to make a few opening remarks.
Thank you, Tom, and hello everyone. I'm pleased to be here today with the H&R Management Team on behalf of the Board of Trustees. Over the last two months, I've spent a considerable amount of time meeting with investors and activists alike to understand their point of view. I'm pleased the process resulted in the nomination of two strong board members, Lindsay Brown and
2021. We are also supportive of Tom and the management team and their strong execution of the strategy to date. The board will continue to hold management accountable to deliver on the strategy over the short, medium, and long term. In summary, on behalf of the board, we're excited about the board renewal.
an expansion that's taken place. We're pleased with the caliber of trustees that have been assembled and we look forward to supporting management to achieve our strategy. Tom. Thanks Donnie. Since we announced our transformational strategic repositioning plan, October 27, 2021, we have made very meaningful progress.
By year end 2021, we completed the tail of over $4 billion of retail and office properties, successfully enhancing portfolio geographical exposure, asset mix, and tenant diversification, while also lowering leverage and increasing liquidity. Throughout 2022, we sold over $463 million dollars in non-core properties, reallocating that capital.
As we are approaching the halfway mark for 2023, our year-to-date completed dispositions total $296 million, mainly comprised of the office property at 160 Elgin in Ottawa, and we anticipate a further $300 million in sales throughout the balance of the year, including the successful closing of four Canadian single-tenant in RONA.
from 23 and 8% respectively at Q2 2021, to 39% and 15%, a total of 54% as of Q1 of this year. Over this time period, our office exposure, excluding the rezoning portfolio, has declined from 38% to 20%.
Coinciding with this progress is the improvement to our liquidity position and balance sheet metrics. Our stock was also one of the top performing REITs in 2022, beating Canadian capped REIT index by 17%.
Year to date, our portfolio and team are producing strong financial and operating results across all our property classes.
Presidential continues to see strong rental great growth. Our high quality, well located office properties with long weighted average lease terms remain attractive investments for potential buyers at 98.6% occupancy. Industrial properties located in key industrial markets remain in high demand as we realize continued rental growth and our high quality, gross reaccurate and single tenant retail property portfolio are well...
In his almost 10-year tenure with H&R, he was instrumental in the creation and growth of Land Tower Residential, where he oversaw the residential team. On behalf of the H&R REIT and the Land Tower teams, I'd like to thank Philippe for his service and wish him the best of luck in his future endeavors. Philippe leaves H&R in a strong position with a highly skilled and experienced residential management and development platform at Land Tower.
that will continue H&R's successful execution against our repositioning plan. Leading this team is Emily Watson, Land Tower's Chief Operating Officer with over 25 years of multi-residential experience.
Emily is responsible for driving operational execution and performance including leading and overseeing portfolio and property management, development, finance, operations and strategic planning. She is a highly experienced real estate executive and in combination with the Land Tower senior leadership team they have over $4 billion of transaction volume under their belts and $2.5 billion in development deliveries.
I'm thrilled to have an individual of her caliber leading the Land Power team driving growth for our unit holders.
Turning to our performance, we have achieved a number of key milestones year-to-date in line to strategy. We have achieved a number of key milestones year-to-date in line to strategy.
First, this is the successful disposition of 160 Elgin for $277 million, which closed on April 20th, H&R's only auto office property comprising 973,000 square feet in downtown Toronto. Given the considerable headwinds of the public and private real estate markets, we are very pleased to have completed this transaction. This one property represented 19% of our Canadian office portfolio.
which almost exclusively consists of two high rises in New York City and Houston, representing approximately $1.3 billion, or approximately 42%, with a $3 billion total office portfolio.
Number two is the Canadian office segment currently undergoing rezoning, representing $815 million, which will increase the value once the rezoning is complete, moving properties to their highest and best use. And number three, the Canadian office portfolio not subject to rezoning, which is slated for disposition, which represents the remaining $674 million.
The second milestone accomplished during the quarter was the unlocking of value through the rezoning of selected office properties, which we realized were fair value increases in the quarter.
Third, we increased distributions by 11.1%, effective January 2023. Lastly, we've enhanced our balance sheet with reduced leverage and increased liquidity. As we approach our annual general meeting on June 15 on behalf of the H&R team, I'd like to thank Ronald Ruttmann for his 27 years of service.
as a trustee on H&R's board, including eight years as chair and most recently as vice chair and lead independent trustee. We're really excited about the new trustees joining the board and we've already welcomed Donny Clough as lead independent trustee. Many of you know Donny from his Crombie days where under his leadership Crombie delivered consistent growth and superior unit holder returns.
while achieving record occupancy levels and significantly strengthening the balance sheet. His experience and expertise encompass the entire real estate, land assembly, acquisitions and investments developments, planning approval, and capital structure.
In a very short period of time, Donny has already made a meaningful impact on our company and I know his guidance will continue to be valuable as we continue to complete the REACH transformational strategy.
As Ani mentioned earlier, last month we announced two very strong board nominees, Lindsey Brand and Leonard Ramski, adding additional bench strength to our board. Lindsey is an experienced real estate industry executive and investor who most recently served as chief investment officer at Dream Unlimited, where she led over $2 billion of acquisitions and structured over $3 billion of development partnerships.
Prior to DREAM, Lindsay held positions at CIBC in real estate commercial banking and corporate development.
Lender is the founder and president of the Dunlow Group, a real estate investment company. Previously, he was managing partner at Brookville Financial Corporation, where he held positions of increasing responsibility in a number of areas, including the active trading and financing of all forms of commercial property and also oversaw its international expansion.
On successful election of Rylindji and Leonard at our upcoming AGM and with the addition of Donny Clowett, Lead Independent Trustee, our board will be comprised of 80% Independent Trustees and 40% women. As a result of our board renewal process that began in 2017, all eight of the Reach Independent Trustees have joined the board in the last three years. When the unwavering support of this distinguished board, the H&R team continues to have a clear...
for unit holders. And with that, I will turn it over to Larry.
Thank you, Tom, and good afternoon, everyone. In my comments to follow, all references to growth and increases in operating results are in reference to the three months ended of 2023 compared to the three months ended of 2022. As Tom mentioned, the strategy of selling office and retail properties.
in order to increase allocations to residential and industrial properties is their improves.
H&R's same property net operating income on a cash basis increased by 10.5%.
Pressing the growth down between our segments.
Land Tower, a residential division led the way with a 21.3% increase, primarily driven by an increase in occupancy at Jackson Park in New York, a strengthening of the U.S. dollar, and strong growth in rents from our properties and fentanyl states.
Land towers same property net operating income in US dollars grew by a very healthy 14.1%. Emily will provide more details on this growth shortly.
Industrial, same property, net operating income increased by 10.2%, driven by rent increases for new and renewing tenants as well as an increase in occupancy.
Off of the same property net operating income increased by 5.4%.
The increase was largely attributable to the strengthening US dollar and the receipt of US dollar as a termination payment.
Our office properties are in strong urban centers with a weighted average lease term of 7.2 euros and leads to strong creditworthy tenants with 80.4% of office revenues coming from tenants with investment grade ratings.
I would like to point out that only 346,000 square feet of visas expire in our Canadian office property during the remainder of 2023, which is approximately 5% of the total square footage in our office portfolio. Of the 346,000 square feet that expire, the total square footage is about 6,000 square feet.
105,000 is from 6,900 Marits in Mississauga, which now expires in 2023.
H&R received a termination payment of $855,000 in Q1, 2023 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 building. The plan approval is expected by Q4 of this year.
And lastly, retail same property NOI increased by 6.2%, primarily driven by the strengthening of the US dollar.
Q1, 2023's FFO was 31 cents per unit compared to 28 cents per unit in Q1, 2022, an 11 percent increase driven by strong operational performance across all segments and aided by the US dollar. For mention in January 2023,
H&R's monthly cash distribution increased to 5 cents a unit, or 60 cents per annum, an 11% increase over the 2022 distribution, excluding the special distribution in December 2022.
H&Rs, Q1, 2020 pay-out ratios remain healthy at 48% of FFOAs and 58% of AFOAs notwithstanding the increase in distribution.
Net asset value per unit as at March 31, 2023 was $21.95 per unit up from $21.80 at December 31, 2022. The following overall weighted average cap rates were used in deriving the fair values of the investment properties.
4.31% for residential properties, 5.2% for industrial properties.
6.4% for retail properties, 6.85% for US office properties.
4.52% for the eight Canadian office properties advancing through the rezoning and intensification process to be converted into predominantly residential properties.
and 7.18% for the remaining 8 Canadian office properties.
On debt, I would like to draw your attention to page 25 of the MD&A for new disclosures on the breakdown of debt per segment.
Death to total access at March 31, 2023 was 43.9% compared to 44% at the end of 2022, and the credit sheet was in excess of 900 million.
In terms of development spending for the remainder of this year, we expect to spend approximately $101 million on our U.S. residential developments and approximately $40 million on our Canadian industrial developments. For more information, visit www.fema.gov.au
In summary, we are very pleased with our 2023 results today 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 Emanee.
Thank you, Larry. Good afternoon, everyone. I am delighted to join the call to share with you some of our first quarter highlights from our multi-family platform. But before we jump in, on behalf of the Land Tower team, I'd like to thank Felipe for his leadership, guidance, and mentorship, and wish him success in the future.
I am excited to continue to lead the Land Tower team in making meaningful contributions to H&R's repositioning plan. Additionally, I look forward to working more closely with Tom, the H&R Executive Team, and the Board of Trustees.
Jumping into first quarter results, we are pleased with the performance of the portfolio. When excluding Jackson Park, same property net operating income from our portfolio in U.S. dollars increased by 12.9% for the three months ending on March 31st.
2023 compared to the respective 2022 period. When including Jackson Park, same property operating income from our portfolio in U.S. dollars increased by 14.1 percent.
As we have seen in previous quarters, long-term demographic trends remain strong for the apartment sector. Although new supply continues to make headlines and overall housing shortage still remains, interest rates continue to rise with the gap between rent to owned rates, making it harder for our residents to become homeowners.
We continue to experience strong rental rate growth in all of our US Sunbelt markets. For Q1, our blended lease tradeout for our portfolio, excluding Jackson Park, was 6.4%.
Despite the reports of elevated supply, we believe our well-located and high-quality product will buoy our future occupancy and continue to support our rental growth.
Despite the reported headwinds, our multifamily portfolio ended the first quarter at 95.3% occupancy while still achieving healthy rent growth.
On the development front, Land Tower West Love in Dallas, Texas is on schedule and on budget and recently finished most of the concrete garage and foundation work.
Framing for the first few turns of the development should reach 4-5, its top 4 within a couple of weeks.
Also in Dallas, Texas, Land Tower Midtown is on schedule and on budget with framing commencing next week. As mentioned in previous quarters, we expect limited variance in the hard cost budget based on how we are tracking.
As it relates to the balance of Land Tower's development pipeline, we are progressing through the different phases of design, drawing, and permitting.
We've received multiple new building permits in Q1 for new projects, underscoring our intent to be fully prepared to capitalize our development pipeline when the time is right.
As we prepare for the future growth of our portfolio, we continue our PropTech initiatives to set the foundation for scalability.
Fortunately, technology has emerged that creates efficiencies, provides transparency to optimize staffing levels, and reduces the dependency on thinning labor pools.
In Q1, some of our Prop Tech advances included expanding our centralized services, which included transitioning renewal negotiations from our onsite teams to a central service team.
Additionally, we began testing artificial intelligence to improve rent collection. Our AI software sends residents that are past due on their rent emails and text messages to encourage and remind payment is due.
Early indicators show great success with the artificial intelligence platform, saving over 170 hours of our team's time handling over a thousand conversations with late payers while decreasing delinquency from prior months.
I would also like to take a moment to comment on our residential platform's growth and culture. We recently concluded Land Tower Leadership Conference at the Universal Studios Orlando, where we hosted all of our leaders and future leaders across the Land Tower platform. It was great to bring our team together, recognizing the achievements the team has made to the
the team cohesion and vision alignment paired with a strong track record should provide support and continued outperform from the Land Tower platform.
In closing, our unified and skillful teams will continue the work we have done for you.
We will execute the same vision with the same team and thus are confident in our ability to continue to grow the land tower platform and make meaningful contributions to H&R's successful execution against the repositioning plan. I am thrilled to lead this incredible team and honored to continue along the same trajectory that we have.
Our strong financial results are a testament to our actions.
Recognizing that there is still significant important work ahead of us, we are committed and are well on our way to creating a simplified, growth-oriented company that will serve as significant value to our unit holders. We now be pleased to answer any questions from our call participants. Operator, please open the line for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session.
Should you have a question, please press the star followed by the one on your touch tone phone. You will hear a three tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys.
Operator 1 First question comes from Mario Saric from Scotia Capital, please go ahead.
Good afternoon. I just wanted to ask a question on the strategic plan in the press release. I think in relation to welcoming Donny Clow as an independent trustee, I noted that the comment was a plan to seek to accelerate the transformation strategy. Am I reading too much into that or...
is you need to plan to get stuff done sooner than what you laid out before.
When you're talking about a five-year timeline and you have COVID and you have all the other economic conditions that are out there, it's pretty hard to answer that question definitively. We would like to accelerate it. Whether we can actually achieve that result is not totally in our hands. So I think the answer, quite frankly, is yes, if possible, but it's not in our hands, so hopefully we'll get there.
Okay, and then the end game has always been 80% multifamily, 20% industrial, US and Canadian respectively.
I'm not sure if there's a lot of synergy between those two asset classes. Is industrial a long-term asset class for you or would you consider disposing of the portfolio under the right scenario?
We've considered exposing the portfolio in that scenario, but you have to appreciate the fact that we are Canadian REIT, we've done secure debt and Canadian content is definitely paramount from a tax perspective, from unsecured banking, from a secure debt perspective and from a banking perspective. So whether we can actually become a totally based US REIT is very questionable at this point in time.
If the right deal comes across, depending where we are with the disposition program, it's something that we would consider, but it's not something on our radar screen at this point in time. With respect to the office assets, has there been any change in the overall?
acquisition disposition environment in the last two to three months of consequence? So acquisition there's been no change so I don't think the market from the acquisition side at least from H&R that's never been on our radar screen. The disposition side I don't think anything's changed. I think if we manage and hopefully we will manage to do some dispositions.
They'll be strategic, they'll be creative. I don't think it'll be real estate one-on-one where you put an asset on an office building on the market and deals flow in the world. That world currently doesn't exist, but we are still optimistic in our disposition program.
My last question, just with respect to the recent management changes, any implications at all with respect to the
Okay, my last question just with respect to the recent management changes, any implications at all with respect to the strategy?
Any
Any implications on the communicated strategic vision after the recent management changes?
I'm having a hard time understanding what the definition of that question really means. Maybe Don, do you understand? No, sorry Mario, we're having trouble, a little bit of trouble hearing you. I apologize. But maybe say the question in a different word, because we're not understanding the question.
Following Felipe's departure, is there any implication to the strategic plan laid out as it was? No, Mario, simple terms. We've laid out the strategic plan in 2021.
Philippe was a great leader and you know, it was a mutual departure, but at this stage We're very pleased with Emily's leadership and land tower and in terms of the actual strategy. It's the same strategy. We articulated in 2021 And we're very pleased to the board. I can tell you the set of my remarks
with management's execution to date and we're really cheering them on here and really we're going to hold them accountable to actually achieving this, executing this strategy. So there's no change, long-winded answer.
Perfect. Okay. That's it. Thanks guys. Thanks, man.
Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star 1 now.
Next question from Jimmy Shen at RBC Capital Markets. Please go ahead.
Yeah, thanks. So it looks like you're making some good progress on some of the...
rezoning the office. I think you've increased the value in your office portfolio this quarter. Should we expect any monetization of any of those projects in the near term? Are any of them candidate for that?
Not in the, let's put it this way, not this year and I would say not for the most part of next year but you could see a monetization event of potentially one property towards the collateral, maybe Q4 2024. We still have a lease on 55 Yonge Street with GIBC.
We are not completely finished all of the rezoning. The world has changed and the rezoning process is, not process, the rezoning result is going to change as well as office becomes much more difficult for the city to rationalize replacing and as residential, the residential opponent probably needs a segment of affordable which Toronto doesn't have currently.
So when that process is finished, I think the first monetization event is gonna be 2-4-2024 or thereabouts. Okay, gotcha. And then I guess since Donny is on the line, you mentioned a couple times that you'll hold management accountable in the execution of strategies. Just curious as to...
sort of what are the key milestones or metrics that you guys are gonna be setting to assess the success of the strategy and whether or not that would include timelines or maybe just give us your general kind of guidelines on how you would assess that.
But I mean, Jimmy, the timeline was outlined in 2021 as a five year timeline. And honestly, the progress the management team has made to date, I think has been extremely strong. You're talking about four and a half billion dollars worth of disposition. Including Elgin, this really part of this year, and Tom indicated possible.
I know people are impatient as we've seen over the last couple of months, but the board is I think overall pleased with the progress. And then as I said, very strongly going to be holding management accountable to achieve the plan. So yeah. Yeah.
Okay.
And then maybe just last question with respect to Philippe. I mean, hopefully my questions are a bit clear but So like we're outsiders looking at the company Obviously, we're not privy of the discussions that go inside the tent But you know when we when we look at sort of Philippe He's been kind of the most visible cheerleader of the firm to the street in the last year
and obviously he's built, helped build Man Tower the last 8, 9 years and seemed to be very passionate about it. And then we see sort of a 180 degree turn. And so rightly or wrongly, again as an outsider looking in, it kind of raises the question of whether there is something going on that should or should not be of concern to shareholders. I don't know what my question is but is there any comment?
that you can make to maybe help us get a better read of the situation.
I'll speak to it. I mean, number one, we can't talk about Philippe's departure. I mean, I think we indicated in the press release it was a mutually agreed upon departure, and so that is what it is. I think importantly, we are saying that we're committed to the strategy. There's no change in direction. We're very confident in both H&R leadership and H&R leadership.
and land tower leadership. Emily is an outstanding leader. Her team, you know, loves her and my experience in walking around properties with her and their execution I think is very strong. So it's important that people know there's no change in the strategy and the execution, as I said, is ahead of schedule. So on until the end of this obviously there's
You know, if anything, Tom and the team deserve congratulations for executing what are very difficult transactions, as I'm sure many of you saw with the Elgin transaction, the complexity, how things are structured in the financing at the end of the day. This is not easy stuff. But we are sticking to the plan and we're executing it well. So in terms of the interpretation of what happened, it's...
People are creating their own negative narratives, and I don't think that's really going to help people too much. I think what is most important is that we stick to the plan and then execute the plan.
Okay, thank you. Appreciate the comment. Thank you. The next question comes from Sam Damiani at TD Cowan. Please go ahead. Thanks and good afternoon everyone. Maybe Tom for you, just on the sort of enhanced disposition outlook for this year.
Yes. Just for clarification, there is no US retail.
Right. Almost nothing. Those are the small little, couple little oil gasses left, but that's not meaningful. Okay. Two or three times.
And then any update on the 160 Elgin buyer with their ability to arrange full first mortgage financing.
I have an update but I can't get this close because I think it's not baked yet. He had a 90-day VTB from us. We expect to be able to get there. There's no extension rights.
If it's 90 days or 120 days, that's not meaningfully different. He expects to get there. I have no, I can't confirm if that's going to actually happen or not. The buyer is optimistic that they're going to get there.
Okay, and with the remaining dispositions, the RONAs and others this year, do you see providing more VTB financing to the buyers?
Currently, what we have under the GO, when I say the $300 million, it does not have any VTBs. But I put a caveat to that. If those aren't the deals or other deals or the deals are going to the future beyond this year to next year, I think it's a way of life right now, and I think that most deals have some element of ETB. It's a function to really to where lenders are and what percentage.
of the purchase price they're gonna finance and what interest rates are. So I see almost all deals out there other than the deals that we currently have with the goal in the $300 million, having some form of structured enhancement, whether it's a buy down or rate or whether it's a mess financing, I think that's the way of life right now.
Okay great, last one for me Larry maybe for you is the the same property in a Y growth guidance that was given last quarter any any change to that?
I think we've had a really strong start to the year, a really good quarter based on that and based on the US dollar staying as strong as it was during the quarter. You know the 150 album coming out of Saint property which...
is declining and declining in its operating income.
I think we're going to be at the top end of that range and probably maybe even a little bit better.
I think we're going to be at the top end of that range and probably maybe even a little bit better. Okay, great. Thank you. We'll turn it back.
Thank you. Thank you. There are no further questions. Please call the number on the call back over for closing comments.