Q1 2024 H&R Real Estate Investment Trust Earnings Call

Yeah.

Good morning, and welcome to each and I feel that state investment shot 2024 first quarter earnings conference call.

But getting the call H and I would like to remind listeners that certain statements, which may include predictions conclusions forecasts or projections in the remarks that follows may contain forward looking information, which reflects the good expectations of management regarding future events and performance and <unk>.

Speak only as of today's date.

Forward looking information requires management to make assumptions I rely on certain material factors and is subject to inherent risk and uncertainties and actual results could differ materially from the statements and the forward looking information.

And this kind of thing you shouldn't IFA national and operating performance and in responding to your questions. We may reference certain financial measures, which did not have I mean, they recognized our standardized and they I F. R S or can't eat and generally accepted accounting principles and are therefore unlikely to be comparable.

To similar measures presented by other party issue right.

non-GAAP measures should not be considered as alternatives to net income of comparable metrics determined in accordance with ISI as indicators of Asia Nice performance liquidity cash flows and profitability.

Is it a nice management uses these measures to eat in assessing their each underlying performance improvements just additional measures. So that investors can do the same.

Additional information about the material factors or assumptions risk and the shipping piece 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 the pride in making such statements.

Hi, there with people in Asia, our use of non-GAAP thing Nashua Mushers I describe it might be best in Asia, Nice public filings, which can be found in ancient ice website.

And but that said I pass that gotcha.

I would now like to introduce Mr. Tom Hudson, Chief Executive Officer of ancient IV. Please go ahead.

Good morning, and thank you all for joining us today to discuss our first quarter results with me on the call are Larry from our Chief Financial Officer, and Emily Watson, Chief operating officer of all that Tower Division.

Year to date properties and properties under contract to be sold totaled 411.

$7 million. This is in addition to the tune of $1 billion of property sales of $6 4 billion of assets spun out between the announcement of the plan at the end of last year.

As of March 31, 2020 for the residential and industrial segments comprised 62% of our total.

And as at March 31, 2024 August.

Total office portfolio comprised 23% of total real estate assets. After the sales of course, the tell US we will be left with 18 off of office properties with a total value of $2 $2 billion.

Based on our current unit price of $9 30, compared to our NAV per unit of $21.05 is if the market isn't giving us zero value for these properties.

Highlighting the value inherent in our unit price.

Average term to maturity in our leases in our office leases of six six years 81, 2% of our office tenants had investment grade ratings underscoring the quality and location of our properties six of our office properties can be redeveloped into residential properties with a significant increase to the current square footage.

You need to realize value through the sale of our office properties and execution of our strategic plan and with that I'll turn the call over to Barry for an update on our results.

Thank you Tom and good morning, everyone.

Comments to follow references to growth and increases in operating results are in reference to the three months ended March 31, 2024 compared to the three months ended March 31 2023.

Hey, Charles same property net operating income on a cash basis increased by one 4%.

Breaking the growth down between our Sigma land tower residential division had a three 2% increase and Emily will provide more details on this shortly.

Industrial same property NOI on a cash basis increased by five 1% driven by rent increases for new and renewed tenants as well as an increase in occupancy.

Attendance at our two new industrial developments in Mississauga.

336000 square feet.

<unk> possession, and they rent free fixture in theory, it will end in Q2, and Q3 2024, respectively.

The average rents.

$8 57 per square foot on our Canadian industrial portfolio is well below market rents, which bodes well for our industrial industrial portfolio continuing to deliver strong results.

Also our same property NOI on a cash basis decreased by three 7%. This decrease was largely attributable to a decrease in occupancy at our properties slated for future development, including.

377 hundred Seventeens weighing Burnaby, BC, which is under contract to be sold.

Our office properties on strong urban centers with a weighted average lease term of approximately six and a half years and if the strong credit worthy tenants with 81, 2% of office revenue coming from tenants with investment grade ratings.

Last year H&R received a lease termination payment of $3 4 million from a tenant at one of our office properties 60, Nonhybrid merits drop in Mississauga.

In Q1 2020 for this property was called food from investment properties the properties under development.

The former 105000 square foot office property has been converted into a brand new 122000 square foot industrial building construction of the new building has just begun.

And lastly, retail same property NOI on a cash basis increased by five 7%, primarily driven by increased occupancy at riverlands.

Q1, 2024th <unk> was 29 seven cents per unit compared to 31 cents per unit in Q1 of 2023.

<unk> cash distributions of 15 cents per unit for the quarter resulted in an <unk> payout ratio of 55% and an <unk> payout ratio of 61%.

Net asset value per unit at March 31, 2024 was $21 <unk> five per unit, an increase from $20.75 at the end of 2023.

Debt to total assets at the rig proportionate share of March 31, 2024 was 44, 5% and liquidity at March 31, 2024 was in excess of 800 million with an unencumbered property pool of approximately $4 3 billion.

Our unencumbered assets to unsecured debt coverage ratio was two two times at March 31 2024.

Looking at our debt stack, we only have $243 million of mortgages. During 2020 for 111 million of those are properties are secured by properties, which we have under contract to be sold and the balance will be refinanced or repaid from the proceeds from our asset held for sale.

And with that I will now turn the call over to Emily.

Thank you Larry and good morning, everyone today I'm excited to share our first quarter performance for our multifamily platform highlighting significant operational achievements and providing insights into our future strategy.

We've seen same store revenue growth this quarter aligned perfectly with our expectations. Our multifamily platform continues to benefit from strong demand as evidenced by stable resident retention and positive traffic trends, while new supply is at a 30 year high of 100000 units were absorbed in Q1, marking a 20 year high.

And showcasing the economic backdrop of continued job and wage growth.

Furthermore, our diversification across both sunbelt in Gateway cities has served us well and driving solid results.

Our operational efficiency shines through our financial metrics, we achieved the same assay revenue growth in U S dollars, increasing by one 5% for the first quarter and same asset net operating income from our portfolio in U S dollars, increasing by three 2% for the three months ending on March 31 2024.

Compared to the respective 2023 period.

Occupancy ended the quarter at 94, 4%, we continue to see positive signs of demand with Q1 resident retention at 54% and 94% occupancy in the Sun belt, and our gateway cities, achieving 74% retention and 97% occupancy.

Move outs to home purchase continue to trend in a historical lows at 9% of total move out and rent to income levels remain affordable at approximately 19%, excluding Jackson part, allowing for future headroom and rental growth.

We've included additional disclosures on page eight of the N DNA, which includes occupancy and average monthly rent per unit by region.

The first quarter past without a decrease in interest rates, which continue to stagnate transaction velocity.

Nonetheless based on recent sales comparisons in the Sun belt and a recent third party appraisal, we are maintaining our fair market value capitalization rate at 5% far Sunbelt portfolio. We anticipate these valuations to remain attractive for institutional quality assets in our target markets.

Turning to development, our land tower Westwood project in Dallas achieved its first temporary certificate of occupancy on schedule with 75 units in April in early April. In addition to these units we opened a leasing center and the majority of the property amenities on April 15th and with over 30 leases to date, we are encouraged by the.

Our leasing in the first four months of lease that we are looking forward to entering the summer leasing season with its best in class development prospective renter feedback has been extremely favorable with our co working spaces and cold brew on top ranking as the crowd favorites.

Atlanta Tower in Midtown also in Dallas construction has progressed well with the development now 100% frames and the first turn of units, finishing cabinets flooring and countertops.

We plan to commence leased up at Midtown This summer.

On the real estate development Trust number one from the Investor interest to invest alongside land tower at the existing development pipeline, what's highlighted by accelerated fundraising results. We build this construct will create value for H&R shareholders as well as our red at investors, while maintaining financial flexibility and taking advantage.

<unk>, a favorable depressed sunbelt supply pipeline in the upcoming years.

Land tower Sunrise at 330 unit development in the Orlando market and lien tower base side at 271 unit development in the Tampa market are progressing as expected. We expect these developments to reach completion in early to mid 'twenty 'twenty, six which we believe to be an excellent time to deliver.

Our unit.

We look forward to providing updates on these developments in the coming quarters.

In conclusion land towers platform has demonstrated remarkable resilience and performance outpacing many of our peers, while we navigate some near term supply challenges our focus on innovative practices and enhancing NOI margins through strategic initiatives continues to yield positive results I want to.

Scanned my gratitude to our incredible team, whose dedication to excellence and innovation has been pivotal in achieving these outcomes.

With that I'll turn the conversation back to Tom. Thank you for your continued support and trust in our vision.

Thanks, Emily and operator, please open the call for questions.

Thank you, ladies and gentlemen, well now begin the question and answer session should you have a question. Please press star followed by one you will hear a path that you had the spin raised chicken they should decline from the pone process. Please press star followed by two and if Youre using a speakerphone. Please sleep the hand.

Said before pressing any keys.

Okay.

Our first question comes from the line of Sam Damiani from TD Cowen. Please go ahead.

Thank you and good morning, everyone, maybe Emily just to start off with woodland tower, what would be your updated views on the.

Trends in the supply.

In your markets when do you think they're going to taper off meaningfully any any different views on that first as last quarter.

Hi, Sam Thanks for the question no actually that really hasn't changed we delivered you know as you know 100000 units just in are our markets in 2023, and it's little edge that a little bit more in 2024, and so far the demand side of the equation and I don't think it's enough.

Fanfare frankly.

Okay.

But with wage growth and starting to see the migration.

Kind of be the same levels as it has before I think 25, it's going to drop off pretty significantly again 26, I think is really going to that part of that.

A year I think 25, we'll still probably absorbing some of the overhang of 'twenty four but you know I I would see 26 being set up to six 7% rent growth just because we'll still have a supply shortage of all the folks that are coming to the Sun belt States.

Speaker Change: That's helpful. And then just given the success of the Red It would you think.

Think about maybe starting construction on on more projects in the near term and if so.

Well Jude bias to do you know another read it feel or do it more on balance sheet.

Well I think we're always open to opportunities so given the given the strength of the appetite that we saw so quickly.

Speaker Change: Probably a better question for Tom but.

Yes, we would we wouldn't pass on an opportunity to continue to develop at the attractive rate.

So when when when things change if things get better than that when the market will let us use our capital to grow then obviously, we'll do it on our own balance sheet, but until then we continue using the red formula going forward.

Okay. Thank you and last one last one for me just on the on the Mezz loan conversion to ownership in Brooklyn, How big was that Mezz loan and also with the remaining mezz loans.

Speaker Change: Is there any.

Speaker Change: Any sort of high level description you can give about the underlying properties.

Speaker Change: Yeah.

Yeah.

Good morning, Sam I believe that marathon until Congress about 40 U S putting money in the U S.

Yes.

Speaker Change: And the rest of the marathon.

We wanted a bit of update on.

Currently.

But our current plans on the rest of the MSR.

I'm looking to get a sense of what types of underlying properties are behind that a pool of mezz loans.

It's mostly the assignments, mostly land mostly land in the U S.

But it's not very material.

This was converted for 10 31 reasons. So we wouldn't convert otherwise it just would really do is parking our 10 31. If you look at it that way when we find a replacement and when the market wants us to find a replacement, which again at this point in time, we're not spending cash.

Speaker Change: Then we look ahead to exit.

Speaker Change: And we're going to something at this stage of the game, we're just deferring or our tax so to speak by parking at the 10 31.

Sorry last one from me action to look at in that regard.

So just also add there are a couple of.

Ones that are not based on that and those are like the one we just did for the sale of 160, Helga and we had a BTB of $30 million on that property. So.

Yeah.

Speaker Change: One or two others that it does not not really material. This was the most material and this is just deferring our tax.

Gotcha, and then just lastly on the Mezz loans or just form as loan any update on the Cove on the Jersey side.

<unk>.

That system is long over there my guess is that will be converted to.

Equity hit with 80, 20 split will have anyway of 'twenty, but the timing on that will probably happen in 2024.

Thank you.

Yeah.

Yeah.

Again, if you would like to ask a question. Please press star one thank you.

Our next question comes from the line of Jamie Shen from RBC capital markets. Please go ahead.

Okay.

Thanks, So maybe just a clarification on the Mezz loan you're referring to this is not bleeding to the Brooklyn asset or the development site that you bought or is it something different.

Relating to the Brooklyn asset correct. It is okay, yeah, Okay alright good.

E any any update on on echo portfolio, and how you're thinking about the potential of of selling your LP interest in that in that business.

Yeah, we're making progress I'm I'm more optimistic that it'll happen.

Speaker Change: And I don't have a data on that but we're.

We're getting the feeling that it's it is a liquid portfolio as far as the quality goes it's it's a it's.

Speaker Change: Save it fully leased 98% leased.

Primarily 54% of industry giant Eagle chain.

It's desirable at the value of that is in and around seven seven ish 775, so because it's the same product as Publix would have Florida publicly traded a five and this will trade at a seven seven and a half because its Ohio, Pennsylvania, I think it'll be desirable the markets will be looking for this and I think we will be able.

Speaker Change: To make an exit within the next 12 months.

Speaker Change: Okay is it is it on the market today.

No okay, Okay, it's being.

Underwritten, but it's not on the market at this point in time.

Okay.

Maybe just a few modeling type questions theory, so the net proceeds from the Telus tower and of course key how.

Speaker Change: How do we model the use of proceeds and border.

Speaker Change: I think the safest.

Would be to just model a.

Prepayment of debt.

The payment of debt okay.

Alright, and the Street line was 5 million in the quarter.

Speaker Change: Maybe it has something to do with the meta Vale assets and I guess, how do we model that one is it does it run off once you when it goes away.

What's that number look like.

Yeah.

Although the free rent or made available after the fixed compare to withdraw from that will be replaced by actual cash rent.

Overall.

On an after forward will make a difference because they prefer thanks Patrick.

Great smoothing into accounts as opposed to the same answer.

Paul will be higher because it'll be ranked et cetera.

Cash rents.

Okay. So how does that 5 million roughly would be like a couple of million from from those are.

When you could model it.

I think the easy way to model. It is this type of high teens rent on those properties available square footage.

That would probably be the NOI coming from those properties.

<unk> seen rent on a square footage.

Okay.

Okay.

I'm, sorry, lastly loss, the Brampton industrial sale, where the tenant exercise the options do you have a lot of assets that are structured that way, we're able to buy I guess, they were able to buy at a certain price. Although we have we have to we have I would say a lot of assets. We have chunky we have.

Two other two other assets that have that option.

Option by the tenant where we expect because of the increase in values of the building in Atlanta, and it will be exercising their option that won't happen for another couple of years.

And just a note on that when that does happen in a financial loss oscillator circumstances does have an option to purchase.

We talk a fair market value of our first value asset purchase option, even extra offers market value might be higher.

Speaker Change: Understood Okay.

Thank you.

Speaker Change: Thanks.

Yes.

Our next question comes from the line of semi ESI. It from CIBC. Please go ahead.

Thanks, Good morning.

Just firstly on 69 young so now you have the amendment to Colorado to residential just wondering what would be maybe that construction cost per square footage for an asset like that today.

Speaker Change: Good morning snack Kingston.

The construction cost for $69 is a bit higher than standard.

It probably is going to be somewhere 100 to $150 a square foot higher than a traditional project just because of the heritage nature of it and the fact that it's a retention projects who has an inherent premium.

Speaker Change: Okay. That's helpful.

And then I guess switching to the balance sheet that that type of debt that tick up a little bit.

Speaker Change: Hi, I'm, just I'm wondering Larry where do you expect that to settle over the course of the year.

With these proceeds is it going to be getting from chorus.

Post <unk>.

<unk> for the quarter.

Speaker Change: That will be used to pay back debt.

You should see that drop again.

Overall, thats, a short term drop and I think you should ask.

Overall.

Speaker Change: Around half of two three times.

Oh, okay.

And also just wanted to confirm that the decline.

Speaker Change: Occupancy in office that was primarily all related to Kingsway.

Primarily related to kings, right, but not totally related to things like they will have the drops in occupancy some tenants vacate.

The.

Speaker Change: <unk> had a pretty powerful.

Square foot tenants I believe one of our other properties to be Redeveloped.

But it is mostly most of it most of the Kings Plaza.

Okay, great. Thank you.

Okay.

Our next question comes from the line from miles tablets from Scotiabank. Please go ahead.

Hey, good morning, So we noticed that we haven't done any buybacks over the last two quarters and finally, the recent announcement of the dispositions how do you view the appeal so.

So we started in CIB versus paying down debt.

Speaker Change: We're open to the MTA abbvie, but at this point in time, we're protecting our balance sheet. So we don't expect to be engaging in the NCS.

Speaker Change: Alright makes sense. Thank you my.

My next question is related to the newly empowered the new.

On the natural portfolio so.

Is it possible to provide a little bit of more color on the.

Speaker Change: Leasing spreads that you are seeing right now.

Sure.

What in particular questions do you have in between renewals are.

Speaker Change: Yeah, I like the new renewals and new leasing spreads are mark to market share.

Sure.

We pretty stable, we had about a 60% basis points improvement over.

Q4, which is really seasonality.

<unk>.

Speaker Change: Q2 is off to a much better start actually where we're seeing flat.

So Q1 was down around 2% of our lease spreads, but flat for Q2, so we're getting a little bit closer into our leasing peak season, and moving into kind of where we see the height of our traffic. So I expect that to really.

About the same in Q2 Q3.

About the same deliveries every single quarter.

Volatility to there, but it's pretty stable across the four quarters, though.

Speaker Change: Come back down and maybe Q4, but Q2 and Q3 I expect them to be pretty flat.

Okay. It makes sense and thank you for that.

Question.

Speaker Change: It was related to the residential portfolio to and also the whole portfolio. So just we just wanted to know if it's possible.

Can you give us your expectations on the street and why growth for this year.

And normally Larry we haven't given any guidance and we want to kind of stay away from giving guidance.

Our other issues.

<unk> bottomed.

Speaker Change: Having all sorts of problems and we just don't want to call. It that is correct.

All right no worries. Thanks, Larry appreciate it that's it for me alternative Okay Goodbye. Thank you.

Speaker Change: Yeah.

Okay.

Okay.

Sorry, No question at this time, Mr. Tom Hofstetter. Please go ahead.

Speaker Change: Thanks to everybody for joining us have a great day.

Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Oh.

Okay.

Yeah.

Speaker Change: [music].