Q4 2024 H&R Real Estate Investment Trust Earnings Call
Speaker Change: Good morning, and welcome to H, you know real estate investment trusts 'twenty 'twenty four fourth quarter earnings conference call.
Before beginning.
Speaker Change: And I would like to remind listeners that certain statements, which may include predictions conclusions forecasts or projections in the remarks that follow may contain forward looking information, but just like the current expectations of management regarding future events and performance and speak only as of today's date.
Speaker Change: Forward looking information requires management to make assumptions are built 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.
Speaker Change: In discussing <unk> 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 ifr, Russia. Canadian generally accepted accounting principles and are therefore unlikely to be comparable to similar measures presented by other reporting issuers.
Speaker Change: non-GAAP measures should not be considered as alternatives to net income are comparable metrics determined in accordance with I have a rash as indicators of Ethernet performance liquidity cash flows and profitability.
Speaker Change: Management uses these measures to aid in assessing underlying performance and provide additional measures. So that investors can do the same.
Speaker Change: Additional information about the material factors assumptions risks and uncertainties that could cause actual results to differ materially from these statements and the forward looking information and the material factors or assumptions that may have been applied in making such statements.
Speaker Change: Let's detail on H, a nice use of non-GAAP financial measures are described in more detail and H, a nice public filings, which can be found on <unk> website at www Dot sito plus dot com.
Speaker Change: I would now like to introduce Mr. Tom Hofstetter, Chief Executive Officer of HIV. Please go ahead, Mr Huff better.
Speaker Change: Good morning, everybody and thanks for joining us we have with US Larry from CFO of H&R in Italy, Watson President land, Howard I'll hand, it over to Larry.
Speaker Change: Yesterday.
Larry: Thank you Tom and good morning, everyone.
Larry: So my comments to follow references to growth and increases in operating results unless stated otherwise are in reference reference to the 12 months ended December 31, 2024 compared to the 12 months ended December 31st 2023.
Larry: We continue to execute on our strategic repositioning plan in 2023, we sold $432 9 million of income producing properties and in 2024 was 429 million of real estate assets.
Larry: On January six 2025, we filed a further $49 8 million.
Larry: 70% of our real estate assets by value is now in the United States.
Larry: Overall, given the headwinds we faced at the end of last year with multifamily supply concerns are weak office market.
Larry: And rising interest rates, we are very pleased with our results breaking down our results between our segments. I'll also segment same property net operating income on a cash basis decreased two 8%.
Larry: There's been a state of Texas office policies from different companies and it seems clear that more and more of them for you hit it backs off which is positive for the sector as a whole.
Larry: Also portfolio of 16 properties, which includes four properties with residential rezoning opportunities now comprises 18% of H&R is total portfolio.
Larry: 87, 6% of our office revenue comes from investment grade tenants.
Larry: A testament to the quality and location of our office properties.
Larry: Our office occupancy at December 31, 2024 was minus six 8% with an average remaining lease term of six years. So the portfolio will continue to provide solid cash flow.
Larry: Our three downtown Toronto office properties residential rezoning opportunities are valued at $140 per square foot, which is less than half the value they want to take a a market.
Larry: The rest of the portfolio has a weighted average cap rate of 776%.
Larry: Residential segment same property net operating income on a cash basis.
Larry: Increased.
Larry: 0.5% in U S dollars.
Larry: The new supply added to our residential market has been absorbed.
Larry: Positive immigration favorable continued and our tenants are also staying longer.
Larry: Since the announcement of H&R strategic plan <unk> average U S residential rents increased from $21 16 per square foot.
Larry: At June 30 of 2021 to $26.84 per square foot.
Larry: We ended the year December 31, 2024 U S dollars.
Larry: Our residential portfolio at December 31, 2024 compare comprised 49% of <unk> overall portfolio.
Larry: Like how it with loving Dallas was substantially completed at transferred from a property under development and investment property in Q3 of 2024.
Larry: Lance how our Midtown also in Dallas was transferred to investment properties in Q2, 2024, and as they come out 26 residential investment property.
Larry: We have an additional two residential developments currently under construction, which are expected to be completed in 2026.
Larry: And all of the ownership interest in these two new developer is 29, 1%.
Larry: Our retail portfolio at December 31, 2024 comprises 15% of H&R its overall portfolio.
Larry: Retail segment same property net operating income increased 5% due to occupancy gains at river landing and foreign exchange.
Larry: The tenants in our retail portfolio of predominantly grocers in the portfolio has been very stable.
Larry: Our largest retail tenants as Jonathan Hugo who has 193 locations in our portfolio.
Larry: Eagle recently announced that they are selling the cake, a convenient stores and leases.
Which are expected to close in Q2.
Larry: This will further diversify our tenant mix with Couche tard, comprising about one 7% of our revenue.
Larry: John Eagle pass about three 9% of our revenue.
Larry: Industrial segment same property net operating income on a cash basis increased six 3%.
Larry: Our industrial portfolio of 65 properties at December 31, 2024 comprised of 18% of <unk> total real estate assets.
Larry: Continues to perform well.
Larry: With the announcement of H&R strategic than average Canadian industrial rents increased from $7 17 per square foot as at June 30 of 2021 to $9.66 per square foot as at December 31, 2024.
Larry: In addition, industrial properties located in the GTA made up 59% of its in our portfolio.
Larry: June 32021, compared to 70% now at December 31, 2024.
Larry: We continue to grow our industrial portfolio and added two newly constructed properties at the beginning of 2024.
Larry: We currently have one industrial property.
Larry: 50% interest in two industrial properties under construction scheduled to be completed later this year.
Larry: Headline <unk> per unit for Q4, 2024 was $29 eight compared to $29 nonsense in Q4 2024.
Larry: Our balance sheet remained strong debt to total assets at the reach proportionate share at December 31, 2024 was 43, 7%.
Larry: If ever there was a healthy nine four times.
Larry: Quality at December 31, 2024, well was in excess of 900 million, what's an unencumbered property pool of approximately $4 4 billion.
Larry: Our unencumbered asset to unsecured.
Larry: Our debt coverage ratio was two three times at December 31, 2024.
Emily: And with that I will now turn the call over to Emily.
Emily: Thanks, Larry and good morning, everyone I'm happy to discuss our fourth quarter and 'twenty 'twenty four performance for our multifamily platform and some operational highlights.
Emily: Our 2024 results rely right aligned with our expectations the United States had an incredible fourth quarter with over 230000 units being absorbed further demonstrating the strengthening drivers for our industry.
Emily: Our multifamily platform continues to benefit from that strong demand as evidenced by our retention of 59% in the fourth quarter.
Emily: We remain focused on the fundamentals of our business and creating NOI expansion through our repositioning opportunities development pipeline and other innovative value added strategies that add to our bottom line.
Emily: Given the declining levels of new supply ahead, and growing demand in our markets, we are well positioned for substantial growth and value creation in the coming years.
Emily: Same property net operating income for residential properties in U S dollars increased by one 4% and 50 basis points, respectively for the three months and year ending December 31st 2024, compared to a respected 2023 periods, primarily due to rental growth and lower property operating.
Emily: Great and costs from our Gateway city properties.
Matt: Say, Matt that occupancy ended the quarter at 95% and 90 basis points increase over the third quarter and a 70 basis point increase from Q4 F. 2023.
Matt: They met that occupancy in the Sun belt increased 100 basis points in Q4 to 94.4 over the third quarter.
Matt: Jackson Park with 99, 3% occupied with 72% retention.
Matt: Sunbelt continues to show strong demand metrics moving into 2025.
Matt: Send out move outs due to home purchases continued to slow to a historical low of seven 7% of total move outs in the fourth quarter and there continues to be approximately 59% discount to rent versus own and our markets.
Matt: Blended trade out for the Sun belt markets were negative five 9% in the fourth quarter ranging from approximately negative nine in Austin to negative two in Dallas, which coincides with levels of direct supply pressure.
Matt: Based on a recent third party appraisal and a handful of Sun belt sales comps, we have maintained our fair market value sunbelt cap rates at $4 97 per cent and believe the rate is appropriate and supported.
Matt: Cap rates are expected to remain low relatively speaking for the institutional quality assets in the Sun belt with capital flows interested and focused on long term heavy sunbelt multifamily allocation.
Matt: On the development front, my entire west La and Dallas, Texas continues to lease well despite the record level of deliveries in Dallas.
Matt: The community is currently 54% occupied and 58% leased the property was completed on time and on budget.
Matt: Also in Dallas, Texas Land tower in Midtown is currently 36% occupied and 46% leased.
Matt: Those properties are leasing well with an average monthly velocity of 25 leases per month, which is above industry reports foreign market and a testament to the superior product and unparalleled amenities our development team has delivered.
Matt: Midtown was also completed on time and on budget.
Matt: Our red at properties are progressing well and also remain on budget with completion expected in mid 2026.
Matt: Land Tower currently has an additional nine development projects in the Sun belt pipeline totaling over 2900 suites at H&R ownership interest with multiple sites ready and prepared for construction.
Matt: We are progressing through the different phases of design, drawing and permitting on the remainder of our Sunbelt development pipeline and currently have two projects shovel ready.
Matt: In summary, the multifamily platform continues to achieve encouraging results and strong performance relative to our multifamily counterpart I.
Matt: I believe this is a result of engaged associates, taking care of our customer.
Tom Hofstetter: In the fourth quarter land tower residential received best places to work in Texas and Best places to work for women by the best companies Great. The land tower team is engaged and charging into 'twenty twenty-five ready to drive continued performance and with that I pass along the conversation back to Tom.
Tom Hofstetter: Thank you Emily operator, you can open up the call for questions.
Tom Hofstetter: Thank you.
Tom Hofstetter: 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 Touchtone phone you will hear a pumped out your hand has been raised.
Tom Hofstetter: Should you wish to decline from the polling process. Please press star followed by the two and if you are using a speaker phone. Please lift the handset before pushing any case.
Speaker Change: The first question comes from Matt Hornack at National Bank Financial. Please go ahead.
Matt Hornack: Hey, guys.
Speaker Change: Just quickly Larry I think and some of the disclosure you mentioned that you have the.
Speaker Change: A true up in property taxes and in the U S portfolio can you give us a sense of that.
Speaker Change: How about would it impact the quarter end and is that in the same property.
Speaker Change: Numbers.
Matt Hornack: Good morning, Matt, Yes, it isn't the same property the effect towards the $1 9 million savings in property taxes for the quarter, but.
Matt Hornack: But we had a we had about in Q4 2022, you had about $1 million adjustment.
Matt Hornack: Perfect.
Matt Hornack: To do a percentage increase back out 1 million from Q from two.
Matt Hornack: 2023, and back out $1 9 million from 2024.
Matt Hornack: Okay.
Matt Hornack: It's a broader statement like the margins that you have I guess for this year for the full year is that kind of representative.
Matt Hornack: Of where you see things at this point and then maybe extending that on just the cadence of how you look at the the.
Matt Hornack: All of the U S multifamily space, if you could give us a sense on this.
Matt Hornack: Emily.
Matt Hornack: How are you first see kind of the trough and then improvement thereafter, because I think the supply side.
Matt Hornack: It's better at least maybe towards the end of this year. Thanks.
Emily: Emily do you want to take that one.
Matt Hornack: Sure.
Matt Hornack: Hi, Matt good morning.
Matt Hornack: I am pleased actually with the we are still seeing NOI expansion. Despite the supply headwinds and January was really off to a great start just for Pan American and we had a negative $5 nine in the Sun belt for our lease spreads in January.
Matt Hornack: That dropped to a negative one seven.
Matt Hornack: So no don't get me wrong, we still have a lot of deliveries that are going to be hitting I think Q1 and Q2.
Matt Hornack: But really dropped off dramatically so in January or I'm, sorry in 2024.
Matt Hornack: In 'twenty 'twenty four we had 120000 in our markets deliver and then 25, we have 69000. So it's frontloaded. So Q1 and Q2, we're still gonna be a little bit choppy, but we do expect Q3 and Q4 to rebound pretty nicely and then of course you know the story.
Matt Hornack: In 2026 of those deliveries are are very minimal. So we think that 26 says as we have kind of forecasted twenty-six it's gonna be a banner year, but 25 is gonna be frontloaded, and then level out in Q3 and Q4.
Speaker Change: Okay I appreciate that color.
Speaker Change: On the industrial portfolio I mean, the growth is low but I think it's just a function of you don't have any leases maturing essentially.
Speaker Change: 2027 looks like it's a bigger year for maturities is that when we should kind of expect an acceleration on the organic growth front for the industrial portfolio.
Matt Hornack: Hey, Matt Yeah, the industrial portfolio average rent is $9 66 based on current trends stay around 14 15 are on mute on our renewals so as they expire as come up that's what you should expect from amongst bar is the bigger growth.
Matt Hornack: Lastly, transactions wise, obviously, we're living through a period of a bit of uncertainty but.
Matt Hornack: Can you give us a sense, maybe Tom in terms of that.
Matt Hornack: Where where institutional capital is moving or not moving at this point.
Matt Hornack: Okay.
Matt Hornack: Oh, I can't really say that the market has changed one quarter over the next quarter institutional capital is.
Just trying to get the sectors, we've been seeing for the past many many quarters and it's just not growing at the office at all our institutional capital's not are excited about the whole lot. The they have to go ahead and spend the money somewhere else. So they're really focusing on industrial which is weakening.
Matt Hornack: A little on the weak side than residential for the most part in our retail there I would say on the sidelines, there's nothing new and nothing is you don't know.
Life Sciences has been a blood bath and so there's an awful lot of money that has to play in a lot of sectors are they're not playing multi res as far as Oh land values. Those I want to touch on that right. Now so it's a very very difficult market with very few trades in comps not a whole lot going on.
Matt Hornack: And those few trades is the spread between <unk> and fitness isn't too wide.
Matt Hornack: Yeah.
Matt Hornack: Fair enough.
Matt Hornack: So as expected and hopefully things get better but it.
Matt Hornack: It is what it is.
Matt Hornack: Yes.
Matt Hornack: Lower interest rates will definitely help.
Matt Hornack: Yeah.
Matt Hornack: That's it for me thanks.
Okay.
Jamie Shen: Thank you. The next question comes from Jamie Shen at RBC Capital markets. Please go ahead.
Jamie Shen: Hey, just to follow up on that question.
Speaker Change: Last year the transaction market is there's no better than it is now but you did achieve 400 million.
Speaker Change: Asset sales. So maybe can you talk about what you're working on in terms of asset sales and.
Speaker Change: What are you targeting in terms of amount and what do you think is realistically.
Please go ahead.
Speaker Change: Can achieve.
Speaker Change: So to put it as an office building in the market. There's nothing that can be put multi res landed but theres not going to be a bit the rest of the stuff that you could sell which is retail for example, or industrial it's predicated on interest rates or something after last quarter. There's no point in selling when it's rates are high when values are just really where they are because of interest rates.
Speaker Change: So we're focused on hopefully by the end of this year liquidating, our essentially our Alco position aguado position and my expectation is laid out by the end of the always show probably have done a deal on our Calvin lands for the four to 413 highway. So that's an awful lot of money, but that that could come in it's really not.
Speaker Change: Driven as market conditions have honest Martha is very strong I think the echo market is again they are looking for a chunky institutional.
Speaker Change: Dollars to spend in retail is very safe in our particular case types will have will have zero debt upon completion of the Couche tard deal. So there's those are three realistic deals that could potentially be done by the end of this year I don't expect a whole lot of other transactions in the office slash without selling industrial and retail as I said, we're gonna wait till sounds great for that.
Speaker Change: On on either of those three which one is more advanced.
Speaker Change: In terms of asset sales.
Speaker Change: So the Counterblast does not advance that's the discussion that's it that's it.
Speaker Change: And the government has as far as timing goes and how fast they wanted to expedite and has a lot to do with the politics of the provincial election. So I wouldn't say that I would say that they seem to engaged and I think that is realistic to say by the end of this year.
Speaker Change: Save for the other two echo seems to have a good likelihood as well I can say, one more or less I wanted to just a potential of cleaning up some some environmental issues not ours, but are within the city and that there would be a demand for that product again, all three we are very realistic, but they won't happen probably until Q.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: And then on the on.
Speaker Change: And on the Hertz, Yes, the 280000 square feet that did.
Speaker Change: Plenty to vacate.
Speaker Change: I know you've leased a good chunk of it.
Speaker Change: How does the rent compare with the expiring rent.
Speaker Change: And then and then what is your expectation for the rest of the space.
Speaker Change: So the spot its way off the.
Speaker Change: The market in Houston like everywhere else is very very low its really question of net effect of rent not face rents and if youre not doing a whole lot of Ti, which we don't plan on doing with the spaces in good condition and in addition, we don't we want to bring down the average rent because a lot of you know the average price per pound of the value of the building.
Speaker Change: You can expect is a substantial deterioration in the rent and the rest of it right and then net effective rent rather.
Speaker Change: [noise] like a house.
Speaker Change: No on a net effective basis I would say it's single digit.
Speaker Change: Okay.
Speaker Change: Okay, and what about the rest of the.
Speaker Change: The remaining 200, some odd brushy.
Speaker Change: Let's see.
Speaker Change: Well, it's not 200 this to 285 in total at around 110 is going to be the one that's done when negotiating with substantially.
Speaker Change: So that's a lot of the balance of that space.
Speaker Change: And then along those single digit net net effective and my guess is that they'll all be leased up by our 2026.
Speaker Change: Okay and can you remind me was that space was it their decision to vacate before the Chevron announcement is just something that came up after the acquisition.
Speaker Change: So again.
Speaker Change: Let's face it the maturing was it what are they planning to vacate that space.
Speaker Change: So they they vacated that space already.
Speaker Change: There was a one third of the building Thats expiring 2026, it's not occupied by Hess is leased by us, but its been sublet by Hess to other tests, Oh, I see how long when did they vacate that was up quite a while back.
Speaker Change: Three years ago, Okay, not like that got it okay.
Speaker Change: Okay.
Speaker Change: Hmm.
Speaker Change: One last.
Speaker Change: On land tower, So I guess some of your peers are saying that the blended lease spreads maybe turning positive in the second half of 'twenty five based on your comments it sounds like that would be in Q2 with respect to your portfolio in the sunbelt.
Speaker Change: Okay.
Speaker Change: Yeah, I can definitely see that just the the momentum that we have coming into 2025, when we still have.
Speaker Change: 70000 units that are delivering I'm optimistic for Q3 and Q4 to be in the positive range.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you and the next question comes from some of my eyesight at CIBC. Please go ahead.
Speaker Change: Thanks. Good morning, just following up on on the land tower discussion I was just wondering.
Speaker Change: How concessions in your markets have trended up if you're seeing those come down over time at all.
Speaker Change: They've been pretty consistent from Q3 to Q4, we were seeing more than than we did obviously and when we didn't have headwind. So I think eventually in the second half they'll come down as well but.
Speaker Change: Q3, we were around 35% of our leases that had concessions and an average of 30 days and that really ranges from a week to go.
Speaker Change: Five weeks in Austin as you can probably assume and then in Q4 that that crept up more seasonality on the number of leases concessions as a percentage of the leases at 63% of our leases had concessions and it came down to about 27 days. So and then Q1 is has.
Speaker Change: Again off to a good start on that case about 45% is what we saw in the month of January so seasonality played out I'm a part of it obviously they didn't the deliveries will play a part of it. So I don't expect us to be using concessions similar to what we were doing our strategy and purpose.
Speaker Change: Sure you know in the second half of the year as well so I think our lease trade outs will well improve as well as the use of concessions will come back down to pre pre COVID-19 pre delivery days.
Speaker Change: Okay got it.
Speaker Change: And then just moving onto the dispositions why no discussion I'm. Tom you mentioned you have some potentially and end in the bag maybe by the end of the year, just wondering when and if those planned dispositions come to fruition and how youre thinking about allocating the sale proceeds and if you have a preference.
Speaker Change: Between deleveraging or buying back shares.
Speaker Change: So all of that happens with a significant amount of dollars and then we can do both and if not all of them happened in the first and foremost is to pay down debt.
Speaker Change: Okay.
Speaker Change: Just on the sale of the Canadian retail post the quarter.
Speaker Change: Was it wasn't one a multiple buyers and should we expect more sales in the near term off of that category.
Speaker Change: No. This was a joint venture partner that we have the right out of our position and are well you should not expect more retail sales as I mentioned before we're going to wait until interest rates come down there's no danger in our retail it's very safe, it's leased to quality tenants supermarkets that are.
Speaker Change: We will be there forever the rental rates are low and they are the dominant their market. So there's no danger on any risks to it. It's just a question of value and values will be predicated on.
Speaker Change: Interest rates, so until those rates come down we're not planning on selling any more assets.
Speaker Change: All of those properties that we sold from Iowa joint venture properties.
Speaker Change: In accordance with simplifying the structure of retail now is basically all 100%.
Speaker Change: Okay got it and then just lastly on the on the debt maturity side you have some debentures coming due in June I was just wondering what your thoughts are there and what seems to be the most attractive option for addressing those.
Speaker Change: Yeah.
Speaker Change: Well, we have $400 million coming through in June.
Speaker Change: The debenture market currently is kind of the old premise play for a while so we will probably look to replace certain about.
Speaker Change: Six weeks or so.
Speaker Change: Do another debenture issue either floating rates for fixed term.
Speaker Change: So that's probably what we're gonna do you'll have some more visibility on muscle cells pumps talking about that could happen towards the end of the year by then.
Speaker Change: That's probably when we will.
Speaker Change: That's helpful. Thanks for the pension.
Speaker Change: Okay. That's all for me thank you.
Speaker Change: Okay.
Speaker Change: Thank you that concludes our Q&A today, I will turn the call back over to Tom for closing comments.
Tom Hofstetter: So running so everybody have a great day.
Speaker Change: Yes.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.