H&R Real Estate Investment Trust

TSX:HR.UN

Q1-2025 Earnings Call

[Operator]

Good morning, and welcome to H&R Real Estate Investment Trust 2025 First Quarter Earnings Conference Call. Before beginning the call, H&R would like to remind listeners that certain statements, which may include predictions, conclusions, forecasts or projections in the remarks that follow may contain forward-looking information which reflect the current expectations of management regarding future events and performance and speak only as of today's date.

Forward-looking information requires management to make assumptions or rely on certain material factors and is subject to inherent risks and uncertainties, and actual results could differ materially from the statements in the forward-looking information. In discussing H&R's financial and operating performance and in responding to your questions, we may reference certain financial measures, which do not have a meaning recognized or standardized under IFRS or Canadian generally accepted principles and are, therefore, unlikely to be comparable to similar measures presented by other reporting issuers.

Non-GAAP measures should not be considered as alternatives to net income or comparable metrics determined in accordance with IFRS as indicators of H&R's performance, liquidity, cash flows and profitability. H&R's management uses these measures to aid in assessing the REIT's underlying performance and provides these additional measures so that investors can do the same. Additional information about the material factors, assumptions, risks and uncertainties that could cause actual results to differ materially from the statements 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 public filings, which can be found on H&R's website and www.sedarplus.com.

I would now like to introduce Mr. Tom Hofstedter, Chief Executive Officer of H&R REIT. Please go ahead, Mr. Hofstedter.

[Thomas Hofstedter, executive]

Good morning, everyone, and thanks for joining us. I'll pass it on to Larry Froom, our CFO, to give you highlights of the quarter, and Larry will then pass it on to Emily Watson of Lantower to give us the highlights of Lantower. Larry?

[Larry Froom, executive]

Thank you, Tom, and good morning, everyone. In my comments to follow, references to growth and increases in operating results, unless stated otherwise, are in reference to the 3 months ended March 31, 2025, compared to the 3 months ended March 31, 2024. In 2024, we sold $429 million of real estate assets. And in Q1 of 2025, we sold 8 retail assets for $60 million. 70% of our real estate assets by value are now in the United States.

Overall, given the headwinds we face with multifamily supply concerns, a weak office market, inflation as well as the tariff war creating general market uncertainty, we are very pleased with our results and in particular, the 4.4% growth in same-property net operating income on a cash basis. Breaking this down between our segments, residential segment same-property net operating income on a cash basis decreased by 0.8% in U.S. dollars. The new supply added in our residential markets is being absorbed. The positive immigration trends have continued, and our tenants are also staying longer.

Emily will provide more details shortly. Our office segment same-property net operating income on a cash basis increased 1.2%, primarily due to the strengthening of the U.S. dollar. There has been a slate of back-to-the-office policies from different companies, and it seems clear that more and more employees are heading back to the office, which is positive for the sector as a whole. Our office portfolio of 16 properties, which includes 4 properties of the residential rezoning opportunities now only comprises 18% of H&R's total portfolio by value. 87.8% of our office revenue comes from investment-grade tenants, a testament to the quality and location of our office properties.

Our office occupancy at March 31, 2025, was 96.7% with an average remaining lease term of 5.8 years. Our retail portfolio at March 31, 2025, comprises 15% of H&R's overall portfolio by value. Retail segment same-property net operating income increased 8.2% due to occupancy gains at River Landing and ForEx. The tenants in our retail portfolio are predominantly grocers and the portfolio has been very stable. Industrial segment same-property net operating income increased 4.5% and industrial portfolio of 65 properties at March 31, 2025, comprises 18% of H&R's total real estate assets by value and continues to perform well. Since the announcement of H&R's strategic plan, H&R's average Canadian industrial rents increased from $7.17 per square foot as at June 30, 2021, to $9.52 per square foot as of March 31, 2025.

In addition, industrial properties located in the GTA made up 59% of H&R's industrial portfolio as at June 30, 2021, compared to 69% of H&R's industrial portfolio as at March 31, 2025. Headline FFO per unit for Q1 2025 was $0.297, the same as Q1 2024. We are pleased with these results as we have sold $489 million of real estate assets since January 1, 2024.

Our balance sheet remains strong. Debt to total assets at the REIT's proportionate share at March 31, 2025, was 44.1% and debt-to-EBITDA was a healthy 9.3x. Liquidity at March 31, 2025, was in excess of $870 million with an unencumbered property pool of approximately $4.5 billion. Our unencumbered asset to unsecured debt coverage ratio was 2.3x at March 31, 2025.

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

[Emily Watson, executive]

Thanks, Larry, and good morning, everyone. Today, I'm happy to share our first quarter performance for our multifamily platform and some operational highlights. Our first quarter results have aligned with our expectations. Our multifamily platform continues to benefit from strong demand as evidenced by stable resident retention and a delta to homeownership. Additionally, continued job and wage growth further demonstrate strengthening drivers for our industry. Rather than opining on headlines, we remain focused on the fundamentals of our business and continue to create NOI expansion through our repositioning opportunities and other innovative value-add strategies that add to our bottom line.

Given the declining levels of new supply ahead and growing demand in our markets, we are well positioned for substantial growth and value creation in coming years. Same property net operating income from residential properties in U.S. dollars decreased by 82 basis points for 3 months ending March 31, 2025, compared to the respective 2024 period, primarily due to a decrease in average rental rates and higher property operating costs from H&R Sunbelt properties. This was partially offset by rental growth from H&R Gateway City properties.

Same-asset occupancy ended the quarter at 94.4%, a 60 basis point decrease over the fourth quarter and no change from Q1 of 2024. Same-asset occupancy in Sunbelt decreased 70 basis points in Q1 to 93.7% over the fourth quarter. Jackson Park was 98.9% occupied with 75% retention. The Sunbelt continues to show strong demand metrics as supply deliveries have passed their peak. Our Sunbelt resident retention was 57% in Q1 and achieved a 60% resident retention in April. Blended lease trade-outs for the Sunbelt markets were negative 2.1% in the first quarter, an improvement of 380 basis points over fourth quarter and Q2 blended trade-outs are positive 10 basis points to date.

These results demonstrate the worst is behind us, and we will continue to see improvement as supply decreases throughout the year. Based on a third-party appraisal and a handful of Sunbelt sales comps, we have maintained our fair market value Sunbelt cap rate at 4.96% and believe the rate is appropriate and supportive. Cap rates are expected to remain low, relatively speaking, for institutional quality assets in the Sunbelt with capital flows interested and focused on long-term heavy Sunbelt multifamily allocation.

On the development front, Lantower West Love in Dallas, Texas continues to lease well despite the record level deliveries in Dallas. The community is currently 65.4% occupied and 70% leased. The property was completed on time and on budget. Also in Dallas, Texas, Lantower Midtown is currently 58.6% occupied and 62.6% leased. Both properties are leasing well with an average monthly velocity of 24 leases per month, which is above industry reports for our market and a testament to the superior product and unparalleled amenities our development team has delivered.

Midtown was also completed on time and on budget. Reddit properties are progressing well and remain on budget with completion expected mid-2026. Lantower currently has an additional 9 development projects in the Sunbelt pipeline, totaling over 2,900 suites at H&R's ownership interest with multiple sites ready and prepared for construction. We are progressing through different phases of design, drawing and permitting on the remainder of our Sunbelt development pipeline and currently have 4 projects fully permitted.

In summary, Lantower's platform has demonstrated remarkable resilience and performance relative to our peers. Our teams have navigated supply challenges and remained laser-focused on innovative practices, including centralization, property-wide WiFi opportunities and AI applications that enhance NOI margins and continue to yield positive results. I want to extend my gratitude to our incredible teams, whose dedication to excellence and innovation has been pivotal in achieving these outcomes.

And with that, I pass along the conversation to Tom.

[Thomas Hofstedter, executive]

Operator?

[Operator]

Are we ready for questions at this time?

[Thomas Hofstedter, executive]

Yes, we are.

[Operator]

[Operator Instructions] The first question comes from Mario Saric at Scotiabank.

[Mario Saric, analyst]

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

[Emily Watson, executive]

Mario, that's a great question. So our same-store blended trade-outs were negative 1.4% with the new lease negative 7.3% and renewals were 3.3%. For the Sunbelt specifically, the new lease trade-outs were negative 5.6%, which was an improvement. It was 13.8% in the fourth quarter, and renewals were 3.3%, which is an increase from 2.2% in the fourth quarter. So the blend in Sunbelt alone were negative 2.1% compared to a negative 5.9%. So we are positive 10 basis points in the Sunbelt as of yesterday. So -- but we still have some headwinds ahead of us on the supply. Supply is expected to be about 75,000 units in '25 with pretty heavily in Q1 and Q2 and then drops off in Q3 and Q4. So I still maintain that I think will still maybe come in a little bit negative in Q2, and that will start seeing positive in Q3 and Q4.

[Mario Saric, analyst]

Got it. Okay. So no real change from the view 3 months ago.

[Emily Watson, executive]

No. Our renewals are a little bit better than what I had anticipated and retention is better. We're real pleased with the 60% retention in April. So -- and we've already closed out April above a 3% renewal, and we have 4%, it's still really early for our May -- I mean, for our June renewals, but they're coming in at around 5%. So definitely see momentum picking up, but still in the same cadence that I had originally anticipated that Q3 and Q4 are going to be really where we've seen some pickup.

[Mario Saric, analyst]

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

[Thomas Hofstedter, executive]

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

[Mario Saric, analyst]

In your view, what are kind of the 1 or 2 top macro factors that are kind of driving the liquidity in the market and what do you...

[Thomas Hofstedter, executive]

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

[Operator]

The next question comes from Sumayya Syed at CIBC Capital Markets.

[Sumayya Hussain, analyst]

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

[Emily Watson, executive]

Great question. So not really, in Q1 of '24, we had -- well, I should say, in Q4 of '23, we overestimated the bad debt and a lot more people paid in Q1 than what we had anticipated or Q4 than what we anticipated. So it was really a reversal. Our bad debt, so it shows an increase in bad debt, but our bad debt in Q1 was 53 basis points, which we were really pleased with. So that was part of it. We also had a little bit higher payroll costs due to, well, a couple of things.

One, we usually run about 7% vacant open positions, and we've been running about 4%. So that kind of good news is that we are more fully staffed than what we have had in the past as well as bonus attainment was a little higher in Q1 than what it was in Q1 of last year. So nothing that I think will be -- that concerns me at all. Our NOI margins are still 59%, 60%. So I think what we're doing is working, but not anything that I'm concerned with. Rental rates supply driven. So we are seeing more concessions in the market that will burn off, which kind of pleased, so people are seeing the optimism in what's coming ahead in Q3 and Q4. Nothing I'm concerned about and kind of aligned with our expectations.

[Sumayya Hussain, analyst]

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

[Thomas Hofstedter, executive]

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

[Operator]

The next question comes from Matt Kornack at National Bank Financial.

[Matt Kornack, analyst]

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

[Emily Watson, executive]

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

[Matt Kornack, analyst]

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

[Emily Watson, executive]

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

[Matt Kornack, analyst]

But it was an office. So Emily, you're good.

[Thomas Hofstedter, executive]

I think, Matt, we all missed the question. What was that?

[Matt Kornack, analyst]

Okay. I just -- I was looking at your lease maturity profile, and you do have about 1 million square feet of office maturities over the next 2 years in Canada. And just wondering how much of that would be destined for redevelopment versus re-leasing. And if it is destined for redevelopment, at this point, are you kind of trying to renew people on a short-term basis as opposed to letting those go vacant?

[Thomas Hofstedter, executive]

So the original residential market to speak of. So we're looking to renew them on a short-term basis over the sale of demo clause and that will be applicable to the lease that are rolling in Front Street, the leases that are rolling in the United States and the Hess, that will be -- we're negotiating right now with tenants, and we have completed some of those leases, that's going to be re-leased. That's not [indiscernible]. And Bouchard, which is 2026, that is not -- that's for redevelopment, that will not be released. That may be extended by Bell, they need to stay on a little bit longer, but we're not looking to re-lease that building.

[Matt Kornack, analyst]

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

[Thomas Hofstedter, executive]

No, what I just mentioned, you have -- sorry, you have Front Street, which, again, that will be -- until it's released, it's vacant. And you have Bouchard, which is 2026, which will stay vacant. 145 Wellington, which is slated for ultimate redevelopment that's 10 years plus down the road. So that's not -- that's going to be re-leased. There's nothing there anyhow though. I'm just mentioning it as a footnote to the fact that it's a residential redevelopment. And Hess, as I mentioned, is 2026, that will be re-leased. And that will -- there's downtime. There's leasing up and then commission, so it takes time.

[Operator]

The next question comes from Jimmy Shan at RBC Capital Markets.

[Khing Shan, analyst]

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

[Thomas Hofstedter, executive]

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

[Khing Shan, analyst]

So a little bit of downtime and then probably sometime in the back half of the year.

[Thomas Hofstedter, executive]

Yes.

[Khing Shan, analyst]

Okay. So on ECHO, I noticed in Q1, the NOI dropped a decent amount from Q4 '24. I was wondering, is there some seasonality there? Or what would account for that drop?

[Larry Froom, executive]

I didn't -- I'll have to get back to you on that one. There wasn't anything substantial that we saw from there. I think if you're looking at it, just be careful when you're looking at it to back out the IFRIC 21 because we have accrued realty taxes for the whole year in the ECHO portfolio. So maybe looking at it with that [indiscernible] back that out?

[Khing Shan, analyst]

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

[Thomas Hofstedter, executive]

So we haven't put it on the market. It's still -- we haven't awarded yet to an investment banker to proceed with. We are having discussions with potential candidates in that regard. It will be -- we don't know -- really, we're going to put it out there and you'll see where you land. You'll see if there's an interest for our interest or there's interest in somebody coming and taking our interest in treasury. It can be anywhere where the best deal lies. So 100%, everything is on the table.

[Khing Shan, analyst]

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

[Thomas Hofstedter, executive]

I don't really know. It's not market conditions driven. It's just getting all of the -- again, there's many, many investors you can look at it as a public company. So it's not just -- it's not H&R definitely saying, let's go and it's not necessarily the Board saying go. You have to appreciate the fact there's like, I would say, close to 500 investors family -- multiple family investors. This is a company that's probably 130 years old. There's many, many layers of family. So until they get all their votes and all the -- every -- their ducks in a row, I can't really control the timing. So I don't want to say fall, like. It's hard to have me predict at that level of surety.

But in the near future, in the foreseeable future, I expect it to happen. I'm not -- I don't think I'm not as anxious for it to happen as you may be. It's a solid company and they'll have no debt on when Couche-Tard finally close that transaction, we'll have 0 debt. The sales are very, very strong. We have total visibility into each store, how it's doing. It's primarily grocery anchored. There's no risk over here whatsoever. So it's not a burning issue for me to sell it. The only reason I'm selling it [indiscernible] you guys, do you mind asking the question. When am I selling it? If I had my choice, I wouldn't sell it. So stop asking and I sell it.

[Khing Shan, analyst]

And then just last question. Again, I know you talked about it, you got a $400 million debenture coming up. What was the plan again on the debenture?

[Larry Froom, executive]

Jimmy, we plan to use our bank lines to pay it off. We're just trying to divide our time to see what sales will come down the pipeline.

[Thomas Hofstedter, executive]

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

[Khing Shan, analyst]

Okay. And what would be rough quantum? Would it be half of the debenture amount?

[Thomas Hofstedter, executive]

You're talking about a minimum of $150 million of proceeds, minimum.

[Operator]

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

[Thomas Hofstedter, executive]

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

[Operator]

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